Our Economic Morass Will Discredit the Fed -- and That's a Good Thing
Frustration with monetarism is building as the Fed loudly ponders another round of quantitative easing. Already today economist Joseph Stiglitz has come out in the Financial Times with a broadside against relying solely on the Fed and ignoring fiscal policy. This just after the Dallas Fed president appeared on CNBC to take a few swipes at Congress and the federal government.
Although the sight of a Nobel laureate and a member of the FOMC engaging in a bit of public food fight is entertaining, it shouldn't distract us from the larger story here. We are only midway through a very long process of breaking down our faith in central bankers as pitch-perfect conductors of the global economic orchestra.
There is a view of history, espoused by the late economist John Kenneth Galbraith, that every financial mania has a public figure who is viewed as omnipotent at the height of the bubble and must be discredited and reviled at the nadir of the reaction that purges the excesses of that era.
During the height of the first half of our unique, two-part mania, Fed Chairman Alan Greenspan was dubbed "the Maestro" in tribute to his seemingly finger-tip control of the world economy. Since then, limelight-loving Greenspan has been diminished and, to many, discredited. But the unique double bubble of our time has relied on something bigger than a mere personality.
The all-powerful shaman of our era was monetarism itself, the idea that an economy can be managed using the simple, elegant tool of interest rates. This blind faith in monetary policy frustrates Keynesians who feel the Fed is wasting time "pushing on string." This is what Stiglitz rails against this morning in the FT:
It should be obvious that monetary policy has not worked to get the economy out of its current doldrums. The best that can be said is that it prevented matters from getting worse. So monetary authorities have turned to quantitative easing.
Oddly, Richard Fisher, the Dallas Fed president seems to agree with him. In a long interview on Squawk Box yesterday, Fisher complained about the limits of what the Fed can and should be expected to do:
I like to say we're not the only people with our hands on the wheel. We have our responsibilities. I believe we've conducted ourselves responsibly. [...] Now it's a question of, again, becoming most effective. And we are not a substitute for fiscal authorities. That's not our job. We're a monitory authority.Fisher's a sitting Fed president, so everything he says is couched in a disinterested, almost diffident, tone. But that doesn't stop him from taking a few swipes at elected officials:
Whatever we do will be most effective if the fiscal authorities would be cooperative -- and regulatory authorities -- and stop sending noisy signals to business community. [...] I do believe if we could still be more effective than we have been, I think we would have been quite effective if there was less confusion about what regulations would be and less what I call inhibitors.Fisher's frustrated and pointing fingers. He's probably right that the mixed signals coming from Washington are limiting the effects of the liquidity that the Fed already has in the system. Stiglitz reminds us that liquidity in and of itself is not a goal:
what matters for most companies (or consumers) is not the nominal interest rate but the availability of funds and the terms that borrowers have to pay. Those variables are not determined by the central bank. The US Federal Reserve may make funds available to banks at close to zero interest rates, but if the banks make those funds available to small and medium-sized enterprises at all, it is at a much higher rate.Fisher agrees that end demand doesn't come from monetary policy but from employers having an incentive to spend money on capital equipment and hiring. That incentive would be the prospect of more sales than companies can handle now. And though Fisher doesn't follow Stiglitz in believing that we need more and bigger fiscal stimulus, or at least he can't say so explicitly, he does admit that the collapse of politics means it's pointless to even look toward Congress for a spending package let alone budget restraint:
[T]he market has been talking about and anticipating [that] it's not very likely congress will be, in any way, shape or form putting together any additional stimulus.If Galbraith's formula is true, that to move on from one era toward a new era of growth, we have to repudiate the shibboleths of the previous "euphoria," then it doesn't look like we've reached the bottom yet. Our political process has neutered fiscal policy while the failure to create a recovery -- or far worse -- is beginning to discredit monetary policy. It will take a lot more than Fisher's admitting the Fed needs help to change the national fantasy that the economy can be managed by monetarism just as it took many years and political revolution -- not to mention Paul Volcker's unexpected success at breaking inflation -- to end the mind set that supported Great Society Liberalism.
Thirty years after Reagan, we're still waiting for a new idea.
Image courtesy of Michael Licht, NotionsCapitol.com via Flickr