The Fed's Dithering Is Not Only Morally Wrong; It's Bad Monetary Policy
The Federal Reserve's dithering over whether to help kickstart the economy is morally questionable. It's also bad policy.
So says Tim Duy, a professor at the University of Oregon, in a long but useful blog post that really gets to the core of what the Ben Bernanke & Co. are doing wrong. The piece begins with a playful story in which a family's attention-getting quarrel over how much money to give a boy at a fair eventually brings the entire fair to a halt. The punchline: "Reaching consensus in the family is always more important than the fair," an adult admonishes the boy.
Duy blogs about the Fed and his writing is indispensible if you want to understand that the Fed should do. Investment bank economists focus on what the Fed will do (since their traders have ways of making money no matter which way rates go) but people like Duy form an increasingly important constituency of experts that understand monetary policy and are willing to call the Fed out in explicit terms. (Many investment bank economists are also afraid of offending the central bankers for various reasons, none of them edifying. That's something you'll never read in the papers, but as a central banking reporter, I can tell you it's absolutely true.) But Duy's critique goes far beyond his mockery of the Fed's obsession with consensus -- something I have argued ends up being bad for all concerned at this moment in history.
In essence, Duy argues that by not explicitly accepting the role of combating the economy's stagnation, the Fed is implicitly countenancing near-deflation. To understand the money quote, remember that in economist-speak, the "output gap" is the difference between actual GDP and the GDP a country could attain with the available resources (known as "potential output"), but without causing inflation. Since people are one of those resources not being exploited, this passage is in effect about unemployment:
[T]he gap itself is important to managing disinflationary expectations. By not specifically targeting the gap, the Fed is implicitly accepting the disinflationary consequences. If the US falls into a Japan-style malaise in the wake of this, or what I think is more likely, the next recession, I believe it will be attributable a clear unwillingness of Fed policymakers to view potential output as a relevant policy objective.I have argued that the Fed's failure to respond more forcefully to high unemployment is a moral failing. You cannot mobilize like the Fed did in support of the financial system, and then exercise the break-the-glass option for the banks, and then act like the Fed is currently acting in the face of high joblessness, whose consequences are immediate, human and widely felt. Duy is no moral philosopher but a fine economist who points out that the Fed's policy is an economic failure as well.
Tackle high unemployment and you will tackle the problem of dangerously low inflation (call it "near deflation"). Do nothing, and go down in history as one terrible Fed.
Related:
- Why Ben Bernanke Has Underestimated The Danger of Deflation
- Not Content With Sitting On Its Hands, The Fed Now Baffles and Misleads Us On Deflation
- Hey, Ben Bernanke! Either Tell Us How We're Going to Grow, or Do Something - Now
- The Fed: Absent a Double-Dip Or Deflation, We'll Hang The Economy Out To Dry
- Criticism of Fed On Quantitative Easing Are Wrong: We Need More
- Fed To Maintain Its Balance Sheet - But Not Because The Economy Is Slipping
- Fighting With Itself, The Fed Does Damage to Its Credibility As Economy Suffers
- Bernanke Gives Us the Evidence For Further Action, But No Clear Endorsement Of It
- Draw Ben Bernanke Out on the D-Word: Is Deflation Near