Who to Trust: Meetings or Markets?

Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times, London.

Here in Washington, the Federal Reserve Board's monetary policy gurus met and decided to keep interest rates low until unemployment drops, even though they agreed that the economy is already improving. Meanwhile, meeting in committee rooms and in the corridors of power, Congress agreed to give the White House what its economists and the president, meeting in the Oval Office, demanded: more stimulus spending. It is true that there is considerable excess capacity in the economy, as the deflation-worriers continually point out. But anyone who believes that the meetings at the Fed, in congress, and in the White House are not laying the ground for future inflation carries a heavy burden of proof.

Meanwhile, in Vienna the members of OPEC, the oil cartel, met and decided that $80 is just about the right price for their crude oil. That means that the cartel is not prepared to support the fragile worldwide recovery by lowering oil prices. It will, of course, sooner or later have to confront the price-threatening problem of stepped-up production from Iraq, perhaps to Saudi Arabian levels, a development that is increasingly likely as foreign oil companies get on with the work of repairing old fields and discovering new ones. But that is for another meeting.

By deciding at its Vienna meeting to keep oil prices far above competitive levels, OPEC is taxing consumers and in effect running a counter-stimulus policy, to the consternation of the groups meeting in Washington.

The Vienna meeting also affected meetings of airline executives and union leaders in London. The decision to keep oil and, therefore, fuel prices up added to the pressure being brought on the fuel-intensive airline industry by strikes and the threat of strikes. Lufthansa has already been put through the wringer by its union, and British Airways is next in line as its cabin crews prepare to lay down their clipboards and serving trays tomorrow (at this writing talks continue and some flights will go, staffed by non-strikers, even if there is a strike). Passengers will not book in usual numbers on an airline under threat of a strike, never mind actually experiencing one. If the British Airways workers succeed, other airline unions around the world might well emulate their British cousin. Indeed, captain David Bourne, Director of the Airline Division of the U.S. International Brotherhood of Teamsters has already met with British union officials.

On to meetings in China. The regime's annual gathering produced a moment of cheer for the world trading community when China's central bankers hinted that the government might relax policies that have kept the nation's currencies undervalued. After all, that would dampen inflationary pressures in a country growing at an annual rate of close to 10 percent. But it is not to be: The regime's leaders used their meeting to make it clear that the peg of the yuan to the dollar is here to stay for a good long while, and that America would have to solve its own problems without any help from China. The OPEC meeting reduced the hopes of the Washington meeting that the economy would resume growth, and the Beijing meeting put a damper on hopes that the U.S. could engineer the export-led reduction in unemployment that President Obama is promising.

Not to be outdone by meetings in Washington, Vienna, and Beijing, Europe held its own round. In Brussels key euroland and EU officials met and agreed that Greece would not be allowed to go under, and, more important, in effect agreed to extend monetary union to fiscal affairs. With no nation too small to fail, richer nations have taken the balance sheets of Greece, Spain, Ireland, Portugal, and Italy onto their own books, and guaranteed investors that they would not be wiped out. Profligacy thrives on this sort of moral hazard.

To make sure that they were not left out of the meeting orgy, Messrs. Sarkozy and Brown met at No. 10 and agreed on major changes in their nations' defense policies and might have reached a deal on the taxation and regulation of big banks.

The real question is whether these meetings really matter, whether they are full of sound and bottles of mineral water, but signify nothing. It is arguable that in the end you can't fight markets. Take OPEC: Its members might like $80 oil more than twice as much as they like $40 oil, but if technology permits the vast amounts of natural gas now known to exist in shale deposits to be extracted, and used in cars and trucks, OPEC might be as effective as a cartel that controls the production of horse-drawn carriages. If the rating agencies decide that continued deficits in America are taking sovereign and related debt to levels that will place a claim on too large a portion of national income, nothing the Fed will be able to do at any meetings it might convene will prevent interest rates from rising, and growth from slowing. If the dollar peg unleashes inflation in China, no meeting can sustain it. If passengers decide that the combined impact of high fuel and labor costs makes flying too expensive, some will shift to trains or stay home, and nothing the union bosses can do at their meetings will save the jobs of their members.

But that is for the long run. Politicians do not live in the long run. In America, they live in a two- to four-year cycle; in Britain in at most a five-year cycle; in many other countries in which democracy is the preferred form of organization, many politicians live almost from day-to-day, as opposition parties wait for a stumble by the government-of-the-moment, and demand elections.

So at least for now we are more or less certain to see results of these many meetings that are, to put it mildly, disconcerting. Fiscal policies that increase national debt. Continued loose monetary policy, either based on conviction by central bankers that the recovery is too fragile to allow tightening, or on their fear that to tighten while unemployment remains high will result in a further sacrifice of what remains of their independence from politicians who prefer not to face out-of-work voters. High oil prices. Continued maintenance of an undervalued yen, forcing the Obama administration, already under pressure from its trade union supporters, to swing to protectionism to stem the flow of imports and increase exports so as to create "good, high-paying American jobs."

Perhaps a meeting moratorium might be in order, and markets left to do their work.

By Irwin Stelzer:
Reprinted with permission from National Review Online