Early in his tenure as Chairman of the Federal Reserve Board, Ben Bernanke promised to make the workings of monetary policy more transparent. By golly – that’s exactly what he’s done! We no longer read the minutes of the Federal Open Market Committee as if they contain hidden messages as to where policy might go in the future. We even bother to notice who is voting which way; gone are the days when every vote had to be unanimous because any no vote would be considered the equivalent of stabbing the Chairman in the back. These days, the people who vote no want their name out there in bright lights and their reasons spelled out in glorious detail.
The minutes released this week for the August FOMC meeting are a treasure trove of transparency. There is so much transparency because these people at the FOMC don’t know what to do. Some want more Quantitative Easing, but they don’t agree on the form it should take: add even more securities to the Fed’s gargantuan balance sheet (now equal to 4% of the entire GDP of the economy); or, sell some short term securities and buy long term securities in order to manipulate long term rates lower, yet keep the overall Fed balance sheet total unchanged.
In my fanciful imagining of what actually happened at the August meeting, I like to think that one or more members stood up and shouted: “Quantitative Easing was a failure! It didn’t keep interest rates lower. It led to all sorts of speculative trading by hedge funds and banks, protecting themselves against the possibility of hyperinflation. What we got as a result of all this speculation was an inflationary surge in commodities, in gold and other precious metals, and in energy products. This goosed up the stock market, but we didn’t get the follow-through benefits in consumer spending and corporate investment in new businesses and jobs that were promised us if the stock market went up. Now we’ve got a global inflation problem that has led to riots and revolutions from Britain to Bahrain, and a US economy sinking under the burden of higher interest rates and gasoline over $4/gallon. We can’t afford any more Quantitative Easing!”
Maybe some brave FOMC members stood up and told the truth, even if it did embarrass Ben Bernanke and the others who thought Quantitative Easing was an imaginative answer to an economy flirting with deflation and depression. The only clue we have that this might have happened lies with the innocuous statement, all prettified in Fed minute politesse, that some “participants thought that providing additional stimulus at this time would risk boosting inflation without providing a significant gain in output or employment.” That’s about as close as we’re going to get to anybody at the Fed saying Quantitative Easing was a failure.
Wall Street has chosen to ignore the three or four people at the Fed who are worried about inflation, and instead focus on the three or four others, like Charles Evans and Janet Yellen and Ben Bernanke, who think the Fed balance sheet can be expanded to infinity if that is what it takes to reignite the borrowing impulses of consumers and businesses. Wall Street has just gone through a serious bout of drug withdrawal, during which it puked up a huge quantity of stocks. Consequently Wall Street has got the car idling outside the Marriner Eccles building in Washington, waiting for the FOMC to come out with a few baggies of its latest fix of Quantitative Easing.
In another fanciful musing, I like to think someone at the FOMC brought up the moral dimension of monetary policy, or make that the immoral dimension thereof. One of the things that would utterly shock and confound our ancestors from the 1930s, 40s, and 50s, is the Fed’s current idea that the way to get the economy moving again is to force people to invest in the stock market. Our forefathers would be shocked by this idea because they learned the hard way that the stock market has a propensity every so often to destroy the savings of millions of investors – that’s just how the market works. They would be confounded by the thought that the Federal Reserve would deliberately want to punish savers and reward speculators, at a time when the nation is in desperate – you might say dire – need of savings.
The Fed should be fetishizing people who save money, because that is a far better source of investment capital for the nation than borrowing trillions of dollars yearly from the Chinese. Our grandfathers and great grandfathers would seriously wonder why no one at the Fed has caught on to the idea that what the economy needs is the shock treatment of an increase in interest rates of 2% or so, so that savers could earn interest income again, rather than eat into their saved-up capital.
Such a policy would mean that the Fed would be turning its back on the Too Big To Fail banks, and would cease its game – which admittedly is very transparent – of transfering the nation’s wealth from savers to Wall Street speculators. It would mean that some of these TBTF banks would fail, and likely drag down many of their counterparts overseas, because all of these big banks are inextricably tied together by their daisy chain of investments in each other’s deposits and securities, and by derivatives securities bought from each other to protect against the default risk of one or more of the group, and by further derivatives securities bought to protect against the risk that the banks selling the first round of credit protection derivatives might fail in a systemic collapse.
It would also mean that the Fed would have to admit it made a mistake in allowing any bank to become Too Big To Fail. That means that it made a mistake approving so many bank mega-mergers, that it should never have allowed Glass-Steagall to be overturned, and that it should have allowed the market to dish out punitive consequences to the banks that were wrapped up in the failure of Continental Illinois, or Long Term Capital Management, or the dot.com collapse, or any number of similar failures. Most of all, the Fed should not have come to the rescue of the big banks in 2008. Each one of these mistakes by the Fed meant that the bankers were absolved of learning from their own mistakes and changing their behavior. They were also encouraged to expect to be bailed out time and again by the government for their errors in judgment and risk management, which is exactly why Wall Street is waiting yet again for the Fed to deliver another round of Quantitative Easing hopium.
Finally, what almost certainly did not happen at this meeting was anybody jumping up and asking why the entire group of people sitting around the table felt compelled to “do something”. It’s an article of faith when you join the Fed as a Board member or regional bank president that you are there to do something. After all, you have this mandate from the Congress to ensure sound economic growth and promote employment. The government is paying you a lot of money, and you get all this prestige and percs. You not only have all these traditional tools of raising and lower interest rates and reserve requirements; “Helicopter” Ben Bernanke has given you all sorts of new and exciting tools to combat deflation. You are supposed to use them, pull levers, and et voila! – economic growth follows.
Nobody is asking the existential question whether the Fed should do nothing. Maybe the job of the Fed is not to avoid economic pain at all costs. Maybe the Fed should stand back and let deflation occur if that is not only the only way to clear the system of a debt bubble, but if that is the inevitable outcome no matter how many rounds of Quantitative Easing are initiated. Maybe the Fed should not be in the business of regulating banks and running the risk that the banks wind up controlling Fed policy, which is obviously what has happened. Maybe the Fed should find a way to keep the monetary base and the monetary aggregates growing at some steady and moderate rate of increase no matter what happens to the economy. This would certainly be an interesting practice in a fiat money monetary system that is unmoored from any real world asset, such as gold.
The Fed doesn’t seem to be asking these existential questions, but others are. Ron Paul has been raising these questions for years, and he’s at the point where he thinks the Fed should be abolished. He’s currently one of the top vote-getters in the Republican primary race. The leading candidate, Rick Perry, is taking a traditional Texas shoot-first-and-ask-questions-later attitude, by accusing the Fed of treason if it dares to interfere in the presidential election by instituting QE3.
Other people are definitely asking these existential questions. If the Fed really wants to get into transparency, it will join in the discussion, because otherwise the conclusion that is ultimately reached will be imposed on the institution whether it likes it or not.