I have said in various places that I violently agree with the opponents of QE3, and it apparently puts me at odds with some economists I look up to with great esteem. I thought it might be appropriate to spell out why I have taken the position I have.
I have not turned into an inflation-nutter. I am very far from being worried about it. I wish the Fed would go full steam ahead, set IOR to zero and QE until the job is done without worrying about inflation targets. But I don’t believe that it will, regardless of what it says short of the mea culpa and changing its ways on the spot; and my thoughts on it do not have much to do with economics, but human nature, specifically humans with power.
Recently, the ECB set its IOR rate to zero. It’s a step in the right direction, for sure. But just take a look at the financial news today and one can see that it is not a step that is far enough, and if left by itself will end up complicating the current problems because nothing else around it has changed; the underlying monetary policy framework, the very source of the problem, is still in full force, going full steam ahead.
One of the largest problems I faced when I had my day job as a strategist was technology for technology’s sake. Fill a room with a bunch of specialist tech gurus to figure out how best to solve a business problem, and one can be there all year and never get anywhere. Why? It’s because what is rational to them is not rational and many times not even relevant to the need. It doesn’t matter to tell them how much money is available and set ground rules about functionality and compatibility; one still ends up in the middle of battling egos and religious tech wars. It’s like herding a bunch of cats and very difficult to police the situation to prevent waste and someone making themselves indispensable by complexity (so they cannot be laid off if the need arises).
If we take a look at the situation in the euro zone, for example but it is hardly exclusive, we have sovereigns going bust. We have people left in desperation. We have the IMF telling them that the risk for debilitating deflation is high, and the main concern of the ECB is credit seniority! All this after beating the drum about price stability for the last three years as the crisis has been unfolding and is headed for a full blown meltdown. It is beyond all reasonable and rational explanation. It is completely irrational to run the euro zone into the ground before making appropriate changes to the underlying monetary policy framework. It’s as if that is more important than the euro itself. It is monetary policy for the sake of monetary policy, crisis for the sake of the policy, nothing that is needed or beneficial.
The Fed is not much different. It has been apparent for some time that the bygones being bygones and the PCE ceiling at 2% (a very similar policy) after the devastating financial crisis is inappropriate. It contains all kinds of intellectual paradoxes, deranged predicaments, and generates perverse incentives for not doing anything to improve economic conditions. Since when is it appropriate to welcome the destruction of private assets as means of meeting targets without the central bank taking the loss? Perhaps that was the kind of thing Volker needed to do, but we are not talking about 1980 and double-digit inflation problems. We have had more than enough destruction of assets and need to recover. Yet, here we are with monetary policy for the sake of monetary policy, crisis for the sake of the 2% ceiling (with no justification for the situation at hand)– nothing rational about it with reams of evidence all around that it is a failure and we have gotten absolutely no mea culpa. No one can tell me that Bernanke is THAT blind or stupid, but he is probably very happy, as well as the politicians when he transfers 100’s of billions in Fed profits to the Treasury. Did it ever occur to anyone that that might have something to do with the ‘costs and risks’ he talks about all the time? How about those 100’s of billions representing real asset confiscation?
QE3 will only add to the pile of assets the Fed feels the need to protect. The bigger it gets, the more it has to take from someone else through opportunistic disinflation. It is disgusting, twisted, and illegal. It is a charade, the sandwich that gets dangled in front of starving children only to have it snatched away, right out of their mouths as soon as they try to take a bite. I hardly see it changing anything, but rather being the next step in the viscous cycle of tyrannical inflation targeting madness.
PS: I think the name of Bernanke’s monetary policy framework should be renamed to “How to make money off the central bank while the rest of the world goes to hell.”
Satros raised a couple of good points and I want to go a little farther into my line of thinking about what I have said here:
Compare public statements about inflation fighting credibility, ‘costs and risks’, and fiscal cliffs made by Bernanke over the past couple of years, when we know it makes no sense at all while the economy is in an absolute mess. It is all spooky echoes from ECB, BIS, etc… central bank borgishness and people concerned more about credit seniority than deflation.
How similar is Fed policy to that of the ECB? Pretty close, I would say. The only exception has been that Bernanke has been more active about preventing deflation – key word – deflation – he knows what it is, how bad it is and why.
Now, Bernanke is either brilliant or is as stupid as a box of rocks in thinking cookie-cutter monetary policy from the ECB, that has very different terms with the sovereigns involved with it than does the Fed with the US government, is a great idea. And just how great of an idea is it when the euro zone is deflating itself into implosion? Does it really take someone like Sumner to see that? It shouldn’t matter if one is Keynesian, Hayekian, Sumnerian, Nubian or Martian – even a basic education in economics is all that is needed. Abraham Lincoln made a speech about monetary deflation in 1838 – even he knew what causes it and what it looks like.
I do not think Bernanke is as stupid as a box of rocks, but I think he has entirely a different set of motivations than what we would expect. Sometimes, though, things have to be put in such a way that makes people pay attention to what is going on. Bernanke may truly not realize the effects of his policy under the circumstances of not being able to raise the FF rate and having a perceived need to push inflation down below his unjustifiable target. But just suppose that someone unknowingly creates such a public nuisance that it ends up injuring or killing someone else. Not knowing that one is responsible for it doesn’t make it any less of a liability or any less true when someone spells it out, perhaps in harsh language, but still true nonetheless. The very simple question is that since the real estate bubble burst 4 years ago, is it appropriate for the Fed to not take the losses in order to contain inflation at its chosen target? If it doesn’t take those losses and the target has to be met, who does take those losses? Is it not de facto confiscation for the sake of the 2% target? I have a very hard time seeing the incentive for getting out of this predicament – when there is no immediate downside for the Fed or the government– and we will never get out of it, away from the ZLB, as long as this goes on, only sink farther into the abyss at a little bit of slower pace that Europe because of Bernanke’s unwillingness to go so far as to allow full blown deflation.
What kind of rationale does Bernanke have for this target? He can’t raise the FF rate which would ordinarily contract credit by destroying some reserves, because the economy is too weak or he wants the housing market to recover, but he is willing to allow market instability to meet his inflation target. It seems that the target presents a huge intellectual paradox and puts him in a deranged predicament, if considering it through the lens of motivations we expect him to have, because meeting the target either by raising the FF rate or allowing market instability to work its magic achieve the same result – with the exception of the Fed not taking the losses required to maintain the target and he gets to reallocate the Titanic deckchairs to where he wants them. Confiscate and reallocate. Whether it makes sense from Bernanke’s perspective depends on what the motivation is – and I repeat myself, Bernanke is not as stupid as a box of rocks. The supposed benefits of his inflation targeting scheme, stability and certainty, are quite elusive – we have everything but – yet it continues given all of the peculiarities involved.
I would be happy to stand corrected if I am wrong. In fact, I would rather be wrong. I would sleep much better at night, and maybe even be excited about the prospects of easing. But there are still many troubling questions that have not been answered or made moot.