I knew I shouldn’t have looked at the video of Charles Plosser of the Philadelphia Fed giving his talk at the Cato Monetary Conference a couple of weeks ago as it is chalked full of monetary insanity. If you’re interested in seeing it, it is here (I enjoy spreading the misery from such intellectual malpractice).
I watched the entire talk, stopping at the Q&A when the very first question was in regard to what a founder wrote 289 years ago about floating exchange money stealing wealth. I truly had all I could stand at by that point. Oh my. There’s so much to criticize I have little idea of where to start.
Perhaps I should begin with what wasn’t there. Mr. Plosser doesn’t seem to have any idea where the financial crisis came from, though he implies that it has something to do with interest rates during the period of the early to mid 2000’s.
I have never seen any material that presents a convincing argument that low interest rates focus investment into the housing sector. We really can’t grow a chicken without first having an egg – and he seems to be asking the audience to take a leap of faith that these two things follow in logical order. They don’t follow. And I assume that as a central banker he understands that long term real interest rates – the kind that generally are involved with housing – are only indirectly influenced by monetary policy. But I suppose that is just one of those inconvenient details among others, like how investment became focused.
If I wanted to take out a loan for an investment, it could be just about any kind. I could buy stocks. I could buy corporate bonds. I could speculate in commodities. Out of all the investments in the world, why would I choose housing? Just maybe there wasn’t anything particularly special about the housing sector, with the exception of the financial innovations from public-private partnerships which would be at least four times removed from monetary policy.
I think what we should really be talking about is the effects of tight money and unexpected disinflation on debt in general. Add to that a discussion about what happens when it is combined with a persistent negative supply shock from skyrocketing oil prices. And for the grand finale, the discussion should drift to what happens when the Fed sterilizes its lender of last resort function as the fractional reserve system is collapsing under the weight of tight money – just like in the 1930’s. In fact, people blamed the victims then too. Were there excesses in the housing market? I believe so. But it did not take the economy down. Tight money and the Fed sucking liquidity out of the financial sector by sterilizing its increased lending took the economy down. And it didn’t stop sucking liquidity out of the system until 2009!
I seem to have picked the correct starting point in order to make a more organized and pointed post, because in order to be perceived as contributing to recovery and having a conversation about the rational conduct of monetary policy which should be the first item on the list for the fed – another one of those inconveniences, the “you break it, you fix it” rule – Mr. Plosser would have to demonstrate that he knows what broke. He is clueless. And if he is clueless about what really went wrong and doesn’t know how to fix it (why is he still there?), what does he want then?
Well, he certainly has a lot to say about preserving Fed independence, particularly in choosing or not choosing to offset Federal budget changes, or as he puts it, “Allowing politicians to behave irresponsibly.” And I’ve already made a “Who the hell do these people think they are?” post regarding the sadomonetarist Warsh that equally applies here. No one really cares for unelected bureaucrats thumbing their noses at the elected bodies of government. It really is tacky and a display of very poor manners which provides a hint that the Fed already has too much independence. It is not for Fed officials to choose what is responsible for Congress to do and what isn’t. They need to just shut up and do what’s required or go find another job.
In summary, I’ve never seen a grown man whine so much. My suggestion is that if he wants the Fed’s independence preserved, he shouldn’t be suggesting that it would inflict even more harm with even tighter money, decide what laws election officials should enact, and force some kind of investment gestapo disguised as “macroprudential policy” down our throats. It’s entirely unwarranted and unfit for a free society.
I think that inflation targeting with an interest rate peg is dead or will be very soon. It is full of pitfalls and does nothing but present a cognitive illusion when it fails. In order to prevent the Fed from behaving irresponsibly, taking its price stability mandate too far, and yes, Congress gets to decide when the Fed has been irresponsible, NGDP level targeting should be added to the mandate. And we also need to have a way to fire regional presidents or ban them from the FOMC.