Marcus Nunes sent me an article from the NY Times about what former Treasury Secretary Timothy Geithner really thinks. Aside from illustrating that Mr. Geithner dons a superhero’s cape in his own mind for “saving the banks,” the article is strangely silent about monetary policy actions during the crucial last half of 2008 in which Mr. Geithner participated. I suppose that if I were Mr. Geithner, I wouldn’t want to talk about it either considering he was at the helm of the NY Fed, in charge of architecting the sterilization of discount window loans as demand for liquidity in the financial sector was on a marked uptick. Monetary policy was passively tightening due to the increased demand before the opening of the discount window and I suspect that the sterilization of discount window loans was more of a kin to trying to bail out a bathtub by dishing water out of one end and pouring it into the other, moving the problem of inadequate liquidity against increasing demand from the financial sector out to broader markets. A commenter on The Money Illusion recently termed what happened with monetary policy as “… then the Fed botched the money supply… and it was like punching the banks in the eye, then handing them a steak to put on it.”
Somewhat in Mr. Geithner’s defense, the NY Fed has to do as instructed by the FOMC. So he didn’t have sole ownership of the ill-fated sterilization plan. And I said somewhat because if I suppose a hypothetical situation where a group of people conspire to commit a robbery and the cops apprehend the driver of the getaway car, the driver is prosecuted as if he had been the one brandishing a weapon and demanding cash from the victims. Somewhere along the line the driver should have told his partners in crime that what they were about to do is wrong and refused to take part. Did Mr. Geithner understand the implications of the sterilization plan and know it was wrong, and if he didn’t, why not? Sadly, the article only covers Geithner’s application of the steak for the banks’ black eyes – after the nominal damage had already been done – and so the world might never know. But still, inquiring minds would like to know.
Even though discussion of the conduct of monetary policy during those crucial months in the last half of 2008 is nonexistent, I managed to pick up a few “leads” on where to look for more information about what the government is doing about the monetary problem – or whether it knows there is a monetary problem. Mr. Geithner mentioned in his interview for the article that he had been the Deputy Assistant Secretary of International Monetary and Financial Policy (IMFP), an office of the US Treasury. So I took a look and found the latest report to Congress from the Treasury on international monetary and financial policy matters. What I found is astounding.
Here is what it says about inflation:
Labor Market Conditions Continued to Improve, and Inflation RemainedModerate
The economy continued to create jobs at a moderate pace in late 2013 and early 2014, and the unemployment rate moved lower. Nonfarm payrolls increased by 183,000 per month on average over the nine months through March 2014, somewhat slower than the 204,000 monthly average during the first half of last year. Nearly 8.3 million jobs have been created since February 2010, including 8.9 million in the private sector. As of March, the level of private employment had surpassed its pre-recession peak, but total payrolls remained more than 400,000 lower due to job losses in the public sector. Between December 2012 and December 2013, the unemployment rate fell by 1.2 percentage points to 6.7 percent and in March 2014 remained at 6.7 percent. The unemployment rate has fallen by 3.3 percentage points from its October 2009 peak but is still 1.7 percentage points higher than at the start of the recession in late 2007. The share of the unemployed out of work for 27 weeks or more, at 35.8 percent, is more than double the 17.5 percent share averaged in 2007, but it has declined from an all-time high of 45.3 percent in April 2010.
Headline and core inflation have generally remained low in recent months. The consumer price index rose 1.1 percent during the year ending in February 2014, down from 2.0 percent a year earlier. Core consumer inflation (which excludes the volatile food and energy categories) moderated to 1.6 percent over the year ending in February 2014 from 2.0 percent over the year-earlier period. Slower growth in medical care costs along with labor market slack and the low level of capacity utilization have helped contain inflationary pressures.
Inflation remained moderate?? The authors report on the highest measure of inflation possible, the CPI that shows inflation around 50% below the Federal Reserve’s target, having declined over the last year, and label that as “moderate.” Assuming that the definition of “moderate” is neither too much nor too little, the present inflation measure is nothing of the sort. This whole passage screams clueless – as if labor market slack and low level of capacity utilization are a help. Oh – my – God. We have extremely low LFPR, a huge problem with long term unemployment, shuttered factories, ghost towns that used to be bustling neighborhoods, 30 yr-olds living with their parents instead of off making families of their own, etc… All these combine to create the persistently below-target inflation measures and these blockheaded bureaucrats celebrate it as mission accomplished, successful containment strategy. Here is exhibit triple-Z of the moral hazard involved with having a single-minded strategy for inflation containment – we get it at the cost of throwing the baby out with the bathwater and it comes with an incredibly perverse bureaucratic celebration for having put and kept millions of people out of work. This is utterly shameful.
I once heard someone say that we get the government we deserve. But I really am not so sure of it. I certainly do not feel that I deserved what happened to me, nor do I believe the victims of nominal instability deserve it either.