In the past there has been some speculation around market monetarist blogs that the Obama Administration was at least the victim of bad macro advice and subsequently ignored the vacancies on the Federal Reserve’s Board of Governors, and this likely had something to do with the lack of an appropriate monetary response to the Great Recession.
But the transcripts of FOMC meetings in 2009 are out which appear to prove the speculation to be just that – speculation. The reason for the lack of an appropriate and timely monetary response is:
“There are a number of considerations, but the two I would mention are, first, that we do face, if not deflation, certainly some disinflation; and disinflation, if it proceeds too quickly, can be counterproductive because it raises real interest rates. [?!] So to the extent that we can, through expectations management or policy communication, reduce disinflationary pressures that is a positive. This is one way perhaps to do that. At the same time that we are using every power we have to try to fight this incredible crisis, there are concerns on the other side that, by expanding our balance sheet and the like, we risk inflation increasing in the medium term. It is important for us to communicate that we will be effective and timely in removing that stimulus, so that we will not have an inflation problem during the exit from our current policies. In that respect, there may be some special features of the current environment that make this topic worth thinking about once again.
“Now, we have been through this process a number of times. As I mentioned, we have made some steps in this direction with our communication strategy—our projections, for example, particularly the long-term projections we are planning for January. So I think the question is whether we want to take another step. If so, what should it be? We all agree—and we have discussed it also on numerous occasions —that this has to be managed very carefully from a political perspective. I think we need to go slowly on that front. Don and I and the staff met this morning with some representatives of the Administration. I did not detect any strong opposition on the substance, but they didn’t want to incur heavy political costs themselves or use up political capital at the beginning of the Administration. Their view was that whatever we did needed to be very carefully managed to avoid getting blown out of proportion in the political sphere. So we will work very carefully and closely with the Administration in thinking about this, not only in the substantive details but also in terms of the political communication.
“So we do want to discuss today a bit of the substance of what we would like to do. But I think we should all have a sensitivity—whatever steps we take —to the need to do it very carefully from a political perspective and perhaps think about the extent of the change, the step we want to take, to balance a more dramatic or discrete step against whatever additional costs or risks there might be from a political perspective.”
The Administration was a victim of poor advice alright – from the Chairman of the Federal Reserve – either by omission or lack of expression of the urgency involved with the destructiveness of a severe disinflation. But why worry about that – it just raises real interest rates.
The incompetence on display in this information is so astounding I feel nauseous. I lost my career, couldn’t find another job, and came closer than I care to discuss to losing my home – everything I’ve worked for all my life – because Obama didn’t want to be bothered by what the Fed was doing???
You just can’t make this stuff up.
HT: Marcus Nunes