The editorial board at Bloomberg has new opinion piece out: Trump shouldn’t bully the Fed. In it, they state that Trump went too far in criticizing the Federal Reserve.
With only a sentence or two having been uttered about monetary policy during an election cycle where tons of colorful rhetoric was tossed about nearly around the clock for months, it’s difficult to understand what may have prompted such an outburst in favor of an institution that is inherently undemocratic. And wondered about it enough to take the bait and read it.
Here are the points the board says makes about a no-touch Fed a good policy:
The standard case for leaving central banks alone to conduct monetary policy rests on three points.
First, a government that controls the central bank might be tempted to finance unaffordable budget deficits by printing money. (See Zimbabwe)
Second, to provide economic stability, a steady hand on the monetary controls is required, which demands some insulation from day-to-day politics. (Would anybody want to put Congress in charge of interest rates?)
Third, monetary policy done right is a technical thing, like running a utility. It’s basically apolitical.
These are all reasonable points. The government could be tempted to print and print and print. But I’d like to point out that the difference between the US and Bloomberg’s favored example of Zimbabwe is that the government is eventually held accountable democratically (See Trump). While in the case of the unaccountable Fed, litmus tests of the anti-inflation religious fervor are the norm, and bad theory in practice can go on unchecked for decades while the people take persistently poor economic performance out on the only people they can hold accountable – the politicians (see Trump).
Point number two sounds nice as it rolls off the tongue, but what does it really mean? I don’t think it means that the Fed should be able to raise interest rates with tight money because it can. Or does it? Or does it mean that the Fed should be allowed to sterilize and deflate the financial system into collapse? Perhaps in a perfect world a steady hand at the Fed translates into economic stability, but not in this one. I wonder just what the politicians should be expected to do with a Fed Chairman and Board of Governors so incompetent as to cause such a calamity. Really, I thought transparency and accountability were American values.
To point number three: I am sure there are just about as many different opinions about what “monetary policy done right” really means as there are pebbles in a brook. What happens if the people at the Fed buy into one that doesn’t quite fit don’t seem to realize it? Perhaps, due to utility, the editorial board at Bloomberg doesn’t really care if there should be such a situation at the Fed. But I think average wage earners actually do, and they vote too.
The Board continue:
Monetary policy isn’t purely technical. It has real-world consequences. Changes in interest rates hurt some and help others. And central banks sometimes have to decide how quickly to curb inflation — with a short, sharp recession, say, or with gentler pressure applied for longer. Such decisions are hardly apolitical.
The point should be obvious to anyone who has been paying attention to the Fed policy for the last decade. Resorting to unconventional measures was necessary after the recent recession. The central banks were right to adopt these methods — governments failed to use fiscal policy effectively, leaving the Fed and its counterparts no choice.
There are at least four respected professional macroeconomists of whom I am aware (Sumner, Christensen, Beckworth and Nunes) that believe that the adopted measures were better than doing nothing, but that the necessity of them resulted from defects in inflation policy implementation. Of course, the bottom line here is that something caused the need for those measures, and it appears the Board is still feeling around the disinflation elephant in the dark. At least they have not offered a more plausible explanation. I suppose that if they don’t get the point that an intended disinflation immediately preceded the banking collapse, and lots of bad debt floating around is a hallmark of it, it would be pretty hard for me to expect them to understand that the fiscal results in Japan over the last 20 years is related to the fiscal expectation here and now. The demand that the US government spend more money it doesn’t have is more than unreasonable. It’s derelict.
Obviously the Board don’t “get it”, and I wonder whether they would know a serious disinflation if it ran up and bit them (I am pretty sure the financial crisis bit many of the members hard).
You know, I am not really sure why I still read Bloomberg, except that it seems like the least dirty shirt in the huge pile of dirty ignorance called MSM. I hope nobody takes this stuff seriously.