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Posts Tagged ‘Monetary Policy’

Like John Stossel and Thomas Sowell, I’m not a big fan of the Federal Reserve.

It’s not just that I’m a libertarian who fantasizes about the denationalization of money.

I also think the Fed hasn’t done a good job, even by its own metrics. There’s very little doubt, for instance, that easy-money policies last decade played a major role in creating the housing bubble and causing the financial crisis.

Yes, Fannie Mae and Freddie Mac played a big role, but it was the Fed that provided the excess liquidity that the GSEs used to subsidize the subprime lending orgy.

But I’m not writing today about possible alternatives to the Fed or big-picture issues dealing with monetary policy.

Instead, I want to highlight three rather positive signs about the Janet Yellen, the new Chair of the Fed’s Board of Governors.

1. Unlike a normal political animal and typical bureaucratic empire builder, she didn’t assert powers that she doesn’t have. She was asked at a congressional hearing about bitcoin and she forthrightly stated that the Federal Reserve has no legislative authority to mess with the online currency.

The Federal Reserve has no authority to supervise or regulate Bitcoin, chair Janet Yellen told Congress on Thursday. …On Wednesday, Manchin wrote to the Fed, Treasury and other regulators warning that the currency was “disruptive to our economy” and calling for its regulation. “Bitcoin is a payment innovation that’s taking place outside the banking industry. To the best of my knowledge there’s no intersection at all, in any way, between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Fed doesn’t have authority to supervise or regulate Bitcoin in anyway,” said Yellen.

This is very refreshing. A government official who is willing to be bound by the rule of law.

President Obama, by contrast, is now infamous for his radical and unilateral rewrites of his failed healthcare law.

Eighteen of them for those keeping count at home.

But it’s not just Obamacare.

Because of my interest in tax competition, fiscal sovereignty, and financial privacy, I’m upset that his Treasury Department pushed through a regulation that overturns – rather than enforces – laws about protecting American banks from tax inquiries by foreign governments.

But let’s not wander into other issues. Today’s post is about positive signs from Janet Yellen.

2. And here’s another one.

Political Cartoons by Gary VarvelThe Fed Chair poured cold water on the left’s fantasy view that higher minimum wage mandates don’t kill jobs.

The new Federal Reserve chairman, Janet Yellen, seemed to offer some support for the CBO’s recent conclusion that increasing the minimum wage to $10.10 an hour, as President Obama and Senate Democrats propose, would cost a significant number of jobs. The CBO projected that the proposal would mean 500,000 fewer jobs by the end of 2016, a conclusion the White House took issue with. Yellen said the CBO “is as qualified as anyone to evaluate the literature” about the employment effects of the minimum wage (some of which argues there would be little to no jobs losses, and some of which suggests there would be significant job losses), and that she “wouldn’t want to argue with their assessment.”

In the cautious-speak world of Fed officials, this is a very strong statement.

Congratulations to Yellen for putting intellectual honesty above partisan loyalty.

3. Most important of all, Yellen also affirmed that she plans on continuing the “taper,” which is the buzzword for winding down the Fed’s easy-money policy.

…she reiterated that it would take a “significant change” to the economy’s prospects for the Fed to put plans to wind down its bond-buying program on hold. …After more than five years of ultra easy monetary policy in the wake of the 2007-2009 recession, the Fed is taking the first small steps towards a more normal footing. It trimmed its bond buying by $10 billion in each of the past two months, and it expects to raise interest rates some time next year as long as the economy continues to improve. Yellen reiterated her concerns about possible asset price bubbles, and suggested the Fed would move to a more qualitative description of when it plans to finally raise rates. …Yellen acknowledged that such low borrowing costs “can give rise to behavior that poses threats to financial stability.”

And she even acknowledged that easy money can cause bubbles.

A refreshing change from some previous Fed Governors.

Now let’s give a caveat. None of this suggests Yellen is a closet libertarian.

She is perceived as being on the left of the spectrum, and it’s worth noting that many hardcore statists in the Democratic Party urged her selection over Larry Summers because he was (incorrectly) seen as somehow being too moderate.

Moreover, I suspect she will say many things in the coming years that will add to my collection of gray hair.

All that being said, I’m glad Obama picked her over Summers. By all accounts, Yellen is honest and will focus her attention on monetary policy.

Summers, by contrast, is a far more political animal and would have used the position of Fed Chair to aggressively push for more statism in areas outside of monetary policy.

P.S. Private financial institutions also played a role in the housing bubble and financial crisis, which is why those entities should have been allowed to go bankrupt instead of benefiting from the corrupt TARP bailout.

P.P.S. Since this post mentions bitcoin and since I sometimes get asked about the online currency, I’ll take this opportunity to say that I hope that it is ultimately successful so that we have alternatives to government monetary monopolies. That being said, I wouldn’t put my (rather inadequate) life savings in bitcoin.

P.P.P.S. If you want an amusing video mocking the Fed, here’s the famous “Ben Bernank” video. And if you want a serious takedown of the Fed, here’s George Selgin’s scholarly but accessible analysis.

P.P.P.P.S. On a completely unrelated topic, if you’re a fan of “House of Cards,” I invite you to pay close attention at about the 30:00 mark of Episode 5, Season 2. If you don’t blink, you may notice an unexpected cameo appearance. Maybe this person has a future acting career if he ever succeeds in restoring limited government and needs to find something new to occupy his time. After all, if President Obama has a future on the silver screen, why not others?

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This is an easy question for me to answer. To be honest, I have no idea.

If I knew such things, I could time the market and I’d be rich beyond my wildest dreams and relaxing on the beach in the Cayman Islands instead of sitting in my kitchen in chilly Virginia.

Heck, I don’t even know whether the Fed’s policy is wrong or just worrisome. It’s possible, after all, that the central bank has provided appropriate liquidity and it will soak it up at the right time.

I don’t think that’s the case. I fear Bernanke is in over his head and that the Fed is engaging in the monetary version of Keynesian economics.

And if that’s true, something bad will happen at some point. If there’s too much liquidity out there, it presumably will show up at some point as either rising prices or an asset bubble.

Then again, we know banks are keeping more than $1 trillion of excess reserves parked at the Fed and maybe it will stay that way forever. In which case the private sector is inadvertently protecting us from bad monetary policy. Thomas Sowell has suggested that something like this is happening.

I can say for sure is that we wouldn’t have to worry if we were in a libertarian fantasy world and the private sector was responsible for money.

You may think that sounds crazy, but that’s the way it used to be, as explained in this short video.

John Stossel has made the same point about competing market-based currencies.

And if you want to see how well money has maintained its value since the Federal Reserve took over, this link has an excellent video.

P.S. I often get asked about the gold standard. It’s good in theory, but the real issue is whether governments can be trusted to operate it prudently and honestly.

P.P.S. Since Christmas is just two days away, we can all wonder whether we will get this present from Ben Bernanke. And if you still have some last-minute shopping to do, here’s a Bernanke t-shirt for your liberal friends.

P.P.P.S. For some laughs, check out Ben Bernanke’s Facebook page.

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In the past, I’ve shared Federal Reserve humor, including this special Fed toilet paper, Ben Bernanke’s hacked Facebook page, the Bernanke-who-stole-Christmas image, a t-shirt celebrating the Fed Chairman, and the famous “Ben Bernank” video.

But this film from Bernanke’s childhood years may be the best of all of them. It is a good symbol of how he learned to conduct monetary policy.

Though, to be fair, it is theoretically possible that the Fed Chairman’s monetary easing is simply the well-timed provision of liquidity and he will soak up all the extra money at precisely the right moment.

But I’m skeptical, as you can see here, here, and here.

The real problem, though, is that we’ve given government a monopoly over money. This video is a good introduction to how governments replaced market-based money with central banking.

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I’ve expressed concern about QE3 and other decisions by the Federal Reserve about monetary policy, but I have also admitted that it’s difficult to know the right monetary policy because it requires having a good idea about both the demand for money and the supply of money.

But this raises a bigger issue. The only reason we expect the Fed to “know the right monetary policy” is because it’s been assigned a monopoly role in the economy. But not just a monopoly role, we also expect the Fed to be some sort of omniscient central planner, knowing when to step on the gas and when to hit the brakes.

And we also are asked to suspend reality and assume that the folks at the Fed will be good central planners and never be influenced by their political masters. Yeah, good luck with that.

With so many difficult – or perhaps impossible – demands placed upon them, no wonder the Fed has a lousy track record (as documented in this powerful George Selgin video).

So let’s ask a fundamental question. Is the Fed necessary? Are we stuck with a central-planning monopoly because there’s no alternative? Professor Larry White says no in this new video from Learn Liberty.

This is one of the best videos I’ve ever seen, so I strongly encourage everyone to share this post widely.

Professor White effectively demonstrates how private markets can replace the five different roles of the Fed. But his arguments are not just based on theory. He shows that the private sector used to handle those roles in the past.

And I especially like his point about how a decentralized market system would operate. Indeed, I would have stressed even more how such a system overcomes the knowledge problem that exists with a monopoly central planner.

Here’s my video on the Fed. I focus more on how central banks developed, but you’ll see some common themes in the two videos.

P.S. Here’s a video with 10 reasons to dislike the Fed.

P.P.S. If you want some Fed humor, we have a Who-is-Ben-Bernanke t-shirt, this Fed song parody, some special Federal Reserve toilet paperBen Bernanke’s hacked Facebook page, and the famous “Ben Bernank” video.

P.P.P.S. Professor White’s video shows how we can improve monetary policy, but let’s also be aware that there are proposals that would lead to even worse monetary policy.

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I posted this t-shirt about Bernanke’s easy-money approach a couple of days ago, but I should have waited ’til today since it would be a perfect accompaniment to any analysis of the Fed Chairman’s unveiling of QE3.

But given the potential economic consequences, I suppose this isn’t a time for jokes. Let’s look at some of what the Wall Street Journal wrote this morning.

This is the Fed’s third round of quantitative easing (QE3) since the 2008 panic, and the difference this time is that Ben is unbounded. The Fed said it will keep interest rates at near-zero “at least through mid-2015,” which is six months longer than its previous vow. The bigger news is that the Fed announced another round of asset purchases—only this time as far as the eye can see. The Fed will start buying $40 billion of additional mortgage assets a month, with a goal of further reducing long-term interest rates. But if “the labor market does not improve substantially,” as the central bankers put it, the Fed will plunge ahead and buy more assets. And if that doesn’t work, it will buy still more. And if. . .

The “And if…” is the key passage. For all intents and purposes, Bernanke has said that the Fed is going to relentlessly focus on the variable it can’t control (employment) at the risk of causing bad news for the variable it can control (inflation).

A trip to the store in Bernankeville

Since that hasn’t worked in the past, it presumably won’t work in the future. The WSJ notes that recent Fed easings have made the economy worse.

Will it work? Mr. Bernanke recently offered a scholarly defense of his extraordinary policy actions since 2008, and there’s no doubt that QE1 was necessary in the heat of the panic. We supported it at the time. The returns on QE2 in 2010-2011 and the Fed’s other actions look far sketchier, even counterproductive. QE2 succeeded in lifting stocks for a time, but it also lifted other asset prices, notably commodities and oil. The Fed’s QE2 goal was to conjure what economists call “wealth effects,” or a greater propensity to spend and invest as consumers and businesses see the value of their stock holdings rise. But the simultaneous increase in commodity prices lifted food and energy prices, which raised costs for businesses and made consumers feel poorer. These “income effects” countered Mr. Bernanke’s wealth effects, and the proof is that growth in the real economy decelerated in 2011. It decelerated again this year amid Operation Twist. When does the Fed take some responsibility for policies that fail in their self-professed goal of spurring growth, rather than blaming everyone else while claiming to be the only policy hero?

For those of us who worry about the pernicious impact of inflation, it’s possible that the Fed will soak up all this excess liquidity at the right time. But don’t hold your breath. The WSJ continues.

The deeper into exotic monetary easing the Fed goes, the harder it will also be to unwind in a timely fashion. Mr. Bernanke says not to worry, he has the tools and the will to pull the trigger before inflation builds. That’s what central bankers always say. But good luck picking the right moment, which may be before prices are seen to be rising but also before the expansion has begun to lift middle-class incomes. That’s one more Bernanke Cliff the economy will eventually face—maybe after Ben has left the Eccles Building.

Last but not least, the WSJ is not terribly happy about the Fed seeking to influence the election.

Given the proximity to the Presidential election, the Fed move can’t be divorced from its political implications. Mr. Bernanke forswore any partisan motives on Thursday, and we’ll give him the benefit of the personal doubt. But by goosing stock prices, and thus lifting the short-term economic mood, the Fed has surely provided President Obama an in-kind re-election contribution.

If we go to the other side of the Atlantic, Allister Heath of City A.M. has some very wise thoughts about QE3.

In the long run, real sustainable growth comes from entrepreneurs inventing better ways of conducting business, from investment in productivity enhancing capex financed from savings, and from more people finding viable jobs. Eventually, the short-term becomes the long-term – and that is where we are today. Cheap money is just a temporary fix – and like all drugs, the economy needs more and more of it merely to stay still now it is hooked. …manipulating the housing and construction markets is a dangerous game that the Fed should not be playing; it would be better to allow the market to clear freely. In a brilliant new paper for the Federal Reserve Bank of Dallas, William R White, one of the few economists to have predicted the financial crisis, warns of the disastrous unintended consequences of ultra easy money. He explains why there are limits to what central banks can do, that monetary “stimulus” is less effective in bolstering aggregate demand than previously, that it triggers negative feedback mechanisms that weaken both the supply and demand-sides of the economy, threatens the health of financial institutions and the functioning of financial markets, damages the independence of central banks, and encourages imprudent behaviour on the part of governments.

In other words, Allister is worried about the Fed acting as some sort of central planning body, attempting to steer the economy.

Sadly, the Fed has a long track record of doing precisely that, as documented in this lecture by Professor George Selgin. It’s 40 minutes, so not for the faint of heart, but if you watch the video, you’ll have a hard time giving the Fed the benefit of the doubt.

And let’s also remember that bad monetary policy is not the only thing to worry about when considering the Fed’s behavior. It also has started to interfere with the functioning of credit markets, thus distorting the allocation of capital.

Here’s the bottom line. I think, at best, the Fed is pushing on a string. Why will it help to create more liquidity when banks already have more than $1 trillion of excess reserves?

The real problem in our economy is the overall burden of government. The tax system is punitive. Wasteful and excessive government spending is diverting resources from productive use. The regulatory burden continues to expand.

These are the policies that need to be fixed. Sadly, they are less likely to be addressed if politicians think they can paper over the problems by figuratively printing more money.

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Like most of you, I imagine, I get lots of email advertisements. It’s very rare that I ever click on something, and I’ve never purchased anything. But sometimes I have to acknowledge a clever pitch or product.

And since I’ve previously publicized special Federal Reserve toilet paper, Ben Bernanke’s hacked Facebook page, and the famous “Ben Bernank” video, you will understand why I think this t-shirt is quite amusing.

Though I’m not sure that’s a great likeness of Bernanke on the t-shirt. Heck, my Bernanke-who-stole-Christmas image may be more accurate.

But I guess that’s not overly important since the real reason for the t-shirt is to express concern about inflationary monetary policy. And that’s something that should worry all of us (it’s already worrying drug dealers).

To be momentarily serious, I don’t follow monetary policy closely enough to make definitive statements, but here’s a good summary of why I’m also worried. I further address monetary policy in this post, and express displeasure with Bernanke’s behavior in this post.

Last but not least, this video is a good introduction to central banking.

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I’ve been worried for quite some time that the European Central Bank was losing its independence, thus undermining the long-run prospects of the euro.

Well, yesterday’s announcement that the ECB would buy the dodgy debt of nations such as Spain didn’t make me feel any better.

Central banks should not be bullied into creating too much money simply because politicians are too corrupt, venal, and short-sighted to control spending.

Here is some of what Allister Heath of City A.M. wrote earlier today. He begins with a wise warning about moral hazard.

There is nothing markets love more than a good dose of monetary activism, especially when they detect a hidden bailout, so it is no wonder that traders and investors reacted so positively to Mario Draghi’s bond buying plan. …Yet generally speaking these days, the more the markets like a central bank intervention, the more I worry. This is because all too often investors are trying to get central banks – and ultimately, the taxpayer – to monetise debt to protect themselves, or because they believe that there are monetary solutions to real, structural problems. I disagree on both counts: excessive debt needs to be written off, with the cost born by the creditors, not redistributed to the taxpayers of more prudent countries or inflated away. It is right that investors should be able to make a fortune if they make a correct bet – but it is equally right that they should lose their shirt when their investment goes sour. This habit of quietly enjoying the former but loudly refusing the latter is one of the main reasons why the City’s reputation is at such a low ebb.

He then explains that the ECB shouldn’t try to mask reality.

…there is a perfectly good reason why the yields of peripheral Eurozone nations have shot up over the past year. It is because the markets have finally started to price risk properly. Higher yields on Spanish or Greek debt reflect the reality of deeply troubled, structurally uncompetitive nations… The market is sending a clear and precise signal, and warning the world that there is a major problem that needs resolution; buying vast amounts of bonds to try and distort or even entirely eliminate that signal and pretend that nothing is wrong with Europe’s weaker economies would be an absurd act of delusion.

I’m not as optimistic as Allister is in this next section, largely because the supposed conditionality will lead to the kind of fiscal gimmicks and moving goal posts that we see in Greece.

…while there are many problems with Draghi’s plans, he is actually being relatively sensible. He will not help Portugal, Ireland and Greece until they are able to access bond markets; even more importantly, Spain and Italy will need to ask for European bailout fund support, and accept the ensuing conditionality, before ECB bond-buying starts. It will theoretically be unlimited in scale but Draghi only wants to “do whatever it takes” as long as politicians toe the line. Given that they won’t, and that many countries will soon be borrowing even more, the crisis will soon flare up again. The simple reality is that the Eurozone in its current form is doomed. Draghi’s plan will buy some time, and his next one even more, as will the one after that. But eventually the size of the fiscal and competitiveness crisis, combined with voter anger in both Northern and Southern countries, will overwhelm all of his attempts at papering over the cracks. It’s just a matter of time.

But I obviously agree with his conclusion. Unless European politicians decide to reduce the burden of government spending, the continent is in deep trouble.

Last but not least, the problem in Europe is not the euro. It is the welfare state. I’m not a huge fan of the single currency, but it is way down on my list of reasons that nations such as Spain, Italy, and Greece are in trouble.

P.S. America will be in the same boat at some point in the future if we don’t reform entitlements.

P.P.S. Allister is the author of this great article explaining why tax competition and tax havens are so important and valuable in the global economy.

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