By Richard Alford, a former New York Fed economist. Since then, he has worked in the financial industry as a trading floor economist and strategist on both the sell side and the buy side
In a speech in 2002, Bernanke said that the Fed would prevent the US from experiencing a Japan-like outcome.
However, the US has experienced a pattern of economic and policy developments that parallels developments in Japan.
Japan experienced a financial bubble and crisis. The Japanese authorities took actions to support asset prices and prevent insolvent businesses from failing. The growth of the Japanese economy remains so anemic that almost two decades after their financial crisis, the authorities are still introducing new stimulative measures and packages.
The US has also experienced a financial bubble, a crisis, a recession and a very slow recovery. The Fed and the Treasury took unprecedented measures to support asset prices and have prevented or helped to prevent the failure of insolvent firms. Despite the Fed’s opportunity to learn from the Japanese experience and all Fed’s efforts to promote the growth, per capita growth in the US has been slower than in Japan.
In short the US economy has experienced exactly what Bernanke said the Fed could and would prevent, save outright deflation.
In the same speech, Bernanke also said that the Fed could call on other government agencies for help should a financial crisis occur.
Despite Bernanke’s statement that the Fed would be part of a multi-pronged, multi-agency, counter-cyclical response to a serious economic downturn, the Fed has been the only macroeconomic policy game in town. There was no sustained fiscal stimulus, and supporters of the use of fiscal stimulus have argued that the package that was adopted was too small to be effective. Fed-Treasury cooperation during the crisis was limited to the Fed financing the Treasury’s de facto nationalization of AIG. This allowed Treasury to avoid going to Congress for the funding and a debate about the appropriateness and terms of the take-over.
Recently, Bernanke said that monetary policy is no panacea. However, the Fed still insists that a recovery based on monetary stimulus alone is forthcoming.
Again, there is dramatic divergence between what the Fed says or expects on the one hand and actual outcomes on the other.
Before the crisis, the Fed denied the existence of a bubble in residential real estate.
Unfortunately, there was a massive bubble. When the bubble popped, it crippled the financial system and ushered a recession with a slow recovery, high unemployment, and the pain of foreclosures.
The Fed had bet on heads only to have tails come up.
The Fed asserted that a rules-based policy regime was better than one based on discretionary decision making.
However, the rule/discretionary dichotomy has proved to be a false one. Policy makers have exercised discretion when they chose the 1) type of rule, e.g., the Taylor rule versus a nominal GDP target; 2) the variant of the rule employed, e.g., the use of CPI (as favored by Taylor) or forecasts of the PCE deflator (as favored by the Fed); and 3) the sensitivity of policy to deviation of targeted variables from targeted levels.
A truly rules-based, no-discretion-allowed regime would also have rules for when and why the rule should be ignored, as well as a rule that would govern if, who and when the rule can be changed, e.g., from the Taylor rule to nominal GDP targeting. The current regime does have any such rules.
However, the Fed did set interest rate policy in accordance with a variant of the Taylor-Rule. The adoption of this rule-based policy was supposed to insure the continuance of the Great Moderation. Prior to the crisis, FOMC members frequently gave speeches in which they took credit for the Great Moderation. Post the crisis, all we heard from them in effect was: “It cannot be our fault. We were following the rule.” A framework that was supposed to impose discipline and to enhance accountability on policy makers became an alibi for a policy failure.
Again the actual outcomes were the opposite of the outcomes and the goals that the Fed set for itself.
Prior to the crisis, the Fed promoted the idea that a rule-based, inflation-focused policy would make policy design and implementation purely technical problems. This, in turn, would insulate the Fed and its policy from political pressures and insure its independence.
The Fed has not enhanced its independence from political meddling and interference far from it. There is an unusually large amount of political pressure and interference aimed at the Fed and its independence. There are efforts in Congress to 1) require audits of the policy design process, 2) impose a quota system on the Board of Governors of the Federal Reserve System requiring that a seat on the Board be allocated to a community banker, and 3) require the Fed to adhere to a Taylor Rule framework for policy design.
The Fed also opened the door to political meddling when it financed Treasury’s de facto nationalization of AIG and the bailout of AIG counterparties, as well as when it decided to engage in a massive re-distribution of wealth and income via ZIRP.
Once again, the outcome – increased politicalization – was opposite of the desired result.
Prior to the crisis, the Fed said it would not comment on or interfere in the design of fiscal policy in yet another attempt to stay above the partisan political fray.
However, in pursuing ZIRP and QE, the Fed is actively engaged in fiscal policy. ZIRP and QE have lowered the Treasury’s cost of borrowing. The decline in interest rates paid by the Treasury directly affects its outlays and the fiscal deficit. Hence QE has a fiscal policy dimension. It may seem benign today, but when ZIRP and QE are ended the rates paid by the Treasury will rise. Other things equal the fiscal deficit will increase as a result of the policy stance and the Fed will be in a political hot seat.
The Fed is more deeply involved in fiscal policy than ever before. Yet again, the Fed has achieved the opposite of the goal it set out for itself.
The Fed promised to be more transparent than in the past.
In some cases, the Fed is no more and probably less transparent than in the past. The Fed releases numerous point estimates of economic variables, including the staff forecast, the forecasts of individual members of the FOMC, forecast ranges, and central tendencies. In short, a series of often inconsistent forecasts with no confidence limits attached, none of which caught the crisis or the recession and all of which have continuously over-estimated the strength of the recovery. On the other hand, the Fed does not divulge one set of numbers that it knows with certainty and that are of interest to the markets, i.e., the vote tallies at FOMC meetings. If transparency is a goal, why not report the exact vote tallies instead of characterizing the votes as “few, some, many”?
In some cases, the Fed is less transparent. The Fed has never released the rationales for targeted rates of asset purchase under the QEs, nor has it released the rationale behind the pace of tapering of the QE purchases. Policy now emerges from a black box. In addition, the Fed has not specified exactly what the expected goals of the ZIRP and the QE programs was/is. Hence the public has no way of evaluating the success of the programs.
Policy transparency is down and not up.
Prior to the crisis, the Fed attached very little if any importance to its regulatory function. As a result, it failed miserably as a financial regulator.
Despite 1) its failure as a regulator, 2) the fact that its chosen model of the economy (DSGE) does not even contain financial institutions or markets, 3) the policy rule that it employed prior to the crisis as well as the leading alternatives do not reflect financial market developments, and 4) the fact that it only pays lip service to financial stability when setting policy, its regulatory reach was expanded.
The Fed now acknowledges that regulation is important. This is precisely the opposite of what the Fed had assumed. The expansion of the Fed’s regulatory reach is the opposite of what the Fed would have argued was necessary, as well as the opposite of what the record suggests is appropriate. Alternatively, one could argue that after resisting changes the Fed has suffered a de facto loss of regulatory authority, even as its regulatory reach outside the banking sector has been expanded.
In its role as a financial regulator, the Fed presents itself as having expertise in risk management.
When ZIRP did not work to the Fed’s satisfaction, the Fed doubled down with QE1. When QE1 did not work to the Fed’s satisfaction, the Fed doubled down with QE2. And when QE2 didn’t work to the Fed’s satisfaction, it doubled down with QE3. This despite a running debate on exactly and to what extent QE has stimulated the real economy.
Furthermore, the Fed says that it should not lean against asset price bubbles because it can never be certain there is an asset price bubble. However, the Fed cannot know with certainty that there isn’t an asset price bubble either. Nonetheless, it sets policy as if an asset price bubble does not exist or are of no concern.
With a sustained satisfactory rate of growth still illusive, signs of excesses in the capital markets, no agreed upon plan to shrink the size of its balance sheet and with the Fed already in a political hot seat, society and the Fed have more on the table than they can afford to lose. The Fed has demonstrated all the risk management acumen and discipline of the London Whale.
The Fed asserts, based on its expertise and knowledge of the economy, that the markets, financial institutions and society as whole should base their behavior on its forecast for the economy, interest rates and inflation.
However, better-credentialed individuals (former full professors at prestigious universities with Nobel Prizes in economics to boot) running a fixed income portfolio at LTCM managed to make errors that threatened the US financial system in 1998. This occurred despite all the credentials and the fact that managing a fixed income portfolio is a trivial problem compared to setting and implementing macroeconomic policy.
Given that episode, the Fed’s failure to foresee the financial crisis, and the repeated incorrect calls for acceleration in growth a few quarters out, why does the Fed assume that economic agents will treat its forecast as gospel and alter their behavior beyond the impact of the interest rate stance?
The Fed employs models that assume rational expectations and efficient markets, but its assertion that current policy pronouncements can manipulate expectations implicitly assumes that economic agents do not remember or learn from the recent past.
The economic and financial systems are complex and dynamic. The fact that the Fed did not achieve all the goals that it set out for itself is not surprising. However, is more than just ironic that the Fed made decisions and pursued policies which resulted in it achieving the opposite of its stated goals and forecasted outcomes.
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The main problem would appear to be that the Fed has still to acknowledge that it has been and still does operate on the basis of failed Neo-Conservative witchcraft, platitudes that they refuse to examine empirically. This refusal and the split responsibility for managing the economy between the Fed and Congress gives the green light to the NeoCon Wild Men of the latter organisation to wreak their havoc on the economy. Thanks Mr Alford for this very good “truth to power” article.
How true. Which begs the question: “What is the worst thing you can say about someone at the Fed?” Answer: “Thank you for that, we understand exactly what you mean”
I would like to point out that the japanese bailouts were for “main street firms”, not just banks. There is a racial solidarity there that precluded mass bankruptcies and homelessness. That may be eroding. Even with a very high language barrier and immigration controls, Japanese society is weakening–in part because their youth have a lower standard of living (though still higher than their American counterparts) vis-a-vis their parents.
Every economist at the Fed needs to be fired. Cut out the cancer before it does ever more damage.
I’ll be lenient here. They can keep their jobs.
Just pay them like preschool teachers.
“The Fed had bet on heads only to have tails come up.”
Better to say that tails came up, and the Fed had bed on Batman.
“This isn’t the bail-out the country needs…but it’s the one it deserves.”
Something like that…
“more than just ironic that the Fed[eral Reserve Corporation] made decisions and pursued policies which resulted in it achieving the opposite of its stated goals and forecasted outcomes.”
“It was here I learnt that corporate principles and military principles are basically the same. Insulation. Illusion. Hype. Activity.”
Tarun J. Tejpal
Great article!
It does however assume that the Fed has interest in metrics like growth and employment outside of the financial sector. That seems to me like assuming the object of US foreign policy is world peace and popular domestic prosperity. As Lambert says, this is “assuming facts not in evidence”.
It’s pretty clear the classic Onion headline “Angry Investors Demand New Bubble To Invest In” is now official policy.
Welcome to America, where every official statement tells a thousand lies. The only question worth asking is how long is this type of system sustainable? This has been going on in earnest for about 10 years. Great, if you’re talking a broadway run, but what kind of mileage can an empire expect shorn up by a police state? The old Soviet Union got about 50 good years. Remember all those state ordered production quotas just like the mumbo jumbo issued by the Fed?
China seems to be the perfect model for today’s centralized authority and it looks like it has legs. America authorities are more than a little jealous. However, the Chinese have 5,000 years of cultural brainwashing working for them, making our Chinese dreams of a command and control authority a little naive.
Unlike the two empires above, the citizenry here are armed to the teeth meaning that every encounter with authorities has the potential to become lethal since everyone is presumed to be armed and dangerous making any uprising, ironically, out of the question.
I guess the end comes when the lies can no longer can be sustained in the face of the obvious. What it obvious to most of here today may take the rest 50-100 years to figure out.
Although the consensus here at NC is that these are features, not bugs, perhaps because I am an historian and know just how stupid and blind people in the past have been about their true condition (Diamond’s Collapse just scratches the surface, as does Tuchman’s The March of Folly) perhaps many of these players are just optimistic ideologues committed to a certain image of reality and not the Machiavellians some here imagine them to be. I don’t know and there is no way of telling at this time (and highly unlikely a record of what these people really believed and imagined will emerge in the future–electronic data is way more perishable and fungible than the kinds of records I am used to reading in the British Admiralty archives). British naval officers writing in the 1930s hardly wasted any thought on who, or even if, their internal memos and position papers were going to be read by 75 years later. Therefore, they were quite indiscrete. Today, every political operative and bureaucrat is conscious that what they same may be read and will be used against them, so I would imagine that they are vastly more circumspect and prone to obfuscation. So determining “bug or feature” is extremely difficult and will continue to be so.
“perhaps many of these players are just optimistic ideologues committed to a certain image of reality and not the Machiavellians some here imagine them to be”
I believe that you just provided us with the definition of an economist, particularly one from academia.
FWIW, James, I don’t see them as consciously evil.
I see them as blind ideologues in a bubble (in more ways than one), who can’t recognize the counter-productivity of their own policies.
I tend to agree – never attribute to malice what can be explained by stupidity.
We are indoctrinated by our parents, our society, and our own inability to look harshly yet truly at ourselves…we slowly (some faster than others) come to the realization that we have been fed a steady diet of bullsh*t.
OH, and per the article:
“….and have prevented or helped to prevent the failure of insolvent firms.”
that should read: ‘and have prevented or helped to prevent the failure of CORRUPT firms.’
FITF
Malice and stupidity are not mutually exclusive you know. And what is often dismissed as innocent “stupidity” is often malicious arrogance.
Yours is a very nuanced and thoughtful consideration of a set of circumstances from an historical perspective.
I take a more cynical position based upon current events. I’m reminded of the mortgage fraud that recently drove this country into ruin. It seems that everyone was caught up in the moment therefore no one was capable of criminal intent. That’s the official position, but we all know that to be a lie. So too we may pacify ourselves by believing that today’s pronouncements are simply earnest and sincere declaration of those caught up in the moment, laced with a tad more career paranoia. I’m sure the Chinese and Soviets nomenclature would recognize and appreciate this type of information required by any good Ministry of Truth. They don’t set out to tell a lie, it just comes out that way because that’s what’s required.
“electronic data is way more perishable and fungible than the kinds of records I am used to reading in the British Admiralty archives”
Ha! A very important observation about electronic data. One that is routinely ignored and just as routinely used to abuse people left, right, and center. If future historians will wonder about the loss of history due to acid-paper based books, just think what they will say about our present day’s infatuation with e-data.
China seems to be the perfect model for today’s centralized authority and it looks like it has legs
Those legs are going to collapse from self poisoning. More than half of China’s exports are from multinational corporations availing themselves of slave labor and a complete lack of environmental standards.
The disastrous level of water, land and air pollution are not counted as an expense or liability against those same multinational corporations that cause the pollution. The payment for this recklessness will be borne by the sickened slaves themselves. When will they finally revolt?
“There was no sustained fiscal stimulus,”
Yes there was. Well, agreed, not enough, but Treasury jumped in and and opened up the Fannie Freddie and FHA spigots to keep housing inflated as much as possible, which seems to have worked. It’s still happening today.
Worked for whom? Not anybody I know.
Know anybody who owns a house, or at least carries a mortgage? If FHA and Fannie Freddie didn’t relax loan requirements, and keep them relaxed, your house would be worth a whole lot less than it is today. And, therefore, the western banking system, although staggering about in a coma, would be basically dead.
This is a great post summarizing the failures of the Fed.
However, I wish that there had been a more explicit statement on the failure of Ben Bernanke in acknowledging the role of fiscal stimulus in testimony before congress. His testimony was obtuse so that it could be construed by neo-conservative/neo-liberal congress critters that there was a need for fiscal deficit reductions. It wasn’t until near the end of his tenure that he made an explicit statement to congress that fiscal stimulus was needed.
‘The Fed has never released the rationales for targeted rates of asset purchase under the QEs, nor has it released the rationale behind the pace of tapering of the QE purchases.’
That’s cuz it wouldn’t look professional to admit that ‘we just pulled it out of our ass’ … which is surely the case, as there is no quantitative theory to back up QE.
Local suboptimization action by the Feds.
“”However, better-credentialed individuals (former full professors at prestigious universities with Nobel Prizes in economics to boot) running a fixed income portfolio at LTCM managed to make errors that threatened the US financial system in 1998. This occurred despite all the credentials and the fact that managing a fixed income portfolio is a trivial problem compared to setting and implementing macroeconomic policy.””
This may have been a fixed income portfolio but that’s like saying CDO squared was a mortgage portfolio. It was one of the first indications that derivatives could act like WMDs.
“”Other things equal the fiscal deficit will increase as a result of the policy stance and the Fed will be in a political hot seat.””
This is bad framing. It assumes that deficits are bad and hinders progressives from making good policy choices. Deficits create wealth. They put money into the private sector, into profits, into savings accounts, into worthwhile public endeavors such as infrastructure, education, medicine. The problem is not the deficits per se but that they are paying for fraud and bankers’ bonuses.
The Fed, like many other PTB, speaks in its own language, which is redefinitions of common words. Just as the Bush II said ‘people’ he meant ‘people as rich as me,’ The Fed redefines ‘the economy’ as the financial industry, as separate from the real economy. ‘Recovery’ is asset price inflation, and ‘rule-based’ means the interests of its clientele in the financial industry. And so on.
Most economists and all the financial press don’t bother interpreting Fedspeak into terms the rest of us use. Whether this is from identification with the banking class or laziness isn’t clear.
To an insider it’s not lying, it’s jargon. However, most of us are outsiders.
“The Fed redefines ‘the economy’ as the financial industry, as separate from the real economy. ‘Recovery’ is asset price inflation, and ‘rule-based’ means the interests of its clientele in the financial industry.”
Couldn’t agree more. The problem is that the real economy will never recover because all asset gains are going elsewhere. This supports my position below that the Fed cannot do anymore than put its toe in the water when they want to raise rates. The result will be: “Whoa, that water is way too cold”. I think we both can decipher that dose of Fed-speak.
Yes. Thanks for spelling it out.
Re: “In a speech in 2002, Ben S. Bernanke said that the Fed would prevent the US from experiencing a Japan-like outcome.” … “However, the US has experienced a pattern of economic and policy developments that parallels developments in Japan.”
After decades of QE, Japan just reported a 7.1 percent decline in quarterly GDP. It is difficult not to conclude that governing economic policy both in Japan and the U.S. continues to be about the carry trade for financial speculation and the massive re-distribution and concentration of wealth and income in the hands of a few well-connected “folks” via QE-ZIRP, not about the real economy.
See: http://www.usnews.com/news/business/articles/2014/09/07/japan-says-economy-contracted-71-percent-in-2q
Re: “In short, the US economy has experienced exactly what Bernanke said the Fed could and would prevent, save outright deflation.”
Um, regarding the prospects for deflation… has anybody checked commodity price charts lately?
See: http://www.finviz.com/futures_charts.ashx
Re:: “There was no sustained fiscal stimulus, and supporters of the use of fiscal stimulus have argued that the package that was adopted was too small to be effective. Fed-Treasury cooperation during the crisis was limited to the Fed financing the Treasury’s de facto nationalization of AIG. This allowed Treasury to avoid going to Congress for the funding and a debate about the appropriateness and terms of the take-over.”
… “Monetarism Is Dead, Long Live Monetarism!”… Oh, yes, and deregulation… Oh, and asset bubbles also.
That the Fed actually does do Fiscal, indirectly and time-delayed, is just one more argument against allowing our elected government to abdicate the difficult choices and pretend to call it all “monetary policy.” When Bernanke confronted his looney accusers in Congressional hearings on this they all started looking at their fingernails and the ceiling. He asked them if they wanted to change the Fed’s mandate so it could actually make fiscal decisions. Hell no! was the answer. And Hell no! is why we are not getting out of this anytime soon. The Fed’s mandate is to maintain the purchasing power of the dollar and (if possible) insure full employment (which has always meant 6%). What we’ve got is classic Trickle Down economix. Because when you’ve got stagflation because the economy is unequally benefiting the top 10% and somebody says We gotta fix this! that means jobs, wages, and demand inflation, which in turn eats away at the purchasing power of the dollar, aka kills a “strong dollar.” This post was so nice I read it twice. But I didn’t see any of this mentioned. Nor was it mentioned that a strong dollar is an export killer as well as a destroyer of the middle class. But why quibble? The Fed’s mandate is the bluntest of all possible instruments for governing a stupid and oppressed country. And it works beautifully right here in the USA. Because god knows we can never devalue the dollar. Nobody even wants to know that we are in a virtual depression with 23% unemployment. Who cares? But yes, it’s clear that the Fed has been fudging the facts along with Congress and the Administration. So no it is most certainly not independent; on the contrary it is the biggest possible lobby for the 1%. We are being governed by a private banking consortium-made-agent-of-all-of our-elected-“representatives.” Screw ’em all.
If we had a reasonable tariff regime and scrapped awful free trade agreements, we wouldn’t need silly mercantilist stuff like an artificially weak dollar or the fruitless pursuit of cost advantages for exports.
+100 and then some.
I am going to go out on a limb and predict that a return to normalization of rates and policies will never happen and those who really understand the nature of the problem already know this. The absolute most we will see is the interest rate in a very tight band, with a heavy bias for low rates, forever. The fundamental problem is that we have asked academic economists whose ideas are entirely theoretical and, as most theories of (particularly) academic economists there is no reason to believe they can or will work in the real world. This is who we hired! When both Bernanke and now Yellen arrived on the scene they had no real idea of the details of how our financial system works and what a house of cards it had become because of many changes, all with unintended consequences, over the years. From the 1970s on, one change after another has added unintended consequences that each, in its own way, put us where we are. And we’re going to dust off Milton Friedman’s theories about dealing with the great depression and shoehorn it into our modern world. Good luck with that. The result is that we are locked into low interest rates and any other ad hoc policies that will keep inflated asset prices inflated and hopefully rising. Thus their mantra, “You can’t recognize a bubble in real time so we will wait until it bursts (or is about to) and then deal with it” (Sometimes referred to as the Greenspan put). And when they say they will deal with it that means they will keep it from deflating using any means possible. Keeping it elevated is not dealing with it. It is more like managing your drug habit so that your withdrawal symptoms do not overwhelm you. Markets fluctuate. At least all of the evidence that we have from the beginning of time support that notion. But our house of cards financial sector cannot sustain heavy losses because of the leverage that has built up over the years. And when I use the term leverage, I mean real leverage not the nonsense that is shown on fictitious mark to market balance sheets. Ss sure as night follows day, when interest rates rise other than a token amount, our financial sector will again be wiped out. James Carville said that when he died he wanted to come back as the bond market (ostensibly because of its power over us). Since he said that, things have happened that make the bond market orders of magnitude more powerful than it was. A similar affect has taken place in the stock market. Surely there are some bond experts among the readers here. To my mind, the fact that calculations of the impact of rising interest rates will been no where to be seen is becasue TPTB don’t want it to be seen. And, think about it, if the people at the Fed are telling us that interest rates will rise and they have not done their own calculations then…what is it that the NFL announcers say every week? – C’mon man.
” as
most theories of (particularly)academic economists there is no reason to believe they can or will work in the real world.”Fixed it for you.
Well said.
The Fed is conducting fiscal policy not just through lowering interest on the public debt. If and when the economy would recover, the Fed will have to withdraw all the excess reserves that have accumulated from it’s QE asset purchases. hey will either have to raise rates or raise the interest paid on reserves or both to prevent excessive inflation, as well as reckless private investments. That means a capital loss on the assets it has bought, on a conventional marked=-o-market basis, But that means the Fed won’t be able to sop up all the excess money it has printed. SO either the fed will have to allow extra monetary looseness, or the treasury will have to step in, by issuing addition debt to make up the short-fall. In the meantime the Fed will try to hide the dilemma from the public by running out the terms of the assets it holds and draining reserves through reverse repos. But remember, the Fed pays the interest it earns on its asset holdings back to the Treasury, after deducting its own expenses. SO even if they manage to hide their implicit losses, they will show up as decreased payments back to the Treasury, which means the fiscal deficit is larger.
SO the bottom-line is that QE is already fiscal policy and the Fed has added to the deficit, probably by $100s bns. before it is all over, without any Congressional authorization to do so, whatever inefficacy or additional dysfunctions might be attributed to the QE policy.
Not sure if it is a problem with central banks in general, or just with the Fed, but the US dollar is a standard, the reserve currency. But it is the Fed’s dollar. Why not open up the US central bank slot to competition? It is the US dollar, after all. Why should there be a monopoly?
I have to disagree with Dr. Alford. The Fed is not failing. It is succeeding spectacularly in its mission which is to coddle the finance industry. That has been its mission since the day it was conceived. Otherwise, why does the NY Fed President, by law, have a permanent spot on the Fed Board and is considered a “first among equals” while all the other Fed Presidents rotate?
And the Fed is not being ironic. It is being duplicitous. Again, this has been true since its inception. Everyone talks about the Fed’s “dual mandate”. There was never such a thing. The true mandate is inflation control, so as to not decimate rich bondholders. The mandate of full employment was a sop thrown in to get the populists on board with the Fed’s creation. It has never been an actual real goal. There’s precious little irony in pointing out that, in direct contrast to its spoken goals of “bailing out Main Street”, the prime benefactors of nearly every policy implemented by the Fed in the last half-decade (if not the last 30 years) has benefited Wall St, usually to the detriment of Main St.
And the Fed has interfered in fiscal matters plenty of times before the current crisis. Witness Greenspan essentially telling Bill Clinton that he shouldn’t spend his surplus but use it to pay down the debt, while reversing course and telling George W Bush that it was okay to use the surplus to cut taxes. If that wasn’t naked political pressure to implement a fiscal policy based purely on Greenspan’s political beliefs, I don’t know what is.
If Dr. Alford believes that somehow the Fed’s current political goals are an anomaly, I would ask what central bank in the world, at this time, can legitimately be called independent? The ECB? It has not only usurped fiscal powers from its putative masters such as Greece and Spain, it has abrogated democracy itself, essentially telling Greek citizens which way they should vote lest the ECB “lifeline” be withdrawn! The Bundesbank, which gets its aversion to inflation not from any economic theory, but from the political memory of the Weimar republic and the belief of German politicians that hyperinflation is what led to Hitler? Or how about the Bank of Japan, which has become the primary means of implementing Abenomics? At least the PBoC has no illusions of independence. In that way, it’s at least less deluded than its peers…
The bottomline is that Dr. Alford is being naive assuming that a Central Bank ever was or ever could be “independent”. Money is an expression of power, ergo there is no such thing as economics divorced from politics. If anything, economics should be seen as merely a branch of political science: the study of power relationships as expressed through the power units we call money. In that light, the Fed’s policy statements and goals are no less political than the Democratic or Republican convention platforms, both of which are backed with substantial “factual evidence” and solid theoretical frameworks (or so their supporters believe :-). No one believes politicians are being “ironic” when they say one thing and do something else. Why should we believe it when it comes to Fed chiefs?
This has been the first recession (out of eleven) since the great depression when public sector spending (federal, state and local) has shrunk (as a % of GDP) during the recovery phase. The Fed has done pretty much all it could given that Congress and the Executive Branch have been on a contractionary tear. Worst fiscal policy performance in modern history, thanks to crank economics and both parties’ cravenness.
Personally, I don’t follow the author’s point. Yes, it is superficially a great indictment of where the Fed has ‘failed’. But come on. The Fed isn’t trying to promote actual growth or heal the economy or whatever. Nor is it expecting that to happen. OMG, do rank and file NY Fed economists actually believe that????
??????????????????????????
ROTFL
***
The Fed is responsible for enabling and obfuscating the looting, for keeping ‘the system’ going. They are doing the job that our government leaders have tasked them to do. And doing it pretty well, it appears, since so many economists seem confused that this is exactly what the bipartisan politicians who appointed Greenspan and Bernanke and Yellen want to have happen.
The Fed is doing its part to enable massive tax cuts for the wealthy while simultaneously spending massive amounts of money on the national security state and corporate welfare. Without the Fed ignoring its regulatory powers over politically connected financial institutions and lowering interest rates and buying securities and so forth, then the aforementioned policies couldn’t continue.
This is like saying that the Department of Justice is failing. It’s doing exactly what it wants to be doing. Expecting it to expect something different is head-in-the-sand bizarre.
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