One's first book, kiss, home run, is always the best.
Clifton Fadiman
Dems Pressuring Fed Reserve Chief Bernanke to Print Money
I am not an economist by training, but I do have a definite point of view. To provide a context for the current kerfuffle, the late economist Milton Friedman, a monetarist (not a Keynesian), suggested there were mistakes made by the Federal Reserve during the post-1929 period; in essence, consumers in tough economic times save more; the reduction in consumption results in price cuts as businesses seek to spark demand for their goods and services. Among other things, we have the possibility of a vicious cycle as people expect their dollar today to go further tomorrow (i.e., deflation). As aggregate demand falls, so does the labor demand to service it. Friedman argued effectively that the Federal Reserve needed to introduce an artificial inflation by increasing the monetary supply (think of it as sort of a thermostat). Friedman believed that the Fed itself triggered the groundwork 1929 crash by a misguided hike in interest rates the prior year to stem what it saw as rampant speculation in the stock market. Once in recession, the Fed mistakenly snuffed out recoveries by raising interest rates too soon (a response to gold purchases, after having dropped interest rates after the crash), prolonging the recession/depression.
Many believe that we've been in a liquidity trap, meaning that the Fed has run out of interest rates to cut and savings are high. (Recall, that has been an issue we've talked about in terms of the last two stimulus checks: the intent of policy makers was to stimulate consumer demand, but most people saved the proceeds.) Hence, a problem is convincing consumers and businesses our currency has bottomed out in terms of deflationary pressures. Take investment in bonds; with nominal interest rates near zero, bond prices are near all-time highs. A bond investor at this stage risks a drop in bond prices if and when interest rates return to a historical norm. Thus, if, on the other hand, investors see the Fed backing bond prices with relevant purchases, it can encourage investments and consumption, e.g., interest rate drops, say on 10-year Treasury bills, can drop the comparable costs of companies in borrowing.
We saw the Japanese make very similar monetary policy mistakes nearly 60 years after our Great Depression, and at some point the Japanese have attempted Friedman-recommended tactics, such as dropping interest rates to near zero and quantitative easing--which has not apparently worked as expected. This is one of my criticisms of current Fed Reserve policy: what have Bernanke and the rest learned from the Japan experience using similar tactics?
The above-cited Bullock article argues, contrary to the popular press, Greenspan and Bernanke are/were no Keynesians (i.e., advocates of government spending to stimulate demand). As libertarians, they preferred fiscal stimuli in the form of tax cuts versus what I call unduly confident progressive 'pick and choose' spending or "investments". (By its very nature, government spending is intrinsically inefficient: it gets its own self-preserving cut of the proceeds.) Tax cuts by their nature increase discretionary income, which real taxpayers (including, yes, millionaires) spend or invest, to the broadest extent of the economy instead of, say, inefficient, ineffective targeted Democratic policy preferences. No one seriously believes that Obama's "investments" in green investments, health care, and education have served as a catalyst in general economic growth.
But Bullock argues, sympathetic to Ron Paul's perspective, that fellow libertarians Greenspan and Bernanke have been far more active interventionist than most of us care for. We worry that the nature and extent of the Fed's intervention are sowing the seeds of dysfunctional growth (e.g., post-2001, in excess investment in real estate, exacerbating the bubble) and potentially economic growth-crippling hyperinflation.
A great deal of discussion has involved dual mandates of the Fed to combat inflation and unemployment, first addressed in the Full Employment Act of 1946, In 1977 and the following year's Humphrey-Hawkins, we saw the Democratic Congress and President emphasizing the full employment mandate. It's very clear that Congressmen Franks, Van Hollen and others are emphasizing the employment mandate, and earlier attacked Congressional GOP leadership's criticism of the Fed as threatening the Fed's independence. The Democrats see easy monetary policy in support of the full employment mandate as a back door stimulus.
That the same Democrats who supported massive intervention during the economic tsunami in 2008 under Bush and have continued to do the same ever since under Obama, would support interventionist policies by the Fed in support of the vague full employment mandate (a political, not monetary policy) is entirely predictable: this is the same political party which stoked the crony relationship of the GSE's increasing that market share from about 6% to nearly half of the total market, using government guarantees for its acquired mortgage notes; this is the same party which, under so-called 2000-page "financial reform" legislation signed by Obama, added materially to the empire-building Fed's responsibilities.
The Republicans are legitimately concerned that there will be unintended consequences, a day of reckoning for ongoing market interventions by the Fed; a massive flood of printed dollars is gambling with a devastating hyperinflation which will put the Fed between the devil and the deep blue sea in trying to triangulate its mutually inconsistent mandates, it has already led to declines in the currency, eroding the value of and confidence in our bonds just as under Obama, our debt now stands at 101.1% our GDP and the Obama Administration nonchalantly is projecting trillion dollar a year deficits indefinitely into the future (and that's if you believe in ObamaCare's smoke and mirrors accounting), Inflation is a cruel, regressive, hidden tax on lower-income citizens. George Will, others, and I believe that any intervention by the Fed should be limited and sparing, and its core responsibilities should be reduced to focus on inflation. Contrary to Democratic double speak, the REAL threat to Federal Reserve independence is its expanded, quasi-political responsibilities, a violation of the responsibilities of the Congress to exercise its responsibilities, not to delegate them to unelected, unaccountable individuals. If we already have high unemployment when all of a sudden inflation ramps up, the Fed may find itself in a situation like Japan is experiencing, perhaps with no dry powder left in its arsenal to combat it.
Higgs has some important observations:
Every Keynesian seems to believe that because consumers are in a dreadful funk, only government stimulus spending can rescue the moribund economy... real personal consumption expenditure recovered from its recession decline by the fourth quarter of 2010. Continuing to grow, it now stands (as of the most recent data, for the second quarter of 2011) even farther above its pre-recession peak...Real government expenditure for consumption and investment ... is also running higher than its pre-recession level...
The economy remains moribund ... because the true driver of economic growth—private investment—remains deeply depressed. Gross private domestic fixed investment fell steeply after the second quarter of 2007, and in the second quarter of 2011 it remained 19 percent below its pre-recession peak. ...net private domestic fixed investment.. peaked in 2006, fell substantially in each of the following three years, and recovered only slightly in 2010, when the index showed net private domestic fixed investment was running about 78 percent below its level in 2005 and 2006. Here is the true reason for the recession’s persistence.... An important reason for this apprehension and the consequent reluctance to make new capital commitments is regime uncertainty—in this case, a widespread, serious fear that the government’s major policies in areas such as taxation, Obamacare, financial reform, environmental regulation, and other areas will have the effect of depriving investors of control over their capital or diminishing their ability to appropriate the income that the capital generates.
Musical Interlude: My Favorite Groups
Fleetwood Mac, "Gypsy". I'm not going to analyze this Nicks' classic song and performance. In my opinion, the song and arrangement are pure pop music genius (like the BeeGees' "Tragedy" or Marc Cohn's "Walking in Memphis"), Nicks' vocals distinctive and spot on, and I'm not into fashion, but I dig the frilly, lacy, ultra-feminine look. The retro-1920's, vintage movie star (Greta Garbo?) look is also compelling.
