Over the last week, I've looked at the various arguments advanced by the three Fed governors who voted against further Fed action (see here, here, and here). Here I want to sum up these arguments into two categories: those that make sense, and those that don't.
These arguments make sense.
1.) The fed is already at the end of what is can do; any new policy will only help at the margins.
This was advanced by Fed president Fisher and Plosser. Fisher noted the Fed has already flooded the economy with money and yet few loans are being made. Plosser noted that interest rates were already at incredibly low levels. Therefore, lowing them an additional 10-20 basis points would only help at the margin. Both of these arguments acknowledge a basic -- and important -- point: there is a limit to what central banks can do. These also highlight another important point: how far outside of the box should the Fed go in its efforts to stimulate the economy? Is a large scale asset purchase program warranted or prudent? These are important questions that should be honestly and openly debated. I should add that I support Bernanke's asset purchase program, but understand what these dissenters are saying and respect their logic.
2.) Inflation is running hotter than we'd like. This was advanced by Plosser and Kocherlakota (oddly, Fed President Fisher disagreed). This is a point I've made here as well, largely based on food prices. Overall YOY CPI is running at 3.8%. And while energy prices are dropping, food prices are stubbornly high right now. At this point we need to ask the question, "how much inflation is good and how much is bad?" There is no correct answer for this; it's really one of scaled degree. However, I believe this is also a legitimate argument.
These arguments don't make sense:
1.) Government can't help. This was advanced by Plosser and, to a lesser extent, Fisher. I could not disagree more strongly. While certainly not the be all and end all, governmental action can help in many ways. A classic example is the New Deal -- which essentially restored US growth by 1937 to pre-depression levels. Also look at China's response to the recession -- they went on a spending binge and are now printing growth in the 8%-10% range. In short, stimulus spending works and has been proven to work in several important historical examples. Conversely, European countries that are engaging in austerity measures are seeing their growth contract.
2.) What's really holding back hiring is too much regulation. This argument was advanced by Fed President Fisher. unfortunately, the data does not support this argument. The reality is regulations are a zero sum game: yes they do destroy jobs BUT they also create more or less the same amount of jobs lost. As I pointed out in another article, according to the BLS labor data, only .2% to .3% of jobs lost in the mass layoff data were lost due to regulation.
What we see above is a mix of pure policy and politics. There is nothing extraordinary about the arguments; but they are worth considering.
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6 comments:
I'd strongly disagree with your rationale for rejecting Plosser's notion that the "gov't can't help".
While certainly there are ways that the gov't CAN help, there most certainly are not ways the THE FED can help (which is Plosser's position). Even their recent policies have not helped (because the problems are not of the monetary kind). Some New Deal-type of program could help, I agree - but these are fiscal solutions that must be put into place by the legistlators. The Fed's monetary policies have nothing to do with this. And to point to "China's response" detracts greatly from the credibility of your arguments. China's economic policies have been disastrous. It is a facade that is already starting to show signs of its foundations cracking.
I disagree with Plosser that regulation kills jobs. I'm even willing to say that appropriate regulations increase jobs. For example, anti-pollution laws creates a demand for pollution control technology. Certainly, some regulations prevent financial meltdowns, which cause economic depressions.
What we need is to get the banks lending again. Given that bank balance sheets are strong, I don't believe that there is one simple reason why banks aren't lending. But we can be sure that they aren't confident that the economy and jobs market is strong enough to prevent potential debtors from massive defaults. I would recommend the government stepping in and helping people with under water mortgages. Perhaps, the government should buy out the millions of vacant homes. They could then house much of the homeless population. There are so many vacant homes, that even if all the homeless were sheltered in these homes, millions would still remain empty. I would recommend that many of these homes be destroyed. Many of the properties, especially where there are vacant homes on adjacent properties, could be turned into parks, or public gardening centers, where people in the neighborhood could grow crops.
August and September were scary months for the economy. But todays report may be an indication that the economy may have reached bottom. Next Friday, the unemployment numbers come out. I'm expecting a poor report. However, with so much gloom in the economy, I wouldn't be surprised that the an increase in discouraged workers kept the unemployment rate from increasing so much. Also, retailers report that they plan to decrease the number of holiday temporary workers this year. Thus, I expect the unemployment rate to rise in November and December. However, this will mean less layoffs in January. Moreover, the Baby Boom generation reaches retirement age next year as next February marks 66 years and nine months since VE Day. This could cause the unemployment situation to improve next year.
@ esong -
Fisher argued that regulatory uncertainty is stifling job creation, not Plosser.
"Given that bank balance sheets are strong..."
Are you drunk? Which banks' balance sheets are you looking at?
"This could cause the unemployment situation to improve next year..."
Your premise assumes that these boomers will actually retire. But I have not seen any data supporting the notion that the average boomer is in anywhere near the financial shape to be able to retire.
http://dallasfed.org/news/speeches/fisher/2011/fs110927.cfm
“Theory is when you understand everything, but nothing works.”
“Practice is when everything works, but nobody understands why.”
“At this station, theory and practice are united, so nothing works and nobody understands why.”
WSM, that's right, the article said Fisher made the argument. I've been acquainted with the Plossers in the past and heard them make this type of argument before, so my tongue slipped.
As for balance sheets, yes, Bank of America is in trouble. But from CNBC I've heard that lenders are sitting on a lot of cash, but are not willing to lend the money.
I don't believe in the Republican's argument that uncertainty in government regulation is the cause of the recent economic slow down. I've heard this argument many times before that when Democrats are in power they cause uncertainty because they want to increase government regulation. This uncertainty causes businesses to hold off on their expansion and hiring plans.
This is actually a ruse for arguing that government regulation is bad. According to their logic, Republican presidents want to deregulate, which also causes uncertainty. However, they will never argue that this uncertainty causes economic slow downs.
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