Gillian Tett has this to say about Richard’s Fisher’s latest speech:
Or as Richard Fisher, head of the Dallas Fed, observed in a powerful speech on Wednesday (which cited the Duke survey): “Nobody on the [Fed] committee . . . really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. The very people we wish to stoke consumption and final demand by creating jobs and expanding business fixed investment are not responding to our [Fed] policy initiatives as well as theory might suggest.”
. . .
The crucial problem, as Fisher noted with such unusual clarity this week, is that the psychology of this is still so uncertain. With anything between $2,000bn and $4,000bn of unused liquidity now swirling around the US financial system (depending on how you measure it), consumers and CFOs alike can sense that monetary policy is becoming less effective. And yet, the more the Fed announces unconventional moves, the more stock market investors appear to demand additional drama. With every new round of QE, expectations and fears are being ratcheted up, in equal measure.
That is not reassuring in any sense. Anyone who feels tempted to start celebrating the recent share price rally, in other words, would do well to read Fisher’s bold speech – and then take a long, deep breath.
“Bold” “Powerful” “Unusual clarity” I’m intrigued, given that Fisher seems perversely proud of the fact that he’s become one of the world’s most powerful economic policymakers, despite not being an economist:
In thinking through many of the policy issues that confront me as a member of the Federal Open Market Committee (FOMC), I tend to combine both backgrounds, as well as an orientation framed by having an MBA and spending a significant portion of my career as a banker and market operator. My perspective is thus framed from the viewpoint of an engineer, an MBA and a former market operator—not as a PhD economist.
Why does Fisher oppose monetary stimulus? It seems he’s worried about the global situation, and its impact on aggregate demand:
With the disaster that our nation’s fiscal policy has become and with uncertainty prevailing over the economic condition of both Europe and China and the prospects for final demand growth here at home, it is no small wonder that businesses are at sixes and sevens in committing to expansion of the kind we need to propel job creation.
I strongly agree that demand is the key problem that’s holding back corporate America. But then why does Fisher oppose monetary stimulus? I’d like a bit more “clarity” on that issue.
One thing that’s perfectly clear is that Fisher’s colleagues at the Fed, those pointy-headed intellectuals who do have PhDs in economics, occasionally have to remind him that one cannot think about macro issues by considering how individual firms might react to monetary policy:
Citing these observations, I suggested last week that the committee might consider the efficacy of further monetary accommodation. When I raised this point inside the Fed and in public speeches, some suggested that perhaps my corporate contacts were “not sophisticated” in the workings of monetary policy and could not see the whole picture from their vantage point. True. But final demand does not spring from thin air. “Sophisticated” or not, these business operators are the target of our policy initiatives: You cannot have consumption and growth in final demand without income growth; you cannot grow income without job creation; you cannot create jobs unless those who have the capacity to hire people—private sector employers—go out and hire.
This is appalling. Yes, income and expenditure are closely related, indeed it’s tautologically true that they are two sides of the same coin. Which means that thinking about more expenditure leading to more income or more income leading to more expenditure gets you precisely nowhere. Some third factor (monetary policy?) must cause both to change in tandem.
To see what’s wrong with surveys of how corporate executives would react to monetary policy, consider the following thought experiment. Back in 1978 interest rates were about 8%, and inflation was trending even higher. Standard macro theory suggests that if the Fed had kept interest rates at 8%, then we would have experienced hyperinflation within a decade. Now imagine that corporate executives were surveyed in 1978. How many would have said “If you keep rates at 8%, we’ll be raising the price of Colgate toothpaste at hyperinflationary rates by 1988″? None?
Despite my doubts about its efficacy, I pray this latest initiative will work. Since the announcement, interest rates on 30-year mortgage commitments have fallen about one-quarter percentage point—about what I had expected—so, so far, so good.
Now I’m really confused. If Fisher opposes monetary stimulus, why in the world would he hope it “succeeds.” Wouldn’t we be better off if it failed to boost NGDP?
To get serious for a moment, despite all the snark it’s obviously true that Fisher might be right and I might be wrong. But here’s what seems beyond dispute: Fisher’s been way off base since 2008, almost continually arguing for tighter money and the dangers of inflation, even as we experienced the lowest inflation since the mid-1950s, and the slowest NGDP growth since the early 1930s. I’d have more respect for him if he was a bit more humble, admitting that he had been repeatedly wrong over the past 4 1/2 years. But I saw no sign of such introspection in this bold speech. Just a desire to push full speed ahead with tight money, even as there are numerous signs of a potentially disastrous slowdown in global demand. Bold and powerful? Yes. Wise? Not even close.