Richard Fisher’s unsophisticated views on monetary policy

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?

Fisher continues:

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.


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29 Responses to “Richard Fisher’s unsophisticated views on monetary policy”

  1. Gravatar of Saturos Saturos
    22. September 2012 at 10:37

    Imagine if we wake up tomorrow and find that Richard Fisher supports massive easing…

  2. Gravatar of Bill Ellis Bill Ellis
    22. September 2012 at 10:48

    Scott,
    Might your ideal form of government be a Wise Economist King ? ( I guess that might depend on what branch of econ )

    Mine would be an Wise Anthropologist King.

  3. Gravatar of mb mb
    22. September 2012 at 11:05

    “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”

    …..except those who seek guidance from models based on the representative firm and representative consumer???

  4. Gravatar of John John
    22. September 2012 at 11:11

    Murphy has a funny post about Scott and the tight money view.

    http://consultingbyrpm.com/blog/2012/09/explainer-why-i-claim-scott-sumner-is-insane-in-the-brain.html

    I doubt Fisher or the vast majority of egghead Ph.D. economists think money is tight right now. The only measure that says that money is overly tight is NGDP, actually only real GDP since 5 year inflation expectations are above the target of 2%. Monetary policy can’t lasting boost real GDP except on a short term basis anyway. The argument that money is tight right now really devolves to the claim that money is tight because the real economy isn’t growing fast enough. It seems like this argument is just saying that more money is a panacea.

  5. Gravatar of ssumner ssumner
    22. September 2012 at 11:43

    Bill, Nope, it’s democracy. Or perhaps Futarchy (“Vote on values and bet on beliefs.”)

  6. Gravatar of ssumner ssumner
    22. September 2012 at 11:45

    John, The Cleveland Fed says 5 year inflaiton expectations are currently way below 2%. The Fed itself expects less than 2%. Inflation over the past 4 years has been 1.2%. So no, NGDP is not the only sign of tight money.

  7. Gravatar of Bob Murphy Bob Murphy
    22. September 2012 at 12:00

    Scott, two quick things:

    (1) In reference to my blog post (which John linked), I acknowledged in the comments that the tame CPI inflation of recent years was your strongest card to play, and that it was indeed a strong card.

    (2) Regarding Fisher, are you just being sarcastic or do you really not see the internal logic of his position? Let me paraphrase him like this: “We need more hiring to fix the economy. My colleagues think that QE3 will lead to more hiring, but I don’t see how: I am not talking to any firms that tell me they would be willing to hire more workers, if only long-term yields were a bit lower. The one exception is in housing, where I can see why lower mortgage rates really would lead individuals to spend more, and thus jump start the income/expenditure/hiring cycle. I wish I could be as optimistic as my colleagues that QE3 would boost demand enough to make a difference, but I just don’t see it.”

    You can say that the above is totally wrong, but I don’t see how it’s internally contradictory, which is what you are claiming in your post.

  8. Gravatar of Morgan Warstler Morgan Warstler
    22. September 2012 at 12:00

    Scott, just because you don’t want to look at something, doesn’t mean it is not there.

    “With the disaster that our nation’s fiscal policy has become”

    Do you thunk Fisher is arguingwe need more Govt. spending and more tax increases?

    Or is he saying, LOWER TAXES, CUT SPENDING and let the nations business owners make all the rules, do whatever they want, hog tie DeKrugman and his concerns about the welfare etc

    And unemployment will take care of itself?

    —–

    That you SKIP what he us saying, shows the problem.

    This isn’t a “is Fisher right” about US fiscal policy, question.

    The question is….

    WHAT IF the MBAs demand their pound of govt. flesh, and they want if FIRST.

    Let’s forget calling it uncertainty, let’s say their are all holding the economy hostage and they want:

    1. less fake concern about pollution
    2. less fake concern about worker rights
    3. less fake concern about funding education
    4. more govt. employees to rubber stamp whatever the hell they feel like doing

    Let’s FIAT this is the situation.

    You are no longer facing AD problem, you are facing a STATUS problem.

    Across the land rich donors are standing up and asking, “why does Obama keep acting like we’re not doing more than our fair share already?”

    So Scott, if what is actually being demanded to get the economy moving is that the RELATIVE STATUS of businessmen to govt. officials has to shift away from govt. officials?

    I’d argue what Businesses mean when they say uncertainty is “I want everyone to be GRATEFUL for my good works, for the jobs I provide, so that when I am investing, I am far more sure, no one is going to show up and start making me jomp through social justice hoops. I want everyone to bend over backwards to make my investment deliver ROI.”

    Then what does printing more money do?

    The good it could do, is the Fed, being CLEAR that extra QE is conditioned on increasing the status of businessmen relative to govt.

    We’re going to find out soon enough…

  9. Gravatar of Donald Pretari Donald Pretari
    22. September 2012 at 12:43

    ” I am not talking to any firms that tell me…” Then can we, at least, be given the names of these people, so that we can understand what they’re saying? This is about as compelling as “They say…”

  10. Gravatar of ssumner ssumner
    22. September 2012 at 13:33

    Donald, Even worse, I seem to recall that Tett said a survey showed about 10% of firms would boost investment if rates were cut, and interpreted that as negative for the effectiveness of QE. And yet even a 1% boost to RGDP (relative to trend) is a fairly big deal.

    Bob, Is Fisher saying that a boost in AD (NGDP) won’t raise RGDP, or is he saying that QE won’t boost NGDP? I can’t make heads or tails of his post. There’s no “clarity.”

  11. Gravatar of Peter Peter
    22. September 2012 at 13:46

    “you cannot grow income without job creation”

    This is so stupid. Let’s say we had zero unemployment and then legalized counterfeiting. Would we still get no income growth if no new jobs were created? Really?

  12. Gravatar of Morgan Warstler Morgan Warstler
    22. September 2012 at 14:25

    No one can doubt that if all federal lands are turned over to states to handle oil leases as they see fit… we get economic growth.

    If you see all around you dumb policy that keeps growth from happening…

    WHY would you worry about printing money?

    The govt. is CHOOSING to not have growth, why should the Fed interfere with govt. policy?

  13. Gravatar of maynardGkeynes maynardGkeynes
    22. September 2012 at 14:49

    The high price of gold does not signify to me that inflation expectations are modest.

  14. Gravatar of Saturos Saturos
    22. September 2012 at 20:12

    maynardG, there’s a lot of factors behind the demand (and supply) of gold, unlike TIPS bonds.

    Morgan, why should the Fed infect the wounds inflicted by the government to the supply side of the economy? The optimal response to supply shocks – lower long term growth is to allow the price level to take a higher path.

  15. Gravatar of The monetary policy world is in dire need of a revamp! | Historinhas The monetary policy world is in dire need of a revamp! | Historinhas
    22. September 2012 at 20:42

    [...] on Gillian Tett, Scott Sumner had this to say: “Bold”  ”Powerful” “Unusual clarity” I’m intrigued, given that [...]

  16. Gravatar of Bob Murphy Bob Murphy
    22. September 2012 at 21:50

    Scott, he’s obviously not thinking of the world the way you are, but if you force me to paraphrase his views in terms of your framework, I would guess that he is saying QE won’t boost NGDP. And that’s why when you write this:

    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?

    …I think that is being unfair to him. It is internally coherent for someone to say, “I don’t think this will get people to spend more, but I hope it does.” You sounded like you were saying, “I thought Fisher doesn’t want people to spend more?”

    Again, I’m not endorsing his views, and I agree with you that he probably gets intro trouble with the income/expenditure stuff if you push it hard. But you were making fun of his focus on individual firms and his hoping that he’s wrong, whereas I don’t think there’s any problem with those two aspects of his statements.

  17. Gravatar of Benjamin Cole Benjamin Cole
    22. September 2012 at 21:53

    How much do yo need to know about Richard Fisher?

    One: He shorted the S&P 500–super-shorted it, in fact, in June 2010 by a few million dollars. He had to disclose that. So we had a member (then) of the FOMC super-shorting Wall Street, while voting on policy. Fisher says the sudden actions were done by a manager of a blind trust, who, of his own volition, decided one day to take a few million and super short equities.

    Two: Fisher traveled to Japen recently, and lectured them on the evils of…inflation. Yes, the “rot” of inflation. You can’t make this up.

    In a guest post for Marcus Nunes, I call Fisher the Inspector Clouseau of central bankers. Fisher has a nice hairdo, but he is an active menace to US prosperity.

  18. Gravatar of Saturos Saturos
    23. September 2012 at 03:43

    Fascinating post by John Cochrane: European Payroll Taxes and Wage Stickiness http://johnhcochrane.blogspot.com.au/2012/09/europes-payroll-taxes.html

    Ben, I remember that post, it was excellent.

  19. Gravatar of Bill Woolsey Bill Woolsey
    23. September 2012 at 06:43

    Scott:

    What does Bernanke say that we are purchasing mortgage backed securities in order to simulate housing demand?

    Perhaps it is becaues that some members of the FOMC ask, “how is this quantitative easing supposed to work?”

    The staff expains this higher inflation in the future, and the members’ eyes glaze over. I don’t get it. Inflation is bad!

    He says that when people have more money than they demand, they spend more.

    The members say, I don’t get it. Doesn’t everyone always demand more money? I’ll take some. he he he.

    Others say, my contacts say that they aren’t demanding money now because they already have plenty of cash and they see no benefit to borrowing more.

    Bernanke says, Ok, OK. We will cause home mortgage rates to fall so monthly payments will be lower so people can afford to buy more homes.

  20. Gravatar of Bill Ellis Bill Ellis
    23. September 2012 at 06:58

    Speaking of unsophisticated views on monetary policy…
    Romney advisors Gramm and Taylor: The Hidden Costs of Monetary Easing.

    By from the WSJ way of Delong….

    Inflation is not, however, the only cost of these unconventional monetary interventions…. There will be even greater costs when the economy begins to grow and the Fed, to prevent inflation, has to reverse course and sell bonds and securities to the public….

    Selling a trillion dollars of Treasury bonds on the market—at the same time the government is running trillion-dollar annual deficits—will drive up interest rates, crowd out private-sector borrowers and impede the recovery…. The same problems will occur as the Fed begins to sell its holdings of mortgage-backed securities…. When the Fed bought these securities, it may have marginally reduced mortgage interest rates. Selling them during a real recovery will likely cause mortgage rates to rise….

    http://delong.typepad.com/sdj/2012/09/yes-john-taylor-and-phil-gramm-have-written-a-column-that-reduces-my-utility-i-blame-miles-kimball.html#more

  21. Gravatar of Saturos Saturos
    23. September 2012 at 09:46

    Bob, just think of the fundamental Monetarist idea, the excess cash balance mechanism. Individuals find themeslves with more money than they want to hold, but no one individually expects aggregate nominal income, or even their own nominal income, to rise as a result. Everyone is completely surprised to find that everyone else has done the same thing, to find their own nominal receipts rising. It’s a limited knowledge disquilibrium process, as Nick Rowe cogently explains. The other thing is that asset prices rise when there is an excess supply of money, but that market price is a result of perfect competition, with individual effects negligible; and that’s what leads people to finally expect the higher permanent nominal income.

    Scott, you have to remember that Fisher probably has Keynesian intuitions, he thinks about real growth and inflation separately. It would be great in his view if real growth rose, terrible if prices did. He doesn’t see monetary policy as being about controlling the aggregate flow of the medium of exchange (but then I suspect few do…)

    Ben, yes what is it with conservatives and their alarmingly great hairdos? (Must be an American culture thing…)

  22. Gravatar of Morgan Warstler Morgan Warstler
    23. September 2012 at 09:54

    “Morgan, why should the Fed infect the wounds inflicted by the government to the supply side of the economy?”

    Because the government wants it this way! Why should the Fed not give the government the economy it ordered?

  23. Gravatar of chris mahoney chris mahoney
    23. September 2012 at 11:49

    I have an idea. Let’s populate our all-powerful monetary policy committee with commercial bankers elected by their peers. Then, economists can try to explain monetary policy to them before they vote. Thank you, Senator Aldrich.

  24. Gravatar of Bill Ellis Bill Ellis
    23. September 2012 at 13:34

    Democracy is fine if you are going to confine yourself to reality.

  25. Gravatar of ssumner ssumner
    23. September 2012 at 16:56

    Bob, Isn’t that inconsistent with his previous views? Doesn’t Fisher oppose QE because he’s worried about inflation.” If not, why does he oppose QE?

    I agree that he doesn’t look at the world the way I do, distinguishing between the issue of whether the Fed can raise NGDP, from the separate issue of whether more NGDP would raise RGDP. And isn’t that precisely the problem?

    He says we have a demand problem, but doesn’t want to raise inflation. All I can do is scratch my head, and say what DeLong recently said; “That does not compute.”

    Ben, I hope he lost money on that short, the market is certainly higher than it was back then.

  26. Gravatar of Major_Freedom Major_Freedom
    23. September 2012 at 16:57

    If bad investment decisions at the individual firm level can be corrected via lower customer spending at that firm, why can’t bad investment decisions at the economy-wide level be corrected via lower customer spending inn that economy?

    If it is a bad idea for a monetary authority to use inflation to ensure that an individual firm’s revenues grow by 5% each year, then why is it a good idea for a monetary authority to use inflation to ensure that more than one firm’s collective revenues grow by 5% each year? If there are widespread investment errors, why shouldn’t there be widespread spending declines as part of the correction process?

    It is not good enough to merely pronounce statements such as “what is true for an individual firm is not necessarily true for the economy as a whole.” For one can agree with this statement AND still hold the argument I am making, on a basis other than fallacy of composition. In other words, who has shown that in this particular example, that what is true for one firm is not true for the economy as a whole?

    Sometimes what is true for the part is true for the whole. These are scenarios where the whole is by nature nothing more than the sum of its parts, for example the individual-based market economy. An economy of 1 million people is nothing greater than 1 million individuals acting in accordance with the market process. There is, economically speaking, nothing more than the individuals and their property. An economy of 1 million people is not a concept of “1 million individuals PLUS”. It is 1 million individuals and only 1 million individuals.

  27. Gravatar of Major_Freedom Major_Freedom
    23. September 2012 at 17:05

    Bill Ellis:

    Democracy is fine if you are going to confine yourself to reality.”

    The reality of a prevalence of the conditional “might of 50% + 1 makes right” dogma, sure.

  28. Gravatar of chris mahoney chris mahoney
    24. September 2012 at 09:04

    Clearly, the central problem at the FOMC is that it has too many economists and not enough members who play golf with CEOs, especially Texas CEOs. Texas CEOs are an under-appreciated source of monetary policy wisdom.

  29. Gravatar of Britmouse Britmouse
    24. September 2012 at 13:22

    The Bank of England’s MPC is staffed purely by economists and they are doing an awful job.

    But there is a job going at the top, nudge nudge:

    http://jobs.economist.com/job/3022/governor-of-the-bank-of-england/

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