This post was written by Simon van Norden of HEC-Montréal.
Krugman on Sunday bemoaned the thinking at the US Fed, writing
So I just read the latest speech from Richard Fisher of the Dallas Fed; it’s one of the most depressing things I’ve read lately, and given what I read that’s saying a lot.
Much of the speech is taken up with arguing that it’s not the Fed’s job to help the struggling economy, because the big problem there is business uncertainty about future regulation. Urk.
Krugman goes on to lament the fact that Fisher really only seems to care about the inflation part of the Fed’s dual mandate and appears to neglect the importance of economic stabilization.
That intrigued me enough to try to find out more about this President and CEO of the Federal Reserve Bank of Dallas, who helps to set US monetary policy. According to his official bio, he’s served both Democratic and Republican administrations, played a senior role in a major law firm and set up a successful investment firm. On the other hand, you could make the case that monetary policy is not his forté. As Mr. Fisher noted (in his speech on November 2, 2006)
... I am not a trained economist and make no pretense whatsoever of being a formal practitioner of the dismal science....I came to economics and the markets late in life. I started out as a midshipman at the Naval Academy, then migrated from learning to navigate the seas to navigating through the undergraduate basics of economics at Harvard. After a brief detour to Oxford—principally to find my wife and perfect my taste for good beer—it was onward to Stanford Business School,...
Looking through many of his speeches since he was appointed in 2005, I was struck by a number of things.
- He loves to use naval metaphors.
- When he talks about monetary policy issues, there’s little mention of unemployment. His clear preoccupation is inflation.
- He sees globalization as a force that has reduced the effectiveness of monetary policy and the scope for fiscal policy.
- He worries a lot about government debt and deficits and taxes.
Krugman seems depressed and surprised to find a man like that on the FOMC. I can understand his depression, but surprised? The views of such central bankers have been on prominent display for years. This man was obsessing about the deficit back in 2007:
...if we fail to get our fiscal house in order, we could bequeath our descendants unconscionable debt and slow the global economy to boot. Is that to be our legacy? [Speech, April 16, 2007]
He’s also been very clear on how fiscal policy should affect monetary policy:
Even the perception that the Fed is pursuing a cheap-money strategy to accommodate fiscal burdens, should it take root, is a paramount risk to the long-term welfare of the U.S. economy. The Federal Reserve will never let this happen. It is not an option. Ever. Period. [Speech, May 28, 2008]
How does he reconcile that with the Fed’s dual mandate? Sometimes he argues it’s more like a single mandate:
Earlier I mentioned the Fed’s dual mandate to manage growth and inflation. In the long run, growth cannot be sustained if markets are undermined by inflation. Stable prices go hand in hand with achieving sustainable economic growth. [Speech, May 28, 2008]
To see how he views this in practice, consider a series of speeches he made in early 2008. Remember, at the time, the economy had been in recession since December 2007, financial markets were severely distressed and major financial institutions were on the brink of collapse. So how did he view the role of monetary policy?
In today’s world, where investors can move their funds instantly from one currency to another to avoid depreciation, the price central bankers pay for high inflation is much higher than in the past. Understanding this, you can see why I am a steadfast inflation-fighting owl. [March 7, 2008]
But he had already nailed his colours to the mast a few days before, with this strongly-worded poke at the NYT.
Here, of course, I refer to the potential harm to the consumer and the business and financial sectors alike by unwittingly allowing the perception to take hold that, as the New York Times editorialized in its lead front page article last Thursday, “the Federal Reserve, signaled [its] readiness … to bolster the economy with cheaper money even though inflation is picking up speed.” Talk of “cheap money” makes my skin crawl. The words imply a debased currency and inflation and the harsh medicine that inevitably must be administered to purge it. So you should not be surprised that I consider the perception that the Fed is pursuing a cheap-money strategy, should it take root, to be a paramount risk to the long-term welfare of the U.S. economy.... [Speech, March 4, 2008]
I just have to stress that last sentence. In March 2008, the paramount risk to the US economy is expected loose monetary policy. But what about the recession? the dual mandate? financial turmoil? He went on to clearly chart his preferred course (with multiple nautical references) in the same speech:
...We cannot, in my opinion, confidently assume that slower U.S. economic growth will quell U.S. inflation and, more important, keep inflationary expectations anchored. Containing inflation is the purpose of the ship I crew for, and if a temporary economic slowdown is what we must endure while we achieve that purpose, then it is, in my opinion, a burden we must bear, however politically inconvenient. To some, this may appear a Hobson’s choice. I don’t see it that way. Our obligation is to prevent inflation in order to sustain long-term employment growth. I believe that the best way to cut through the treacherous economic waves that are upon us and keep our ship steaming forward is to stick to our purpose. [Speech, March 4, 2008]
Bear Stearns collapsed the following week. His response?
In building the bridge to restore financial order and efficiency, my primary interest is to do the minimum necessary to get the job done. And no more. In so doing, my hope is that we restore the long-term faith of the millions of risk takers who make our economy so mighty. [April 9, 2008]
Such is the mindset of some of the men on the FOMC.
My bottom line is that I agree with Krugman. It is depressing, no, make that calamitous, to have someone with such a dangerous and cultivated degree of ignorance in a critical decision-making role. But let’s not be surprised. And let’s not pretend that Mr. Fisher is alone.