Run Away: The Fed Gives In?

This is plainly ridiculous.I am stupefied by the nonsense emanating from officialdom over the economy. Two separate Federal Reserve presidents recently made total fools of themselves, and yet they are taken seriously. Philadelphia Fed President Charles Plosser and Minneapolis Fed President Narayana Kocherlakota have both given speeches, and made other comments within the last day or so, that argue the Fed should cease its efforts at supporting the economy. The center of their attention being the bond purchase program the Fed has been following in order to inject liquidity into the economy. Both argue the program should be halted or reduced.

The Fed is fast approaching having to make a decision on whether it should make another effort to add stimulus to the economy. These speeches are the first by Fed presidents on the subject and give us insight into the divisions that are weakening the Fed’s ability to act decisively. We should expect other officials to weigh in as the week goes by.

What astonishes me with these first comments are a clear dereliction of duty.

It is plainly absurd to quit and throw up your hands just because the first round hasn’t had the success you wanted.As Adam Posen, a member of the UK Monetary Policy Committee, said about similar statements in the UK, such talk is tantamount to arguing we should stop pouring water on a burning fire because, well ummm … we’ve already put a lot of water on it. The point is if the fire is still raging you keep going. Even if that means breaking the records for the amount of water you use. Duh.

Plosser made the entirely ridiculous comment that ‰ÛÏMonetary policy is not a magic elixir that can solve every economic ill,‰Û?. True enough, perhaps. But it is our only available tool given that Congress has walked away from its responsibility to do anything and is now caught up in partisan bickering as America’s perpetual election season grinds on.

Plus I obviously need to remind Plosser that it is the Fed’s responsibility, along with assuring price stability, to support full employment. Tossing that goal aside as if it is unimportant is an extraordinary admission of failure. Worse still, it is a callous and morally suspect attitude. The tools are still available to the Fed to help support the economy. Not to use them simply because we are in uncharted territory in terms of volume of bonds purchased is a child like response to the crisis. To say we’ve never been here before just dumb: the recession was a record breaking problem. The solution could well thus be record breaking as well. For Plosser to suggest we stop our efforts to get the economy humming again merely because we’ve done a fair bit already is either an act of cowardice, or an act of barbaric indifference to the millions of Americans still affected by the financial system implosion that people like Plosser stood by and watched happen.

Of course Plosser’s monumental stupidity is simply a result of his continued commitment to the discredited economic theories that brought us the disaster in the first place. He hasn’t learned. Or he simply sees no reason to learn. His agenda is clear: he wants to inflict pain on us all so that the market magic he worships can manifest itself clearly. Apparently no amount of evidence is sufficient to pry Plosser from his cave of ignorance.

And as for Kocherlakota: his argument is practically the same. He suggests that adding more liquidity is a waste of time since the economy is awash with cash already. He points to the record bank reserves – now well over $1 trillion – to support his case. He does not want us to add more when that enormous pile is unused. Plus, he goes on, all that liquidity will surely come back to haunt us as inflation when the economy gets going.

Not true. Not true. Not true.

The banks are not lending because no one wants to borrow. No one wants to borrow because we have huge over capacity. We have huge over capacity because there is no demand. There is no demand because households and businesses are hoarding cash. That cash has poured into the banks and into the bond markets which is why the banks have such big reserves. So. To break this cycle we need to stimulate demand. To use another of Posen’s examples of how this is absurd. Just because we’ve been driving a long time does not mean, automatically, that we’ve arrived. We have a goal. We keep working and working until that goal is achieved. Stopping now would render all the earlier efforts for naught.

To say, as Kocherkalota does, that we should stand aside because the credit markets are not as bad as they were, is another extraordinary abandonment of responsibility. That the markets are healed somewhat is meaningless: it is the economy that needs to heal. Further, to talk about imminent inflation, or some putative inflation threat, is totally irrelevant. There is no sign of inflation anywhere. All signs point to continued disinflation or even to deflation.

That $1 trillion demonstrates the extent of the damage the banks did. They very nearly destroyed the entire economy with their incompetence. They plunged us into the abyss, where we fell deeply into a liquidity trap. Zero interest rates and massive unused piles of cash are textbook symptoms of such a trap. You do not break out by doing nothing unless you are content to undergo a depression style process of contraction.

How difficult is this to understand?

Evidently very hard for people like these two who are resolutely driven by their austerity biased ideology.

One last thing. Never allow your children to talk the way Plosser did. He added, as another reason for inaction, that he feared failure and that such failure may taint the Fed’s reputation. What?? As if inaction and dereliction of duty were not enough to do the damage, he wants to duck and cower in the corner as well.

Running away from our problems is not a policy.

Someone should tell the Fed. This is not a test of their ideology. This is a test of their commitment to their responsibility.

Thus far they seem intent on failure.