In case you needed any more evidence that top policymakers are divorced both from reality and from understanding the consequences of their actions, witness Federal Reserve Board Vice Chairman Stanley Fischer’s interview today, in which he stated that “we had a financial crisis which was caused by behavior in the banking and other parts of the financial system and it did enormous damage to this economy.” Sorry, but it wasn’t bad actors in the banking system that caused the financial crisis. The Federal Reserve System was pumping money into the economy as fast as it could, pushing interest rates too low for too long and encouraging excessive risk-taking. Government housing policies were pushing for higher and higher homeownership rates, spurring lenders to reduce their lending standards to meet the government’s targets. And then once the crisis hit the Fed and the federal government tried to wipe their hands of the whole mess and blame everything on a few bad actors. That’s why Dodd-Frank and the whole mess of post-crisis regulations that have come down the pike completely missed the mark. Not only WILL they do nothing to stop a future crisis, they CAN do nothing to stop a future crisis because they misdiagnosed the cause. Dodd-Frank was just an attempt to use the crisis to force through a bevy of legislation that otherwise would have floundered in Congress for years. The worst part of it is that even after everyone will have realized that the bill was a complete flop, it will remain on the books for decades.
The Hoover Institution’s DC office held a short event this morning on “Rules for International Monetary Stability” which highlighted papers from last year’s Hoover Institution Monetary Policy Conference. While much of the discussion devolved into the minutiae of the particular monetary rules that “should” be implemented, there was one thing that stuck out to me that didn’t seem to be picked up on either by the audience or by the presenters. Professor Michael Bordo, in his presentation on monetary policy rules mentioned on several occasions how well the international gold standard worked as a monetary policy rule from 1880 to 1914. However, he also stated that it “stopped working” after World War I.
But as George Selgin and others have pointed out, not only did it work well, it didn’t just “stop working” – it was done away with by governments the world over. The gold standard was a hindrance to government spending, so governments around the world decided to jettison it. That was not a fault of the gold standard, it was a feature, keeping governments from being able to print money ad infinitum. Once governments got off gold, all sorts of mischief ensued – bank holidays, successive devaluations, hyperinflation, etc. I was tempted to ask the presenters: “If the gold standard worked so well, why not use that as the monetary policy rule going forward?” You can hear the scoffing now, and the protestations that the gold standard is impractical and that’s why it was abandoned. But in reality, the gold standard is no different than the Taylor Rule or any other monetary policy rule – once it begins to handcuff the government’s ability to inflate its way out of a recession it will be discarded. Fiscal dominance will always win out.
At the end of the day, discussions about central bank independence are moot. The success of any monetary policy rule, or indeed any monetary policy, is dependent on the government’s AND the central bank’s willingness to voluntarily set very limited boundaries for its own actions and to adhere to those boundaries. Once those boundaries have been crossed, the credibility of the government or the central bank to withdraw and retrench within those boundaries is gone. That’s what we face today. Central banks that have engaged in relentless quantitative easing, credit accommodation, and experimental negative interest rate policies cannot be trusted to return even to a pre-crisis monetary policy stance, let alone anything resembling a stable monetary policy rule.
Fed Vice Chairman Stanley Fischer today said that weak growth in the US economy in the first quarter is likely only temporary, and that the Fed could continue on with its planned rate hikes. Time will tell whether he’s right or wrong, but there is so much evidence out there that the economy is dependent on central bank money printing for its continued health that we can’t help but think that Fischer really isn’t in tune with what’s going on. Once the central bank stock and bond purchases wind down, stock markets will lose their luster, markets will begin to panic, and in the absence of any further quantitative easing the malinvestments that have been propagated through a decade of easy money will eventually be brought to light. Fischer, like most economists of the past few decades, doesn’t understand the consequences of his actions because of his failure to believe the teachings of Austrian Business Cycle Theory. That disbelief is irrelevant, however, and the consequences of the Fed’s decisions will occur regardless. When they do, let this post be a reminder that the Vice Chairman of the most powerful central bank in the world didn’t see the crisis coming.
There is perhaps no better way of summing up the direction of any organization than the phrase: “Personnel is policy.” With regard to government, that means that the people who are put into positions of power indicate the direction of actual policy more clearly than the President’s statements. President Ronald Reagan’s tenure was a good example of this. Despite his many public statements in favor of gold, his appointments to key positions and in particular to the Gold Commission were people who undermined his publicly-stated positions. Whether he was aware of this or not is up for debate, especially as we now know of his battle with Alzheimer’s.
That is the danger that might face the current Trump Administration where, despite his many public statements favorable to the gold standard, President Trump may end up appointing officials who hold exactly the opposite view as he does. This is particularly important now that news outlets have been reporting this week that President Trump is set to appoint Randal Quarles to the Federal Reserve Board as Vice Chairman of Regulation. Mr. Quarles’ biography is as establishment as it comes. He received his A.B. from Columbia University and his J.D. from Yale Law School. He worked at the Carlyle Group, a leading private equity firm whose close political connections to former senior Administration officials are legendary. His wife is Hope Eccles, grand-niece of Marriner Eccles, the Federal Reserve Board’s Chairman from 1934-1948, after whom the Fed’s headquarters building is named. Mr. Quarles also served as Under Secretary of the US Treasury, Assistant Secretary of the Treasury for International Affairs, US Executive Director of the IMF, US Executive Director of the European Bank for Reconstruction and Development, etc. Doesn’t exactly sound like a guy who is about to shake things up, right?
While his nomination isn’t official yet, let’s look at some other possible candidates President Trump might appoint to the Federal Reserve’s Board of Governors. We’ve split them into four categories.
1. The Dream Team – those candidates who would be the best possible from the perspective of those of us favoring sound monetary policy.
2. Establishment Favorites – the favorite candidates of the Establishment, or those already under consideration by the Administration.
3. The Compromise Candidates – these candidates are all former Presidents of regional Federal Reserve Banks. While they wouldn’t be the first choices of either the Establishment or of advocates of sound monetary policy, sending former regional Fed Presidents to serve on the Board might send a message to the Board to take into account not just the views of the Washington/New York financial-political elites.
4. The Dark Horses – while perfectly qualified for serving on the Board, these candidates are probably not as well known to the general public, and even to most policymakers, as some of the others.
Remember, President Trump will have at least four appointments to make in his first term, maybe even five if Chairman Yellen resigns her seat after her chairmanship is up, so his decisions on appointments could have a strong impact on the conduct of monetary policy going forward.
- The IMF Just Finished Its First “High Level” Meeting on Blockchain (CoinDesk)
- Fed’s Powell Says Parts of Too-Big-To-Fail Rules “Unnecessarily Burdensome” and May Not Be Needed at All (CNBC)
- Brief Remarks by Governor Jerome Powell (Federal Reserve Board)
- What the Gold Standard Is and Why It “Failed” (Sound Money Project)
- Fed’s Powell Open to Adjusting Post-Crisis Bank Regulation (Fox Business)
- US House Banking Chairman Unveils Dodd-Frank Replacement (Reuters)
- Mastercard Creates Credit Card With Fingerprint Scanner (CNBC)
- Federal Reserve Announces Two Enforcement Actions Against Deutsche Bank AG (Federal Reserve Board)
- Bank of England’s Carney Calls for “Dynamic” Financial Rules (CNBC)
- BOJ’s Kuroda Warns Against Policies Unwinding Free Trade (Fox Business)
- Fed’s Powell Suggests Streamlining Bank Stress Tests (Fox Business)
- Global Finance Leaders Find a More Temperate Trump in Washington (Reuters)
- The US Can’t Afford Trump’s $1 Trillion Infrastructure Spending, Warns Former Fed Chief Greenspan (CNBC)
- The Market Suddenly Doubts the Fed Will Raise Rates Twice More This Year (CNBC)
- Trump to Sign “Financial-Related” Executive Actions on Friday: Sources (CNBC)
- International Effects of Recent Policy Tightening: Speech by Vice Chairman Stanley Fischer (Federal Reserve Board)
- China Eases Yuan Outflow Controls in Sign of Recovered Confidence (CNBC)
- Boston Fed President Discusses Central Bank Asset Purchases, Balance Sheets (Boston Fed)
- Fed’s Rosengren Wants to Shrink Balance Sheet So Slowly That Rate Hikes Can Continue at Same Time (MarketWatch)
- Trump “Absolutely Not” Trying to Talk Down Dollar – Treasury’s Mnuchin (Reuters)
- Fed’s Fischer: US Monetary Policy Normalization Likely to Be Gradual (CNBC)
- European Banks Need More Than Simple Business Restructuring, IMF Warns (CNBC)
- Federal Reserve Should Act Predictably to Avoid Big Market Moves, Says IMF Director (CNBC)
- Fed Beige Book: Modest Wage Growth Is Broadening (Wall Street Journal)
- US Spooks Compromised SWIFT Banking Network: Hackers Group (Cointelegraph)
- Former Coordinator of the Plunge Protection Team to Be Nominated by Trump for Top Federal Reserve Position (Economic Policy Journal)
- Atlanta and NY Fed Cut US First Quarter GDP View After Weak Data (CNBC)
- Monetary Policy Expectations and Surprises: Speech by Vice Chairman Stanley Fischer (Federal Reserve Board)
- How a Trump Presidency Poses Big Questions for IMF and World Bank (Financial Times)
- Will the French Election Shake the Euro and the Markets? (Financial Times)
- Unlike Yellen, Rumored New Fed Bank Supervision Chief Supports Rule-Based Interest Rates (MarketWatch)
- Fed Official Backs Bond Paring This Year (CNBC)
- Switzerland Is Not Manipulating Its Currency (CNBC)
- Maduro Preparing to Swap Venezuela’s Gold for Dollars (Zerohedge)
- Time Has Come for Banks to Prepare for Interest Rate Rises: Bundesbank (CNBC)
- Trump Administration Narrows List for Fed Regulatory Post (CNBC)
- Curtains for Global Financial Regulation (Wall Street Journal)
- Jamie Dimon Says Fixing Mortgage Industry Would Boost Lending by $300 Billion a Year (MarketWatch)
- Trump’s Foreign Exchange Wobbles Risk Backlash at Home (Financial Times)
- Big US Banks Defy Calls That They Should Be Broken Up (Financial Times)
- Wall Street CEOs Downplay Risk of New Bank Breakup Law (Reuters)
- India’s Government to Consider New Digital Currency Rules (CoinDesk)
- Moody’s: Don’t Expect US to Lead Blockchain Adoption (CoinDesk)
- Royal Mint Blockchain Gold Project Gets BitGo, Alphapoint as Partners (Cointelegraph)
- Federal Reserve Vice Chairman Just Held a Secretive Off-the-Record Private Meeting With Insiders: WHY? (Economic Policy Journal)
- Fed’s Kaplan Says Balance Sheet Plans Won’t Shift Rate Hike Path (CNBC)
- How Big a Problem Is the Zero Lower Bound on Interest Rates? (Ben Bernanke’s Blog)
- Bernanke’s Conundrum: Why Do Investors Trust the Fed? (MarketWatch)
- Bitcoin Value Rises Over $1 Billion as Japan, Russia Move to Legitimize Cryptocurrency (CNBC)
- This Digital Currency Is About to Succeed Where Bitcoin Has Failed (MarketWatch)
- Trump: China Not a Currency Manipulator, Trade Deficit OK in Exchange for Help on North Korea (MarketWatch)
- Trump Won’t Rule Out Second Yellen Term, Signaling Drift to the Mainstream (Reuters)
- Why Did Trump Flip Flop on Yellen? She May Be the Dove He Needs, Analysts Say (MarketWatch)
- Banks Scramble to Fix Old Systems as IT “Cowboys” Ride Into Sunset (CNBC)
- The Fed Could Use Less Book Learning and More Street Smarts (Wall Street Journal)
- New York Fed, Two More Wanted No Discount Rate Change in March (CNBC)
- Inflation Hawk Lacker Was the Fed’s Fall Guy (Mises Institute)
- Minutes of the Board’s Discount Rate Meetings From February 13 Through March 15, 2017 (Federal Reserve Board)
- Neel Kashkari at the Minnesota Business Partnership (Minneapolis Fed)
- Trump’s Message to Bankers: Wall Street Reform Rules May Be Eliminated (Reuters)
- Fed’s Kashkari Sees Room for Improvement on Inflation, Jobs (CNBC)