Should-Read: Doug Campbell: Douglas L. Campbell: In the Idiocy of Kevin Warsh: More Evidence for the ‘Self-Induced Paralysis’ Thesis: “I believe it is clear that the main reason the economy has been growing slowly since the financial crisis is overly tight monetary policy… http://douglaslcampbell.blogspot.ru/2017/07/in-idiocy-of-kevin-warsh-more-evidence.html
…In particular, look at… 2009, when the Fed adopted no new stimulus despite headline deflation and mass job losses, on net (in terms of rates or asset purchases, forward guidance was done), or in 2010, when the Fed raised the discount rate. What on Earth could they have been thinking?… Part of the answer might be that Ben Bernanke, ever a consensus builder, would have liked to do more, but was also constrained by other members of the FOMC. Sam Bell provides some evidence for this in a can’t miss article on Kevin Warsh, who now appears to be a front-runner for the Fed Chair job, who was still worried about inflation pressures even after Lehman Brothers failed in 2008…. Warsh is a lawyer by training… appointed to the Fed at age 35 with a light resume after his father-in-law, Ronald Lauder… likely influenced his selection with donations. Even as the economy was tanking in 2008 and 2009, Bell writes that “Warsh adopted a skeptical and increasingly oppositional posture. He doubted the Fed could do much good without creating much bigger problems.”
Much bigger problems? What could be a bigger problem than letting the economy burn in a financial crisis?
“In March 2009 he told his Fed colleagues that he was “quite uncomfortable with the idea of purchasing long-term Treasuries in size” because ‘if the Fed is perceived to be monetizing debt and serving as a buyer of last resort in the name of lowering risk-free rates, we could end up with higher rates and less credibility as a central bank.'” The Fed should hold off on more stimulus in the worst recession in 75 years because it might actually end up with higher rates and lose credibility? Why wouldn’t the Fed lose credibility if it was perceived as not fighting the recession? Warsh continued to warn about the dangers of both monetary and fiscal stimulus in 2010. Warsh was also far and away not the only crazy one at the Fed at that time. In 2011… Daniel Tarullo… told me he believed that Jean-Claude Trichet’s interest rate hikes in 2010–which are widely seen to have been premature and to have helped ignite the European Debt Crisis–were justified. These comments suggested to me that Tarullo was somewhere to the right of Genghis Khan on monetary policy. Then, there were also worthies like Richard Fisher, Often Wrong but Seldom Boring, who “warned throughout most of 2008 that inflation was the primary danger to the economy”.
And that, my friends, is how the Tea Party was born….
The FOMC is that it’s a job most people seem to not want to do for very long. It’s a revolving door. Most people will do it for 4-5 years, and then quit for greener pastures, as it is not a job that pays that much, particularly by the pornographic standards of finance and banking…. In part because it is a revolving door the Obama administration never took its appointments seriously. They left in place an FOMC made up mostly of Republicans, including staunch white male MBA-holding Republicans raised in the south in the 1960s. Obama’s economic advisors apparently did not see this as potentially problematic.
And, then we had Bernanke, who apparently still holds the view that economic growth in the US economy is still more-or-less OK. In 2011, I also had a conversation with Ben Bernanke…. He was actually surprised when I asked him why he wasn’t doing more, given that core inflation at the time was running around 1.4%. His response is that higher inflation wasn’t costless. But I didn’t see how inflation of 2% vs. 1.4% would be as costly as millions of people out of work. It seems, few people at the Fed were trying to influence him in the direction of doing more. What all of this evidence does is make the thesis of “Self-Induced Paralysis”, that the major problem with the US economy is overly tight monetary policy, more plausible…