More continuity than change
Newspaper reports suggest that the US President will be naming the next chairperson of the Federal Reserve soon. I had done a blog post recently suggesting that either Kevin Warsh or John Taylor would be good choices. The current incumbent may still continue. Or, the President might appoint either Taylor or Jerome H. Powell. Recently, Taylor made a speech (“Rules Versus Discretion: Assessing The Debate Over The Conduct Of Monetary Policy”, 13 October 2017) at a conference organized by the Federal Reserve Bank of Boston. The speech was followed by a Q&A session with Taylor in which former Fed governors also participated. Both the speech and the Q&A session left me feeling underwhelmed.
In fact, I got the impression that he was going out of his way to present himself as representing continuity rather than change. I think he wants the job and, therefore, he was sending a coded message to the financial market that he was not a threat to them and that he was not a big disruptor. He oversimplified the issue by stating that sound monetary policy was all about setting out a strategy and maybe, doing a bit more homework about explaining why one deviated from that, say, in the last meeting even as one stuck to the strategy. Surely, it involves slightly more work but not something that is out of the realm of the creative abilities of central bankers and their economic research staff. So, in that sense, Taylor too would be disappointing. He is less in favour of monetary policy discretion but without any change in the fundamental orientation of monetary policy over the last three decades.
The issue is the political economy capture of monetary policy. Of course, it will be hard to prove with concrete evidence. There is only circumstantial evidence: the post-Fed tenure sinecures with financial institutions and speaking fees, the revolving door between the Wall Street and New York Fed and other regional Feds (somewhat rare) and the asymmetric asset price interventions, including the leakage of information during the regional Fed governors’ meetings. See papers by Anna Cieslak and Annette-Vissing Jorgensen. In a paper they wrote in March 2016, James Montier and Philip Pilkington of GMO showed that, post-1983, stock returns on Federal open market committee meeting days tended to be higher. The increase was more pronounced in the 2008-12 period. It did not matter if the Fed lowered or increased interest rates. The mere fact that it was meeting was enough to ensure positive stock market returns. There was no mention of any of these aspects of the conduct of monetary policy in Taylor’s presentation.
At one place, Taylor argues that America’s monetary policy followed some sort of a rule between 1985 and 2003 but not between 2003 and 2006, and that this explained the differential economic performance in the two periods. It is too simplistic and even, I dare say, ignorant. There are far too many moving parts to ascribe the differential economic performance (only) to the monetary policy framework.
Let us go back a bit to the creation of money. Not that I know the history well. I am open to correction here. First, there was barter. Then, money brought standardization. The public wanted purchasing power to remain intact. Hence, money was tied to some metallic standard. Then, wars and empire-building clashed with the rules of metallic standards. Periodic debasement was resorted to. Then, they (kings/governments) realized that this wouldn’t work. All people cannot be fooled all the time. They wanted the monopoly power to control money supply, to print money when needed and yet “fool” the public that their purchasing power would not be eroded. An independent central bank was a fiction that “guaranteed” this non-debasement “promise”. In theory, it is never independent. The fiction of separation between the creator of money and the user/spender of money was needed to reassure the public so that it wouldn’t question the monopoly that the state acquired to print money.
If an independent central bank is about not making the public poorer through erosion of purchasing power, then it has to have independence from the financial sector and financial markets too. After all, asset markets and asset price inflation do create relative poverty and also, in some situations, especially when they deflate, absolute poverty.
But governments are not questioning this lack of central bank independence from financial interests because the agents of the government—the legislators and the executive—are captured by the financial sector.
So, a question to ask Taylor is, how does his framework prevent the central bank from being captured by the considerations of financial markets and asset owners?
A more fundamental question is whether one needs to end government-central bank monopoly on money now that wars need not be conventional and hence, need not be financed. Hacking and cyber wars do not need much money at all. One can gut an economy with a few hundred lines of code. How much does it cost?
So, can we give back control over money and interest rates to the market so that we really do have a free-market economy?
Taylor is not even remotely close to asking these questions. That is why I feel that his candidature is more about continuity than about change. The Ponzi scheme—that asset markets globally have become—will not end under Taylor or Powell. It is disappointing.
V. Anantha Nageswaran is an independent consultant based in Singapore. He blogs regularly at Thegoldstandardsite.wordpress.com.
Read Anantha’s Mint columns here.
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