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The People Who Missed an $8 Trillion Housing Bubble and Thought Iceland's Economy Was Thriving Oppose Auditing the Fed
That is what Alan Blinder tells us in a Washington Post column today. Blinder tells us that the vast majority of academic economists and people in the financial industry oppose efforts to make the Fed more accountable to Congress. (He also bizarrely asserts that "very, very few" people support more congressional control of the Fed. This would seem to be inconsistent with the support for the Paul-Grayson bill to audit the Fed.)
Blinder tells us why more congressional input into monetary policy would be a bad thing. He notes that the Fed will start to raise interest rates at some point when the economy starts to recover. He then presents the hypothetical scenario: "Would we like to see the FOMC members called on the congressional carpet to explain why they are 'killing jobs'?"
Very good question. Just about everyone I know would say "yes." As phone records for Treasury Secretary Timothy Geithner from his days as president of the New York Fed show, Fed officials are in constant contact with top figures in the financial industry. There is no doubt that they would loudly hear the complaints from the industry if they were not raising interest rates fast enough to meet the industry's concerns about inflation.
The financial industry tends to be more concerned about inflation than the rest of us. While there is a large body of research that shows that modest rates of inflation (3-4 percent) have little negative economic effect,
the financial industry holds large amounts of fixed rate long-term debt. This debt loses value even if there are just small increases in the rate of inflation. For this reason, the financial industry tends to be much more vigilant in opposing inflation than manufacturing or other industries or the public at large, who may benefit from seeing the real value of mortgages and other debt eroded. Given the excessive influence of the financial industry on Fed policy, it would be perfectly reasonable for those not tied to the industry to desire a countervailing force on Fed policy.
It is also worth noting in this context the Fed's propensity to error on the side of excessive tightness. In the mid-90s, most of the members of the Board of Governors wanted the Fed to raise interest rates because they argued that the unemployment rate was getting too low. At the time, the unemployment rate was 5.6 percent, the level that most academic economists viewed as consistent with a stable rate of inflation.
Alan Greenspan, who was not an academic economist, argued that there was no evidence of inflation in the economy, in spite of the relatively low unemployment rate. He insisted on keeping interest rates low and allowing the unemployment rate to fall. The unemployment rate did eventually fall to 4.0 percent, with little perceptible uptick in inflation. This allowed for the first period of sustained real wage growth for most workers since the 60s. However, these gains were only possible because of the quirkiness of Greenspan's economic outlook and his extraordinary prestige at the time as Fed chairman.
--Dean Baker
COMMENTS (8)
The House committee just approved the Paul-Grayson, but if you searched up and down Bloomberg's web site today, you'll find no mention of it. However you will find a story about Yale football and about a Harvard poker player.
Posted by: some guy in a cube | November 20, 2009 8:14 AM
So I take it you do not think that loose monetary policy has anything to do with asset bubbles?
Also you mention that mortgage holders might like some inflation. True, but doesn't that only work for the first generation? Once lenders believe the fed is commited to 4% inflation they will raise mortgage rates to keep their real rates the same.
Posted by: Erik L | November 20, 2009 8:18 AM
Blinder goes to Congress as an "authority but, like SO MANY Economists exposed in the last three years, he's a water carrier.
Until Macro Economists correlate "inflation" to a representative population sampling, the argument's meaningless. Of course AG said their was no inflation, HE spear-headed the effort to kill it (& Glass-Steagall as well because more excess is always better than excess).
Is it a surprise he was ordained "Guru" status by the thieves he nurtured? Maybe only to so many of your Economist Brethren who sat by silently in their subsidized ivory towers. To the rest of us it was obvious.
Posted by: bailey | November 20, 2009 8:18 AM
See Glenn Greenwald for more on Paul-Grayson. Actually, Congress's action on this is so far at odds with what they usually do that I suspect an ulterior motive, although it could just be power hunger (patronage?). What exactly are they likely to do with the power?
Posted by: skeptonomist | November 20, 2009 9:17 AM
"the rest of us" you mean the "us" without savings (for, like, a house, when prices are more in line) and the "us" having no trouble to take tax payer's money and hand it over to a bank for a mortgage on a overpriced house? Those "us"? Well I must be alone then in my idea that bankers and governments actually like inflatian very much, decreasing their debts, inflating assets, solvency blah etc. IMHO inflation is stealing and the banks just pretend to be concerned with inflation. Whey figured out ways so we don't see the inflation in de CPI numbers, how great. Lots and lots of non-productive (FIRE) jobs, lots of bubbles. I don't know Dean, you're the economist but I don't like inflation one bit.
Posted by: mich | November 20, 2009 9:55 AM
Regular reader here and one in total agreement, mostly. However, just wanted to point out that Warren, the oracle here in Omaha,on his recent appearance on Charlie Rose apposed regulation of the
Fed by Congress. I assumed he did so because of the nature of Congress-e.g. lot of interesting characters there and very political. I'm just saying.
Posted by: JCS | November 20, 2009 1:41 PM
JCS: "Warren, the oracle here in Omaha,on his recent appearance on Charlie Rose apposed regulation of the
Fed by Congress. I assumed he did so because of the nature of Congress"
Buffett has his own agenda like everybody else. He's the largest Goldman-Sachs shareholder and has long been heavily involved in the finance industry (particularly insurance). So while his lines like characterizing derivatives as financial WMD's mean that he's a prudent long term investor rather than a reckless speculator, he's still got his own book to sell. The finance industry opposes changes to the Fed because in the status quo the Fed is their best buddy.
Posted by: alex | November 20, 2009 4:17 PM
Any move to hold any government agency truly accountable is welcome news. However, I doubt anyone hopes that the Fed will be truly accountable.
Congress itself is not exactly a poster child for accountability. How can anyone seriously expect Congress to hold the Fed accountable.
The Fed is pliable and compliant. Just take a moment to recall Greenspan's testimony before Congress in support of the Bush tax cuts. A truly accountable Fed chairman would have told the Congress that those tax cuts would leave the Federal government without the resources to avoid deficits going forward and that Congress would have to drastically rein in spending to avoid increasing the national debt. After Greenspan's "independent" testimony, who was left to challenge the Bush tax cuts from a position of authority?
The result of the independence of Greenspan
Posted by: Ron Alley | November 20, 2009 9:03 PM