Fed Up
Today’s Outside
the Box is a special treat. My good friend and fellow Texan
Danielle DiMartino Booth’s new book, Fed Up: An
Insider’s Take on Why the Federal Reserve Is Bad for America, was out officially
yesterday, on Valentine’s Day, and already there are dozens of reviews all over
the internet.
Ten years ago, Danielle left a trading gig on Wall Street to work
directly for Dallas Federal Reserve President Richard Fisher. She helped him
gain insights into the economy and aided in crafting his speeches and writings.
Those of us who knew her knew that she was a gifted writer; and when Fisher
resigned and Danielle left the Fed, she started her own website and newsletter; and now her talent is apparent to
many more people. She is the third most followed person on LinkedIn, after less
than a year.
And then we come to her book. It’s a simply devastating account of
what actually goes on inside the Federal Reserve. To say she eviscerates that
august institution is to be kind. I saw her treatment of the Fed coming,
because Danielle and I have shared many conversations in which we despaired of
the impact the Federal Reserve is having on Main Street. But what do you expect
when you have a bunch of PhDs who share an economic philosophy and an attitude
that lets them think they know just how to manage the US economy and control
the price of the most valuable commodity in the world, the interest rate on the
US dollar.
That low rates devastate middle-class savers and retirees (as they
enrichen Wall Street and the big banks) seems not to register on the Fed’s
cost-benefit analysis scale. I think longtime readers pretty well know how I
feel about the Federal Reserve and their policies.
You can go to the Amazon page for Fed Up and read most of the book’s first
chapter, but I persuaded Danielle to let me take you right to the end of the
book and her summary of how the Fed should be reorganized. This is a powerful
to-do list that I hope every Congressman and Senator will read. It is crucially
important that they reorganize this institution that is playing havoc with Main
Street. After you read Fed Up,
I think you too will be ready to join the movement to demand the restructuring
of our central bank. We should remove the Fed’s dual mandate, reinforce its oversight
functions, and so forth, while understanding that there is a role for an
independent central bank – just not the role subscribed to by the academics who
currently run the Fed.
Culture Shock
“If it were possible to take interest rates
into negative territory, I would be voting for that.”
– Janet Yellen, February 2010
As her fame has grown, Janet Yellen is recognized in restaurants
and airports around the world. But her world has narrowed. Because the Fed
chairman can so easily move markets with a few casual words, Yellen can’t get
together regularly and shoot the breeze with businesspeople or analysts who
follow the Fed for a living. She must rely on her instincts, her Keynesian
training, and the MIT Mafia.
“You can’t think about what is happening in the economy
constructively, from a policy standpoint, unless you have some theoretical
paradigm in mind,” Yellen had told Lemann of the New Yorker in 2014.
One of Lemann’s final observations: “The Fed, not the Treasury or
the White House or Congress, is now the primary economic policymaker in the
United States, and therefore the world.”
But what if Yellen’s theoretical paradigm is dead wrong?
The woman who “did not see and did not appreciate what the risks
were with securitization, the credit rating agencies, the shadow banking
system, the SIVs ... until it happened” has led us straight into an abyss.
It’s time to climb out. The Federal Reserve’s leadership must come
to grips with its role in creating the extraordinary circumstances in which it
now finds itself. It must embrace reforms to regain its credibility.
Even Fedwire finally admitted in August 2016 that the Federal
Reserve had lost its mojo, with a story headlined “Years of Fed Missteps Fueled
Disillusion with the Economy and Washington.” In an effort to explain rising
extremism in American politics in a series called “The Great Unraveling,” Jon
Hilsenrath described a Fed confronting “hardened public skepticism and growing
self-doubt.”
Mistakes by the Fed included missing the housing bubble and
financial crisis, being “blinded” to the slowdown in the growth of worker productivity,
and failing to anticipate how inflation behaved in regard to the job market.
The Fed’s economic projections of GDP and how fast the economy would grow were
wrong time and again.
People are starting to wake up. A Gallup poll showed that
Americans’ confidence that the Fed was doing a “good” or “excellent” job had
fallen from 53 percent in September 2003 to 38 percent in November 2014.
Another poll in April 2016 showed that only 38 percent of Americans had a great
deal or fair amount of confidence in Yellen, while 35 percent had little
or none – a huge shift from the early 2000s when 70 percent and higher
expressed confidence (however misguided) in Greenspan.
In early 2016, Yellen told an audience in New York that it was too
bad the government had leaned so heavily on the Fed while “tax and spending
policies were stymied by disagreements between Congress and the White House.”
Maybe if she hadn’t been throwing money at them, lawmakers might have gotten
their house in order.
“The Federal Reserve is a giant weapon that has no ammunition
left,” Fisher told CNBC on January 6, 2016.
The Fed must retool and rearm.
First things first. Congress should release the Fed from the
bondage of its dual mandate.
A singular focus on maintaining price stability will place the
duty of maximizing employment back into the hands of politicians, making them
responsible for shaping fiscal policy that ensures American businesses enjoy a
traditionally competitive landscape in which to build and grow business.
The added bonus: shedding the dual mandate will discourage future
forays into unconventional monetary policy.
Next, the Fed needs to get out of the business of trying to compel
people to spend by manipulating inflation expectations. Not only has it
introduced a dangerous addiction to debt among all players in the economy, it
has succeeded in virtually outlawing saving.
Most seniors pine for a return to the beginning of this century
when they could get a five-year jumbo CD with a 5 percent APR, offset by
inflation somewhere in the neighborhood of 2 percent. Traditionally, 2 to 3
percentage points above inflation is where that old relic, the fed funds rate,
traded. The math worked.
Under ZIRP, only fools save for a rainy day. The floor on
overnight rates must be permanently raised to at least 2 percent and Fed
officials should pledge to never again breach that floor. Not only will it
preserve the functionality of the banking system, it will remind people that
saving is good, indeed a virtue. And that debt always has a price.
Limit the number of academic PhDs at the Fed, not just among the
leadership but on the staffs of the Board and District Banks. Bring in more
actual practitioners – businesspeople who have been on the receiving end of Fed
policy, CEOs and CFOs, people who have been on the hot seat, who have witnessed
the financialization of the country and believe that American companies should
make things and provide services, not just move money around.
Governors should be given terms of five years, like District Bank
presidents, with term limits to bring in new blood and fresh ideas.
Grant all the District Bank presidents, not just New York’s, a
permanent vote on the FOMC. Why should Wall Street, not Main Street, dominate
the Fed’s decision making?
While we’re at it, let’s redraw the Fed’s geographical map to
better reflect America’s economic powerhouses.
California’s economy alone is the sixth biggest in the world. Add
another Fed Bank to the Twelfth District to better represent how the Western
states have flourished over the last hundred years.
Why does Missouri have two Fed banks? Minneapolis and Cleveland
can be absorbed into the Chicago Fed. Do Richmond, Philadelphia, and Boston all
need Fed District Banks? Consolidate in recognition of the fact that it isn’t
1913 anymore.
Slash the Fed’s bloated Research Department. It’s hard to argue
that a thousand Fed economists are productive and providing value-added insight
when their forecasting skills are no better than the flip of a coin and half of
their studies cannot be replicated.
Send most of the PhD economists back to academia where they
belong. Require the rest to focus on research that benefits the Fed, studying
how its policies impact American taxpayers and citizens. (Did the Fed do any
studies about how ZIRP and QE would impact banking and consumers before it
imposed them? No.)
Now take all the money you’ve saved and aim it squarely at Wall
Street investment banks intent on always staying one step ahead of the Fed’s
regulatory reach. Hire brilliant people for the Fed’s Sup & Reg departments
and pay them market rates. Rest assured this will be ground zero of the next
crisis.
And mix it up. One of Rosenblum’s students applied for a job at
the New York Fed. He came from a blue-collar background, spent seven years in
the military, and earned his MBA from SMU on the GI Bill. Smart guy. But he
couldn’t get to first base at the New York Fed. They hire people from Yale and
Harvard and NYU – people just like themselves. Others need not apply.
Then the top Ivy Leaguers stay for two years and move on to bigger
money at Citibank or Goldman Sachs. It’s a tribe that’s been bred over ninety
years and slow to change.
But if the culture of extreme deference at the New York Fed (which
also exists in District Banks to a lesser degree) is not quashed, regulatory
capture will continue with disastrous results. The Fed must give bank examiners
the resources they need to understand the ever-evolving financial innovations
created by Wall Street and back them up when they challenge high-paid bankers
who live to skirt the rules.
Regulators must focus on the big picture as well as nodes of risk.
Interconnectedness took down the economy in 2008, not just the shenanigans of a
few rogue banks.
Focus on systemic risk and regulation around the FOMC table.
Create a post with equal power and authority to that of the chair to focus on
supervision and regulation. Yellen talks about monetary policy ad nauseam, but
when challenged by the press or Congress on regulatory policy she stumbles and
mumbles and does her best doe-in-the-headlights impersonation. Markets need
predictability and transparency when it comes to Fed policy, not guesswork,
parsing of the chair’s words, and manipulation of FOMC minutes.
Finally, let nature take its course. Reengage creative
destruction. Markets by their nature are supposed to be volatile. Zero interest
rates prevent the natural failures of weak companies, weighing down the economy
with overcapacity for generations.
Recessions might have been more frequent, the financial losses
greater for some, but if the Fed had let the economy heal on its own, America
would have been stronger in the end and the bedrock of our nation, capitalism,
would not have been corrupted.
I could never have imagined how my near decade-long journey at the
Federal Reserve would play out.
In the beginning, I had been a “risk radar” to benefit myself and
those closest to me. I wanted to stay out of debt and make certain that my
children had great educations and a foundation of financial savvy so that they
could pursue their versions of the American dream.
But I realize now the stakes are much higher.
We’ve become a nation of haves and have-nots thanks to Fed
policies that benefit the wealthiest investors, punish the savers and the
retired, and put the nation’s balance sheet at risk.
As consumers on the receiving end of Fed policies, we must reform
our education system so that the American dream can be accessible to everyone.
We must campaign for Congress to stop hiding behind the Fed’s skirts.
And we must demand that the Fed stop offering excuse after excuse
for its failures. Short-term interest rates must return to some semblance
of normality and the Fed’s outrageously swollen balance sheet must shrink in
size. And most of all, the Fed must never follow Europe by taking interest
rates into negative territory.
No more excuses. The Fed’s mandate isn’t to have a perfect world.
That only exists in fairy tales, dreams, and the Fed’s econometric models.
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