Wednesday, August 29, 2012

Senator Bob Corker Whining to British Bankers About the US Fed.

commentary by Roger Erickson

Bernanke should show some humility

Overall, Corker's article causes my hair to stand on end. More than anything else, it makes me feel that there's a banking lobby once again running circles around US policy - a lobby that has Congressmen eating out of their hands. People this confused should NOT be on the Senate Banking Committee.

First off, why on earth would a US Congressman publish a rant in the FT, a bankers rag in a foreign country? That strikes me the same way LIBOR does, catering to a London banking cartel vs your own constituency. We don't need our Congresspeople discussing our policy in foreign newspapers.

Plus, the article is riddled with inconsistencies. (Fed watching is a distraction ... so complain about the Fed! Really?) Maybe we could send Corker some Nike shoes, with a note saying "Just Do It" ?

After reading the article, I'm not sure exactly why Corker is bringing up the issues he mentions, in a letter to a foreign banking newspaper. Classic politics? Bring up a few valid points, but twist their relevance?

For whatever reason, Corker has a problem with the Fed's dual mandate.

'A big part of the problem is that the US Congress has given the Fed an overly broad "dual mandate" of price stability and full employment. In 1978 Congress congratulated itself for “ending unemployment” via its passage of the Humphrey-Hawkins Act, which added full employment to the Federal Reserve’s existing mandate. This approach has not only proved unsound. It undermines the free market system, allows Congress to use the central bank as a scapegoat while avoiding tough policy decisions, and creates Fed addicts in our financial markets.'

He might have had a bit of a point there, if some Congresspeople really thought they'd delegated responsibility by abrogating it! Yet that's only a fraction of the whole story. He's doing the Humphrey-Hawkins Act a sweeping & severe disservice, and pandering to the 1% who would prefer right of first refusal on private ownership of any publicly-funded R&D. I smell a rat!

'[The Fed's Dual Mandate] undermines the free market system, allows Congress to use the central bank as a scapegoat while avoiding tough policy decisions, and creates Fed addicts in our financial markets.'

Perhaps, but that's no excuse for not acting like a Senator! If he were serious, wouldn't he be having this conversation with colleagues behind closed doors? This sort of public rant in a foreign banker's newspaper would irritate me if I were trying to serve on the Banking Committee. So what's the real purpose? Was the rant requested by certain lobbyists? For what reason? Who are Corker's financial advisors and main campaign finance contributors?

"We are one of the only developed countries in the world that has such a mandate. The European Central Bank, the Bank of England and the Bundesbank, to name but a few examples, all have single mandates."

First, wanting to be like the ECB or other CBs is not necessarily a positive!  Second, it's questionable how true his thesis is. And either way, what's the point for a Congressman responsible for shaping domestic banking policy? I have a bad feeling that Corker simply doesn't know what he's talking about, and is being used & abused by his campaign donors.

Comments at the FT article are all over the place, but one raises a killer point:

"This is the gentleman who when he had a chance to question Jamie dimon. Just brushed aside any serious questions and showered praise on the gentleman- these are the same guys who don't want any regulation" [sic]

In publishing his letter to the FT, what is Bob Corker showing?


23 comments:

Roger Erickson said...

"We need a Federal Reserve that will help, not hinder, our country’s vital transformation to an economy comprised of savers ..."

What on earth is he talking about?

Fiat currency = public initiative.
Why should we save public initiative?
How could we? By putting it off?

Initiative, if not used in real time, is lost forever.

dave said...

why doesnt dumbass corker look at englands health care system as well. http://bobcesca.com/blog-archives/2012/08/worst-person-in-the-world-37.html they are letting it all hang out for everyone to see

Roger Erickson said...

In parallel, Frau Merkel is heading to China ".. hoping to strengthen booming trade ties and obtain assurances from Beijing that it will support the fragile euro zone by buying the bonds of its stricken southern members."
http://www.phayul.com/news/article.aspx?article=Ahead+of+Beijing+visit%2C+Chancellor+Mekel+urged+to+condemn+China%E2%80%99s+crackdown+in+Tibet&id=32009


Wow! Way to undermine the ECB & Euro Parliament - who should be furious, if they even grasp what's going on.

If the EEU wants political unification, they better start acting like they aren't dependent upon others.

PeterP said...

Corker is a piece of work. He was heavily featured in one of the best Daily Show episodes:

http://www.thedailyshow.com/watch/thu-june-14-2012/bank-yankers---jamie-dimon-on-capitol-hill

Mike Norman said...

Corker routinely gets it wrong. His state ranks among the lowest in per capita Gross State Product, per capita income, educational standing, lifespan...in other words, all the measures of standard of living. That's true for much of the Republican South. If we follow his prescriptions, or those of his fellow Repubs, the 99% are all slaves. Listening to these guys sometimes makes me think that's what they want, to bring back slavery.

Geoff said...

I do agree with Corker that monetary policy is a blunt instrument that is quite ineffective in dealing with the employment part of the Fed mandate. I'd even go further and say that the second part of the mandate, i.e. inflation, is also largely beyond the control of the Fed. Fiscal policy would be more effective on both counts, at least in the current environment.

paul said...

Geoff,

Even a blind squirrel…

Corker doesn't get any credit here.

Tom Hickey said...

I do agree with Corker that monetary policy is a blunt instrument that is quite ineffective in dealing with the employment part of the Fed mandate. I'd even go further and say that the second part of the mandate, i.e. inflation, is also largely beyond the control of the Fed. Fiscal policy would be more effective on both counts, at least in the current environment.

The point of MMT, except that MMT says that fiscal is always more efficient and effective than monetary because monetary policy lacks a clear-cut transmission mechanism, being based on expectations, whereas the transmission mechanism of fiscal is clear-cut, being based on sectoral balances, SFC modeling, and functional finance.

Geoff said...

Right, Tom!

Anonymous said...

I can't comment on the article because it's behind FT's demonic pay wall, but I like this comment:

I'd even go further and say that the second part of the mandate, i.e. inflation, is also largely beyond the control of the Fed.

I'm endlessly confused at the obsessive fear by economists and Fed officials that the very moment they stop worrying about inflation, the inflation imp will appear and we'll be headed to ~10% per annum. It's apparently a vestige of the 1970s, but if you actually look at what happened in the 1970s, you see:

1) Two oil-fueled inflation spikes;
2) Maybe a wage-price spiral before the second oil spike;
3) Strong disinflation between the first spike and the second spike or wage-price spiral.

So the Fed, plus the institutional element of strong(ish) labor and price indexation in employment contracts, and acts of God (or the Saudi monarchy) in the form of supply shocks, might have - *might* have - created one wage price spiral, and inflation rates that topped off at 10% and 13% in the aftermath of the supply shocks. Despite frequently negative real interest rates coupled with the largest increases in energy costs we've ever seen, they just barely managed to kiss double digit inflation.

The sheer stupidity of the fear that they'll lose control over inflation is only matched by the sheer stupidity of the idea that they can easily create inflation. I'm not sure which is the more idiotic reading of history.

Tom Hickey said...

might have - *might* have - created one wage price spiral

This was behind the major push then to undercut labor bargaining power, which was successful the time and still continues.

Dan Kervick said...

I don't think the Fed can achieve employment rate objectives in any reliable way, so giving it a mandate to do so was probably a mistake. The expectation that the nation's employment objectives can be achieved by the central bank is a pathology of monetarism and its various theoretical spinoffs in the neoliberal era, an era that is hopefully coming to a close.

So I would go that far in agreeing with Corker, and agree with some of his points about the distraction and obsession of Fed-watching.

However, if the maximum employment mandate is taken away from the Fed, Congress must restore to itself a measure of direct operational control over monetary policy, so that it can use its constitutionally granted monetary powers to power countercyclical fiscal expansion and full employment without raising more taxes and issuing more debt.

The current operational requirement that Congress and the Executive Branch tax or borrow in order to spend from the public Treasury is, as MMT points out, a purely voluntary and self-imposed restriction that Congress has placed on its own operations. There is no inherent need for it.

The division between fiscal policy and monetary policy, and the attempt to invest these two dimensions of policy in two distinct and separate institutions - a politically elected Congress and presidency, on the one hand, and an unelected and barely accountable central "bank" on the other - is unnatural and inefficient. The central bank should just manage the liquidity and integrity of the banking system, with a clearer line of accountability to Congress. The nation's monetary policy should be in the hands of its people - not some secret panel of unelected bankers.

While the issuance of government securities is not a solvency problem for the government, much of it constitutes an unnecessary boondoggle for the affluent: free money given to the holders of financial capital in exchange for providing our government with a sort of permission slip to spend. Yet, Congress itself has created the whole bogus permission slip system!

Anonymous said...

In responce to Roger´s thoughful
words about Frau Merkel.As all know all Germans are not philosophers,but thankfully all germans are neither
supporters of Angela Merkel´s austerity policy either .There are lot protest in Germany about it.
One clever german kaleckian economist is prof. Heiner Flassbeck
chief economist at UNCTAD.He have real intelligent words to say about the Eurocrize.Watch this videos:
http://www.youtube.com/watch?v=2d96lhbO0z0

http://www.youtube.com/watch?v=TFKzAAd_1W8&feature=related

http://www.youtube.com/watch?v=kIKGb7EkkbE&feature=relmfu

Edmund said...

This was behind the major push then to undercut labor bargaining power, which was successful the time and still continues.

Yep. But my comment - as "Anonymous" because Java was screwed up - appears to have imploded.

Tom Hickey said...

Just posted Heiner Flassbeck's take on the euroland crisis.

Anonymous said...

Thanks Tom!An excellent article by H.Flassbeck!

Ralph Musgrave said...

Tom Hickey says, “MMT says that fiscal is always more efficient and effective than monetary..” Just to be accurate, MMT advocates combining the two doesn’t it? That is in a recession MMT says “create new money and spend it into the economy (and/or cut taxes)”.

I.e. pure fiscal consists of having government borrow and spend, rather than print and spend.

Dan Kervick said...

Good point Ralph. I think we need to try to get over the idea that the distinction between monetary policy and fiscal policy is the same thing as the distinction between central bank policy and legislative/treasury policy.

Congress has it within its power to carry out monetary policy in the very act of spending!

Tom Hickey said...

Monetary policy under normal conditions is just interest rate setting — through a command system under the control of a handful of unelected bureaucrats. In abnormal conditions, this small coterie attempts to assert more control over the economy. It's absurd, in addition to be anti-capitalistic and anti-democratic. Britain at least had the ability to see this contradiction and set up Libor instead within the private sector. And look where that led. Government putting control of economic levers in the hands of a small group of interested people, or allowing it to happen, generates a command system pure and simple.

paul said...

"I.e. pure fiscal consists of having government borrow and spend, rather than print and spend."

What???

You've lost me here.

y said...

All government spending involves "money creation". When the government holds its own currency, it doesn't have any "money". The money is created as it is issued to the non-government, i.e. spent or lent.

The restrictions on the treasury are simply that it must have a positive balance in its account before it can spend, and that it mustn't spend more than that balance. This positive balance essentially denotes how much money has previously been "destroyed" in payment to the treasury.



y said...

of course the treasury doesn't think of it this way, though...

...dumbasses

Calgacus said...

Ralph:I.e. pure fiscal consists of having government borrow and spend, rather than print and spend.

Ralph, if I understand you correctly, that is not really the right way to define "pure fiscal" - that is not the way that MMT & Lerner decompose things.

For MMT & FF & goddamn common sense - print/spend is "pure fiscal". The way things are done now is what Lerner called borrowingandspending - match spending with bonds 1-1.

The mainstream thinks of borrowingandspending as the "pure", fundamental operation, and I think you are following that. And it sees MMT/FF pure (print)spending as borrowingandspending followed by QE, the Central Bank "printing money" to buy the bonds the Treasury just printed (which it sold to put $ in the TGA to spend), to "finance" the deficit.

But this is all smoke & mirrors. The MMT/FF way of thinking is much simpler & clearer, and describes the actual economic interactions of the government with the non-government in a normal country, without uselessly tracking how much one pocket of government pretend-owes another.