A New Monetary Policy Framework? Old Faithful Meets the ‘New Normal’
Henry Washburn, Nathaniel P. Langford and Lt. Gustavus C. Doane, three intrepid souls who came, saw, mapped, and then in language so vivid as to be almost unbelievable, described in all its rugged splendor the sheer beauty of the land through which they traveled. President Ulysses S. Grant had charged these men with leading the 1870 Washburn Expedition for the exploration and mapping of Wyoming’s northwestern portion. It was this vast untamed wilderness that in just two short years’ time, from 1870 to 1872, would encompass our nation’s first national park, the majestic Yellowstone.
Reading the glowing accounts, and finding themselves enthralled by the words, they came, not just from near, but from the far reaches of the globe so that they too could see these wonders. They were not to be disappointed, and still they come today. First travel was by wagon, then station wagon and finally the ubiquitous SUV. And, now as then, there is that one must see constant, what those explorers could only describe as Old Faithful, a geyser that gushed forth in all its glory with unfailing frequency.
In the hate-to-burst-your-bubble department, The Geyser Observation and Study Association notes the following of Old Faithful:
“It is not the biggest or most regular geyser in Yellowstone but it is the biggest regular geyser.”
(No, you are not imagining that whoever wrote that description must have been channeling the late, great Yogi Berra.)
In fact, Old Faithful has become less faithful over the years. When the expeditioners first happened upon this faithful beauty, she erupted every 65 minutes, give or take. But, since the turn of this young century, the average wait between showy spectacles has risen to 92 minutes. The occurrence of several earthquakes has resulted in sufficient enough changes in the geyser’s circulation to throw the old girl off her ‘A’ game.
In the event you too are contemplating a visit to the famous geyser but don’t relish all that time in your SUV with the kiddos, be reassured it’s but a mere 89.1 miles from the Jackson Hole airport, as in two hours, door to door. So don’t drive, fly.
Among those making that trek in the next coming days will likely be more than a few learned economists. The usual tourist suspects will no doubt find themselves elbow to elbow with those day-trippers as they wait patiently, or not so patiently for the average 92 minutes Old Faithful now requires to blow. And while it’s true they might briefly venture afield, it’s not the scenery these economists have come to see. Theirs is a gathering by invitation only from the Kansas City Federal Reserve who will be hosting the annual confab to end all economist confabs in beautiful Jackson Hole.
Attendees will be on red alert for any hint of coming actions on policymakers’ parts as Janet Yellen herself graces the faithful with her presence. The question is, will she stand and enlighteningly deliver? Those attentively listening certainly hope so. They too have begun to appreciate that like the increasingly fickle geyser, the gathering is not as consistent as it once was in providing direction on the future path of monetary policy.
There is, however, one thing that is certain. The aim of the conference is noble and true as designated by its lofty theme, “Designing Resilient Monetary Policy Frameworks for the Future.” Oh, but that it would be possible for the new normal to not be more of the same, that the future not hold what was laid out in clandestine fashion at the very same event nine years ago.
In the event you’re too young to remember, or have blocked 2007 (and 2008 and 2009) from your memory banks for the sanctity of your sanity, the abrupt folding of New Century had given birth to a new spectator sport: Keeping count of subprime lenders going belly up. Does anyone out there remember the Mortgage Lender Implode-O-Meter? (Latest count in case you’ve long since deleted the bookmark is 388 since 2006).
At about the time the Meter was shifting into high gear, in early 2007, then Fed Chairman Ben Bernanke was reassuring the masses on the housing front. Of modern day downfalls,”…these were regional things.” Of the outlook, “A national decline in house prices hadn’t occurred since the 1930s.”
What a difference a summer made. By the time the crème de la crème of the economic community was journeying to Jackson Hole that year, BNP Paribas, a massive French bank, had announced it was suspending withdrawals from three investment funds that held subprime securities.
“Regional” had morphed to globally systemic in the blink of an eye.
A clandestine meeting was thus convened at Jackson Hole with the Chair’s closest lieutenants including New York Fed heavyweights Timothy Geithner and Bill Dudley. According to some Forth Estate worthy reporting by John Cassidy for the New Yorker, Bernanke posed the following question to his acolytes, “What tools do we have and what tools do we need?” With that one question, a Pandora’s Box of acronyms we now hold near, but decidedly not dear, was thrown open, with flourishing gusto.
Many of the emergency liquidity programs that provided vital functionality to the suffocating financial system were conceived that day, all based on the premise that the Fed’s balance sheet could be substituted for the compromised balance sheets of most of the conventional banking system. Recall that banks had been taken down by themselves, at least the parts of themselves that comprised the shadow banking system they had kept hidden from the prying eyes of all but the savviest, albeit dismissed, regulators.
But that isn’t where the real theoretical damage was wrought that day in that sanctorum in the mountains. The zero bound (ZIRP) and beyond (QE infinity) – those were the day’s twin agreed upon concepts that really laid the groundwork for where we find ourselves today, as in trapped.
Was Bernanke at peace with the Doctrine that carried his name? That’s doubtful given what he did share publicly at that year’s conference, cleverly captured by Andrew Ross Sorkin in excerpt from his book, Too Big to Fail:
“’It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions.’ Yet his very next sentence – ‘But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy,’”
Sorkin goes on to rightly conclude that Bernanke’s conflicted thinking drove him to protect Bear Stearns only a matter of months later, moral hazard be damned.
Bear in mind, the extraordinary measures never needed to have come about in the first place. Alas, the willful blindness to the very idea of bubbles has time and again left interest rates too low for too long, but yours truly digresses…
Where do we find ourselves today? In a word: fixated.
Markets are dying to know whether Janet Yellen will echo her protégé or seconds in command. Will she wax hawkish and validate Bill Dudley and Stanley Fischer’s admonitions that the financial markets are too complacent in discounting away Fed hikes for the foreseeable future? Or will she swing completely to the opposite end of the spectrum, confirming San Francisco Fed President John Williams’s frightening refutation of the liquidity trap, the idea that the inflation target need be raised?
If only there were a third option. That thought strikes a chord every time the title of Bernanke’s memoir, The Courage to Act, comes to mind. Had more central bankers had a different courage, the courage to not act, to hold the line, fiscal solutions would have been forced. Sadly, it is not in the DNA of modern day policymakers to embrace inaction. Something, anything, must always be done to offset politicians’ misfeasance. In the event the circularity of central bankers’ compulsions is lost on you, their acts all but compel misbehavior among our politicians.
Just think how much better off the workforce would be today had 99 weeks of unemployment insurance not been so cheap to underwrite care of ZIRP. And imagine how less obscene the cost of college tuition would be today had Greenspan heeded the handful of Fed insiders’ warnings about the danger of homes being parlayed into ATM machines (OK so high school grads might have had to settle for a more humble but still worthy institution of higher learning had mom and dad not taken out that home equity loan to send them to a more prestigious college.)
But that didn’t happen. Today we all pay a higher price. In fact, the same can be said of most of the things we consider to be necessities where rampant inflation has driven up the cost of rent and healthcare. Contrast that with the goods, as opposed to services, deflation that keeps central bankers up at night, for those discretionary items such as flat screen TVs and flat top baseball hats. Are you beginning to get the picture of how severely strained the household sector is?
To relieve this problem the Fed should raise the inflation target? That makes sense in what world?? It would accomplish exactly what to quash the euphoria of a stock market whose level of overvaluation has only been higher in 1929, 2000, and 2007?
Ask any pension fund manager in the world how to square this thinking and they’re liable to order a strait jacket, and pronto.
What we really need is a machine to travel back in time. That’s the only thing that would give us a fighting chance to successfully design a resilient monetary policy framework for the future. Unfortunately, that technology does not exist.
That leads us back to the beautiful square gracing downtown Jackson Hole, to a New Old Faithful, sentenced again and again to pay the price for the future actions of central bankers who simply don’t have the courage to stand down. For now, don’t bother looking for any beauty of the inspiring kind across this economic landscape. It’s flat as far as the eye can see.
Originally posted on Danielle DiMartino Booth’s website.