George Will: The Fed's not-so-golden rule
A display case in the lobby of the Federal Reserve Bank in Richmond, Va., might express humility. The case holds a 99.9 percent pure gold bar weighing 401.75 troy ounces. Minted in 1952, when the price of gold was $35 an ounce, the bar was worth about $14,000. In 1978, when this bank acquired the bar, the average price of gold was $193.40 an ounce and the bar was worth about $78,000. Today, with gold selling for around $1,600 an ounce, it is worth about $642,800. If the Federal Reserve's primary mission is to preserve the currency as a store of value, displaying the gold bar is an almost droll declaration: "Mission unaccomplished."
Today the Fed's second mission is to maximize employment, and Chairman Ben Bernanke construes the dual mandate as a single capacious assignment - "promoting a healthy economy." But the Fed's hubris ignores the fact that it anticipated neither the Great Depression that began in 1929 nor the Great Recession that began five years ago. The Fed failed to cure the former, and today's unprecedentedly anemic recovery - approximately three million fewer people are working than were five years ago - has failed to cure the latter: If the workforce participation rate were as high as it was when Barack Obama was first inaugurated, the unemployment rate would be 10.8 percent.
Jeffrey M. Lacker has become the Fed's resident dissenter. As a voting member of the Federal Open Market Committee, Lacker, president of the regional bank in Richmond, has cast one-third of the dissents recorded during Bernanke's seven years as chairman. Lacker, who has dissented at more than half the policy meetings where he has been a voting member, has done so in the name of institutional humility.
When he told The New York Times, "We're at the limits of our understanding of how monetary policy affects the economy," he was too polite. We are increasingly understanding the deleterious effects - political as well as economic - of very low interest rates for a very long time.
While Lacker says "a vigorous monetary policy response can be necessary at times to prevent a contraction from becoming a deflationary spiral," the Fed continues its vigorous pursuit of growth through cheap credit more than four years after the moment of crisis.
Bernanke says "using monetary policy to try to influence the political debate on the budget would be highly inappropriate" and "it is important to keep politics out of monetary policy decisions." But monetary decisions powerfully and predictably influence political debates.
Will Rogers said, "Be thankful we're not getting all the government we're paying for." Today we are not paying for all the government we are getting, and the political class benefiting from this practice should be thankful for the Fed's low interest rate policy, which makes running deficits inexpensive. In addition to making big government cheap, this causes a flight of investors from interest-paying assets into equities - the rising stock market primarily benefits the wealthy - and commodities, rather than job-creating investments.
Fed policy, which has failed so far, can also fail by succeeding. If strong economic growth begins, interest rates will rise substantially, and the cost of debt service will cause the deficit to explode.
The Fed's policy regarding the safety net it weaves beneath large - "systemically important" - financial institutions deemed too big to fail is called "constructive ambiguity." Lacker believes the policy is not constructive because it is not really ambiguous. Although bailing out too-big-to-fail firms is discretionary, market participants "draw inferences for future policy from our past actions." Ambiguity, he says, breeds expectations that the Fed will act as rescuer, and these expectations are incentives for risk-taking that can compel the Fed to act. "Constructive ambiguity," says Lacker, "became increasingly hopeless in the face of accumulating instances of intervention."
The Fed, born in 1913, is now the largest buyer of 30-year Treasury securities. And it, not Congress, which supposedly controls the government's purse strings, funds the $447.7 million Consumer Financial Protection Bureau, which is headed by a person not lawfully in office. (Richard Cordray was installed by Obama by a process that a court has recently ruled amounts to a spurious "recess" appointment made to vitiate the Senate's power to advise and consent to presidential appointments.) So before blowing out the 100 candles on the Fed's birthday cake, consider the perverse result of current Fed policy: Although money is promiscuously printed to keep interest rates low, credit is tight as money flows toward high-return assets. Such as gold.
George Will's email address is firstname.lastname@example.org.