By Jeff Harding.
Richard Fisher, the president of the Dallas Federal Reserve Bank gave a talk yesterday at my alma mater, U.C. Santa Barbara and I had a chance to meet him and ask a question after his speech.
His talk was entitled, Post-Traumatic Slack Syndrome and the Economic Outlook (With Thanks to Finn Kydland, Dolly Parton and John Kenneth Galbraith).
Richard Fisher (suit) and Econophile
I wasn’t rude enough to confront him during the cocktail hour about his economic schooling, content merely to chatter idly about people he might know or not know among my small group of friends gathered around him. Based on his speeches, I would put Mr. Fisher in the Monetarist category of economic thinking based on his comments and references to Milton Friedman. Mr. Fisher is a Harvard grad and got an MBA at Stanford. Very bright fellow with an impressive background. He was a member of the the Fed Open Market Committee in 2008, and was a notable bear and anti-inflationist. I would say that had I the chance, he would be an enjoyable fellow to have coffee with.
When a Fed official such as Mr. Fisher gives a speech, it is “official” despite any disclaimers to the contrary. When I got home last night, I saw that his speech was already on the Dallas Fed’s web site. The story was picked up by Bloomberg as well.
He reiterated most of what we already know about the Fed’s take on the economy. As a president of the Dallas bank, his comments reflect the “official” line. As such he appeared to be frank in his assessments yet at the same time expressing competence and confidence that one would expect of the central banker.
He said:
The collective sense of our group [FOMC] was that the economy was leveling out. We noted that conditions in financial markets were continuing to improve; household spending was stabilizing but remained constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit; and businesses were making progress in aligning inventories with still-anemic sales and were continuing to cut back on fixed investment and payrolls. The committee concluded, given both the monetary accommodation we had put in place and fiscal policy, that it was reasonable to expect a gradual resumption of economic growth in a context of price stability.
His take: “… for the immediate future, the risk to price stability is a deflationary risk, not an inflationary one … All of which means that we are likely to see a prolonged period of sluggish economic performance and uncomfortably high unemployment as businesses reallocate capital and labor to fit the new economic landscape.”
He feels strongly that the Fed has taken the right approach in pumping cash into the markets and respects the impact of fiscal stimulus.
He did say some interesting things. Like many economists he talked about excess capacity and framed it in terms of economic “slack:”
There are too many ships at sea; too many rail cars; too many airplanes and trucks; too many homes; too many hotels and apartments and office buildings; too many retail stores and malls and convenience stores; too much oil, natural gas and corn; and, according to Wall Street Journal reports this week, even too much champagne and bottled water.
What he is saying is that there was malinvestment as a result of the cheap and plentiful money that was made available, although he didn’t exactly say this, by the Fed. He also notes that we are in a process of “regearing” which “will take time and that, in the interim, households and businesses will focus on shoring up their savings and balance sheets rather than spending money. For consumption, that translates into a slow crawl out of purgatory.”
He also noted that spending by all governments was about 40% of GDP which is not sustainable:
The problem is that government stabilization measures come with a real long-term price tag: higher tax rates, greater national indebtedness and the prospect of higher interest rates driven by the government’s issuance of debt. These long-term costs of a larger government limit the American people’s willingness to rely on the public sector to drive overall economic growth. A fiscal gag reflex ensues, and the public-sector option looks less and less attractive as anything other than a temporary source of growth.
He also called the huge future debt for Social Security and Medicare “inter-generational theft.”
This is all pretty good stuff coming from a Fed president, I will have to admit.
Here’s the negative:
- He believes the Fed is a positive force in the economy and that they have saved the world from financial collapse.
- He believes that the Fed can manipulate money supply enough to effect a valid “exit” strategy in order to prevent inflation.
- He believes the consumer will eventually come around again.
- He believes the Fed won’t monetize the Federal debt.
Like most economists and Fed pundits, Fisher failed to see the crisis coming and his past prognostications were cautious but wrong. Here are some examples I gleaned from past speeched he made, and I don’t think I’m cherry picking the bad ones:
[I] think we are ending the year in pretty good shape. I do not agree with pundits who argue about whether we can engineer a “soft landing.” “Landing” implies stopping. I prefer to say that the Fed’s job is to provide the monetary conditions necessary to pilot our economy at a comfortable cruising altitude and speed while preventing the engine from overheating with inflation. As we look to 2007, I consider this objective to be within reach. And that, good Rotarians, would be far from a dismal outcome.
It would appear that whatever new risks may be associated with the increasing use of nontraditional [subprime] mortgages[, they] are being dispersed across financial institutions and investors [through securitization]. … But markets can sometimes stand logic on its head, so we must remain vigilant in adhering to prudent lending standards. Rising house prices would tend to conceal any added risks accompanying them. We will continue to keep a watchful eye for the potential dangers of stagnant or falling home prices in the future, combined with the potential for increases in mortgage payments relative to income.
I wouldn’t be a gracious host in our fair city if I unfairly criticized Mr. Fisher for his caution yet his failure to see the coming storm. But, like most economists, he relies on yesterday to predict tomorrow. And I will also say that he is not atypical of those at the Fed who believe in the Fed’s ability to solve problems.
I can’t reconcile his statements like “the Fed’s job is to provide the monetary conditions necessary to pilot our economy at a comfortable cruising altitude and speed while preventing the engine from overheating with inflation” made in 2006 with statements of his confidence in the Fed’s ability to execute an exit strategy. If the Fed was any good at doing these things, why didn’t it prevent the crisis to begin with?
Most readers of this blog understand that the Fed and government regulation created the fertile plain on which Wall Street and much of the world played out the largest credit bubble in world history. Greed is always a factor on Wall Street and Main Street, but it takes cheap money to create a bubble and only one institution can do that.
Mr. Fisher is one of the more insightful people at the Fed, but he is captive of the same general thinking that got us in this mess in the first place. His confidence in monetary econometrics is unfounded.
