September 10, 2006
Too Much Group Think On The FOMC?
Reader quiz offers some comments on my previous post, and I feel compelled to answer above the fold. quiz begins:
The data suggest that the Fed has a group think problem. If I step back and look at the set up leading to the Greenspan "bubblicious" economy, I have to wonder where was the dissent at the Federal Reserve ? Where was the vocal opposition from main stream economists, for that matter ?
... There appears to be no room at the table for dissenting opinions, less wall street become upset that the Fed will ruin the market "set up".
quiz could, of course, be talking about either bubblicious-economy I (the latter 90s stock market boom) or bubblicious-economy II (the recently ended residential real estate boom). His reference (in the full version of his comment) to the 1% federal funds rate and Mr. Greenspan's reference to ARMS suggest the latter, but it may help to at first focus on the former period, where the historical record is just a bit clearer. And in any event, plenty of people with quiz's point of view lay the blame for both episodes on the various incarnations of Greenspan-era FOMCs, so let me start with bubblicious I.
In 1998 my former boss, Federal Reserve Bank of Cleveland president Jerry Jordan, dissented at 5 out of 8 meetings. (There was no vote recorded in the statement following the 50-basis point cut in October) In August he included this comment in his dissent:
... ample credit provision encourages speculative lending and excessive consumption. Consequently, continued rapid growth in the money supply creates the risk that inflation will accelerate and economic imbalances will become protracted."
I offer this by way of saying the opinion that monetary policy was potentially contributing to imbalances in the economy did have a voice on the Committee. I think if you read the transcripts you will find that others were concerned as well, even if no other dissents were registered (beyond Bill Poole's early in the year). My reading of the transcripts suggest that continuing stress from the Southeast Asia currency crises and the aftermath of the Long Term Capital Management collapse and revaluation of the Russian ruble helped to forestall a majority movement toward tighter monetary policy at the time.
I also always try to remind people that the Fed was created in 1913 to deal with the problem of systemic risk to the financial system. This orientation, it strikes me, is burned into the DNA of most central bankers, and the events of fall 1998 make this abundantly clear. Members of the FOMC had, at that time, been expressing concern for over a year that policy was going to have to be tightened. But events in global financial markets seemed to argue in favor erring on the side of not drawing back on liquidity when it appeared to be needed most. Those concerns were, at the very least, ones that might be (and were) acted upon by reasonable men and women.
Perhaps quiz thinks that the real mistake was not pulling back on monetary policy until the latter part of 1999 -- many people do, including Mr. Jordan, as the record makes clear. But those assessments are 20/20 hindsight, and I don't believe you have to appeal to the political winds blown by Wall Street interests to make a case for the decisions that were made in real time.
Back to bubblicious II, quiz continues:
The Federal Reserve is far too political, catering to the wall street crowd. I think they have a pretty good idea of the long term effect of their policies but lack the political will to look beyond the GDP, core inflation, and employment numbers at next month's meeting. Since 2001, the Greenspan Fed performance has been a disgrace. Maybe Bernanke is a closet Volker.
I guess I will just argue that the final chapters are to be written on the period since 2001. But I think this is an important question: Suppose I placed you back at the end of 2001 -- in the aftermath of 9/11, the recession maybe over, maybe not -- and asked you to make projections about the course of the U.S. economy through 2005. Suppose further I stipulated that, knowing nothing else, your forecast had to be predicated on a 350-percent plus increase in the price of oil. What would that forecast have looked like?
Last night I flew to Portland, Oregon. Dulles was crazy -- maybe everyone wanted to fly on 9/10 rather than 9/11