Central Bankers throughout the U.S. have a real psychological problem, they can’t trust the data that animates the models they study. This is why character remains the sole foundation for applied politics. A Paul Volcker or Milton Friedman would not waste time apprehending how to resolve the ‘man-made’ disaster that is the U.S. economy.
Let’s face it, the Fed. has lost its credibility. To regain it, its going to have to threaten Big Banks, large multinationals and Congress itself. I suggest Dr. Yellen get a-hold of House members and maintain sound equitable relationships before moving to apply the very medicine required to heal the economy: fiscal reform.
I’m aware of how the M’s are used, especially M3. But fiscal instruments are needed here not macro.
No amount of macro-prudential supervision can supplant the requisite ‘policy mix’ that should have come out of our Executive. Instead, what we’ve gotten is more arcane talk from technocrats.
Even guys like Allan Meltzer have revealed the absolute necessity that the Fed was in keeping the payment/credit system alive in 2008. Outside the 2007-2009 financial crisis, the role for the Fed was minimal. But that’s not what happened right!
Congress abdicated throughout, and our Executive decided to punt. The result: we used monetary instruments to fix fiscal problems. The governing class wanted and got a very pliant Federal Reserve. Running a highly accommodative monetary policy to counteract deflationary outcomes has run its course. Much of what was paid out to purchase Treasurys and mortgage backed securities have been put back in the form of excess reserves deposited throughout Federal Reserve Banks. As of this writing we’ve got $2.517 Trillion of excess reserves parked on balance sheets.
What’s the problem?
Banks treat borrowers through the prism of hard money, meaning they don’t give out loans without strong collateral. This is the source of why their is no recovery, the American citizen has not been permitted to get to equity/capital formation.
The Fed used monetary instruments to keep interest rates artificially low, underwrite abundant available credit throughout the non-depository market, sustain bond ratio’s and numerous other trading markets all to the effect of spawning speculative activity.
None of this has reached the citizen.
The architects of Keynesian law sought and applied macro-prudential supervision since 2007, ignoring classical economics. Now the Fed monitors capital & liquidity ratios, seeks tighter restrictions on bank practices while subjecting banks to stress tests.
All of this is subject to political order. THAT’S THE PROBLEM. It’s Congress’s job to monitor the Federal Reserve. The Fed was always responsible for banking supervision, for overseeing the majority of our credit system by regulating depository institutions. But these institutions only account for 20% of credit markets. The rest comes from politically allocated credit from Congress!! (Yes you read that right.)
To ameliorate dangerously emerging risk, Congress must review the political order that animates both the political convictions of Federal Reserve members and the litany of administrative bureaucracies contributing to boom/bust cycles.