The Fed’s Credibility Gap
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
We were just settling down to compose a column about the fact that the man whom Congressman Ron Paul would install as chairman of the Federal Reserve — the editor of the Interest Rate Observer, James Grant — would be testifying today on Capitol Hill when our eyes fell upon a headline in the Financial Times. “Gillian Tett: The rising uncertainty over the Fed’s effectiveness.” It seems that in respect of quantitative easing, the U.S. managing editor and rising star of the London newspaper is breaking with the paper’s editorial page war horse, Martin Wolf.
On Wednesday, Mr. Wolf issued a column that was run out under a headline “Bernanke deserves praise for bold and ethical move.” Not by Ms. Tett’s lights. She warns of the “high costs” of the third round of quantitative easing. It is a devastating column that starts out with a reprise of a survey of 887 large companies by Duke University. The survey discovered that 84% percent of those surveyed “professed indifference” to even a “two per cent fall” in interest rates. Monetary action, it suggested, would not be particularly effective in terms of boosting investment and jobs.
Ms. Tett called it “sobering stuff,” particularly given that Mr. Bernanke justified the third round of quantitative easing by citing the persistence of high unemployment and lackluster growth. She went on to lay out some facts unmentioned by Mr. Bernanke in respect of opinion within the Fed system. The Fed had said that 11 of 12 voting members of the open market committee had backed Mr. Bernanke’s move. It failed to say, Ms. Tett reported, that several non-voting members did not support the move. This was a reference to regional presidents, who get a vote only on a rotating basis.
“If you include those non-voting members,” Ms. Tett noted, “about a third of the committee was wary, if not unhappy, with QE3.” That is how a credibility gap is built, and a credibility gap seems to be building in respect of the Fed. The way Ms. Tett put it was that the “bigger worry” is that the benefits of the third quantitative easing “are so unclear, because the transmission mechanism is so muddled, while the potential costs are so high.” She quoted the speech by the president of the Dallas Fed, Richard Fisher, warning that “nobody” on the Open Market Committee “really knows what will work to get the economy back on course.”
Which brings us back to Mr. Grant’s testimony on Capitol Hill. He was called to testify by the chairman of the House subcommittee on monetary affairs, Ron Paul, who is nearing the end of his time in Congress (today is the last session until the election) and is seeking to bring into the record the new thinking. The subcommittee posted on its Web site the text of Mr. Grant’s piece in the Interest Rate Observer of September 7, the most skeptical of the columns on Mr. Bernanke’s Jackson Hole speech. It ran under the headline “What the chairman didn’t mention.” The unmentioned material seems to be any reference to the decades of monetary history and central banking before 1965.
Mr. Grant actually pored over the source materials listed for Mr. Bernanke’s speech and found none before 1965 and but a few before 2007. Many were persons in Mr. Bernanke’s employ at the Fed. In other words, a closed loop. Mr. Grant ends his piece by quoting a 1921 essay by Oliver Mitchell Wentworth Sprague in which the Harvard professor warned, as Mr. Grant characterized it, “against the temptation to print one’s way out of cyclical trouble.” In the essay Sprague cautioned against paper money’s “constant temptation to over issue when confronted by real or imaginary emergencies.”
* * *
If two swallows fail to make a summer, no doubt two great columns fail to make a revolution. But they are grounds for hope. We’ve lived long enough a newspaper life to remember when a few editorial writers were all who were pecking away at the doctrine of peaceful co-existence with the Soviet Union. Not to draw inappropriate comparisons. The Fed isn’t the Soviet Union. But the received nature of what passes for wisdom on monetary policy these days reminds us of the Cold War mindset. So bring on Mr. Grant, we say (and, while one is at it, make Ms. Tett editor of the FT). It is a moment to remember, too, how fast Bretton Woods fell when it fell. It wouldn’t surprise us if the long, sad experiment with fiat money ended as swiftly.