How We Got Here and Where We’re Going

If you’re interested in that sort of thing, over at RealClearMarkets Jeffrey Snider’s article does a deep dive into banking history, weaving together themes of interest rates, exchange rates, inflation, and employment to arrive at a single conclusion: the Fed’s policies have been absurd. Here is his peroration:

If this year turns out the way it is already shaping up, can you really not imagine Janet Yellen (or her successor, assuming she doesn’t survive the growing debacle) doing the same as the Bank of Japan? There has already been a steady growth of stories and rumors, all emanating carefully from that policy corridor, of intellectual flirtations with negative interest rates. Not only that, the FOMC in June 2003, just as Greenspan was achieving his “ultra-low”, ridiculed the Bank of Japan for its first two (of ten or eleven, depending on how you count) QE’s – only to follow them almost exactly just five years later.

Central bank measures have, again, become increasingly absurd; everywhere they have been so has been only further deprived of true and sustainable economic growth. I won’t waste your time here revisiting the subject of this “recovery” as there is no longer any point to reciting the catalog of woe. The reconciliation of this disparity is simply reputation alone. Volcker’s goodwill still lingers in the institutional sense even if Greenspan as “maestro” has more and more rotted. It is all the more frustrating that such reputation was given in the first place, unearned as it really was.

Central planning never works and the episode of 1969 demonstrates exactly why; bureaucracies cannot cope with dynamic conditions. When faced with those, bureaucracies instead react hostilely (if not in outright denial), searching for a way to induce or maintain stasis and sclerosis so that control and power become the dominant goal in religious proportions. There is no more dynamic surface than banking, especially banking freed from the strictures of money.

Thus, the more dynamic that seeps out or leaks into function beyond the self-narrowed gaze and limited apprehension of the central bank, the more absurd lengths the central bank must take to project, even if only to itself, its domination on only its own terms. Last month, the current incarnation of the FOMC took once more to the federal funds rate even though there is nobody there because that is what they do and that is what shall rule. This drastic misplacement was apparent before the first QE or the first FOMC vote on ZIRP; it was all right there in at least March 2007, Bernanke seated in front of Congress full of self-righteous arrogance. That, too, had become something of a quasi-currency. The more he expressed what was just plain wrong but couched in the soothing tones of Volcker-type confidence, the more the world just bought it – and headed right over the cliff.

My concern is that with all of the backstops, subsidies, and incentives, bankers have forgotten how the banking industry works or at least worked. And now we’ve returned to the old standby topic: deadweight loss. We can only tolerate so much deadweight loss. There are limits.