Central Planners: Humility and Hubris
There are two types of Fed bureaucrats at present – a small minority that stresses its 'humility' – for example Kansas City Fed president Esther George, who we suspect will be inclined to follow in Thomas Hoenig's footsteps and come down on the cautious/hawkish side of the debate, and even more so Jeffrey Lacker of the Richmond Fed. Lacker increasingly appears to be harboring genuine doubts about the entire central planning undertaking as such. This was not always so; in 2004, he apparently held that the Greenspan Fed had acted appropriately in the wake of the collapse of the Nasdaq bubble and that the “major monetary policy questions were settled”.
“We’re at the limits of our understanding of how monetary policy affects the economy,” Mr. Lacker said in a recent interview in his office atop the bank’s skyscraper here. “Sometimes when you test the limits you find out where the limits are by breaking through and going too far.”
Mr. Lacker, 57, often uses the word “humility” in describing his views. He means that the Fed should recognize that its power to stimulate the economy is limited, both for technical reasons and because it should not encroach on the domain of elected officials by picking winners and losers.
As he sees it, the Fed’s current effort to reduce unemployment by purchasing mortgage-backed securities crossed both lines. He sees little evidence that it will help to create jobs. And he says that buying mortgage bonds is a form of fiscal policy, because it lowers interest rates for a particular kind of borrower.
“It’s very unfair to think of me as not caring about the unemployed,” he said. “It just seems to me that there are real impediments, that just throwing money at the economy is unlikely to solve the problems that are keeping a 55-year-old furniture worker from finding a good competitive job.”
Here is a telling comment as to how Lacker's perspective has shifted since 2004:
“Mr. Lacker recalled that he regarded the major questions of monetary policy as settled. “I thought we’d converged around a good healthy framework where the range of debate was going to be limited,” he said. “I was wrong about that.”
At this juncture Lacker is the one Fed president who comes closest to the degree of doubt frequently expressed by Thomas Hoenig while he was still a member of the FOMC. In fact, when considering Hoenig's speeches during his final few months at the Fed, the impression one came away with was that he had come to positively resent the idea of 'steering' the economy by means of monetary policy.
Many mainstream economic quacks believe such a careful deliberative approach to be 'dangerous' (we kid you not). Here is what the well-known interventionists from Berkeley, the Romers, have to say:
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