Saturday, October 18, 2014

"Growth management isn't the Fed's forte"

This is the title of an op-ed piece by David Malpass in the Thursday, 10/16, Wall Street Journal.  Much of it echoed thoughts that have been expressed here, which is a bit surprising since Malpass is a veteran of the Reagan and Bush the first administrations and is a contributor to conservative "think tanks".  While there is a glaring absence of commentary on fiscal policy in Malpass's article, he takes on monetary policy in aggressive fashion, some examples of which will follow.

He writes of the recovery, "this time, median incomes fell as financial markets rose.  The Fed has imposed near-zero interest rates on small savers, channeling trillions of dollars in low cost credit to Fed-selected beneficiaries, especially governments and large-scale corporate borrowers".  How many times has that obvious fact been pointed out here.  Malpass continues, "The result has been helpful for the rich but has been toxic to small businesses and median incomes because underpriced credit goes to well-established bond issuers--- not known for job creation---at the expense of savers and business loans".  What more can be said.

Malpass notes the power over the mortgage industry held by the Fed, and Congress and the Justice Department are added to his comment here.  After being disastrously managed going into the Great Recession, the giants Fannie Mae and Freddie Mac have been made even more powerful.  With the threat of regulatory penalty hanging over all aspects of the securitization industry and the absence of a competitive appetite from what's left of the private mortgage industry, mortgage originators are in a quandary.  Almost the only way to clear mortgage assets off of the banks' books is through Freddie and Fannie, and they are wary when doing so due to all of the assets that have been put back to the banks with penalties due to "impairment".  Malpass does not make these points, I do, but he implies them.  These government sponsored institutions take no responsibility for what they underwrite even though their executives and traders are paid like investment bankers.  The oversight by Congress is still either non-existent or disruptive.  Banks remain exceedingly cautious about what they originate due to this state of play.  The zero interest rate policy offers no relief to this situation.  Marginally higher interest rates would not be an issue if the specter of questionable "put backs" was not always looming and banks could confidently distribute their originations.

Malpass looks at financial regulation with a similar cautionary view.  To quote again, he writes, "Companies are running into a Catch-22 as they appeal harmful regulatory actions.  Many of the regulations from the incomprehensible 2010 Dodd-Frank financial law have yet to be written and therefore can't be challenged".  That comment is not completely understood here as what is "harmful" from Malpass's point of view is not clear,  but his point about the "clarity" of Dodd-Frank is on the mark.  The bill was far too long and full of minor rules that have potentially major unforeseen consequences.

Malpass closes as follows:  "The Fed has fostered the illusion that it can create growth.  The zero-rate problem is obvious to almost everyone outside the Beltway.  Credit markets don't function with prices set at zero, and the economic results have been disastrous, with median incomes severely depressed fives years into the expansion."  Malpass goes on the express his opinion that the Fed's policy has stifled "investment and hiring that is needed to create faster growth."

Malpass makes it all seem simple and one could wish that were the case.  He makes points that would not be expected from someone with his political background, although calling to task a Democratic administration fits the bill.  His prescription for economic growth other than what not to do is unstated, but to his credit he does not get into the balance the budget type of gibberish common to tea party types.  He seems to take the high road, and makes some points worth considering.

They have been considered here for several years, and reading them in the WSJ from anyone was welcome.  That there might be a middle ground point of view is encouraging, how unique that thought is these days.  


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