Undeterred by Failure
It is in the nature of bureaucrats to want to see their bureaucracies grow, both in size as well as in power. One of the phenomena often encountered in the unsustainable mixture of socialism and capitalism known as the modern regulatory State is that failure produces a clamor to expand what has failed.
For instance, after it was demonstrated in Japan for almost three decades running that massive deficit spending and monetary pumping failed to revive the economy, the failing strategy hasn’t been abandoned, but has simply been redoubled in size. The complete incompetence of the ‘national security’ apparatus that was so vividly on display on occasion of the WTC attack in 2001, has led to a large increase in the powers and size of the security bureaucracy and the creation a vast overarching additional bureaucracy.
It does not matter which service the State provides: over time, the cost will inexorably increase and the quality will at the same time just as inexorably decline. This is the inevitable result of a monopoly that lacks the ability to engage in economic calculation and judge the opportunity costs of its actions.
The policies instituted by the Federal Reserve have produced ever larger oscillations in the boom-bust cycle and dramatically undermined the economy. In a rational world, one would expect the debate to by now have moved on to the topic of how to replace the cartelized banking system as quickly and efficiently as possible with a free market alternative, i.e., a free banking system.
In reality, the opposite has happened: the regulatory powers of the Fed have been increased. Now the newest appointments to the Federal Reserve board argue that the central planners must become even more ‘activist’.
US Economy Must be ‘Managed’ by the Fed
A recent report by Reuters informs us that an expansion of the Fed’s role in ‘managing the US economy’ is allegedly needed:
“The two new nominees to the Federal Reserve’s Board of Governors are expected to push for an expanded Fed role in managing the U.S. economy, working to replace the current raft of programs that resulted from the financial crisis with more permanent tools.
The arrival of former Bank of Israel Governor Stanley Fischer and former U.S. Treasury official Lael Brainard will add two strong voices to back Chair Janet Yellen’s view that loose monetary policy needs to be extended to turn around a slack labor market.
Fischer intervened directly in Israel’s mortgage market to tackle a real estate bubble, while Brainard pushed EU governments hard for more aggressive action from the European Central Bank during the euro zone crisis.
Interviews with former colleagues and a review of their public statements and published material also suggest both will want the Fed to remain in activist mode long after its current programs wind down and its bloated balance sheet shrinks.
How they influence the U.S. central bank is a critically important question for investors, who are searching for clues on when the Fed will lift interest rates from near zero, where they’ve been since late 2008. It is a debate that may well be the defining one of Yellen’s tenure.
In coming months, the Fed may have to remake the tools it uses to control interest rates, choose whether to liquidate or hold the $4 trillion of investments it has on its balance sheet, and decide when to begin pushing borrowing costs higher. It will also need to make longer-term decisions about how closely it wants to be involved in monitoring and shaping financial markets to guard against another systemic crisis.
Fischer, who is nominated to be Fed vice chairman, is expected from day one to pursue his belief that central banks need to develop new powers and tools to prevent future crises.
“What Fischer can bring to the table is some very valuable practical experience guided by a strong analytical framework,” said David Stockton, the Fed’s former research director and now a senior fellow at the Peterson Institute for International Economics.
Fischer, 70, sees “a lot of work to be done” to get central banks to integrate concerns about financial stability into their monetary policy decisions, said Stockton. “As he has looked at the crisis and thought about the advanced economies, he has seen there are some serious lapses.”
