The Fed’s Credit Channel Is Broken And Its Bathtub Economics Has Failed

Among the many evils of monetary central planning is the conceit that 12 members of the FOMC can actually tweak the performance of a $17 trillion economy on virtually a month to month basis—using the crude tools of interest rate pegging and word cloud emissions (i.e. “verbal guidance”). Read the meeting minutes or the actual transcripts with a five-year release lag and they sound like an economic weather report. Unlike the TV weatherman, however, our monetary politburo actually endeavors to change the economic weather for the period immediately ahead.

Accordingly, the Fed is pre-occupied with utterly transient and frequently revised-away monthly release data on retail sales, housing starts, auto production, business investment, employment and inflation. But its always about the latest ticks in the data—never about the larger patterns and the deeper longer-term trends. And of course that’s the essence of the Keynesian affliction. The denizens of the Eccles Building—-overwhelmingly academics and policy apparatchiks—-rarely venture into the real economic world, and, therefore, do believe that the US economy is just a giant bathtub that must the filled to the brim with “aggregate demand” and all will be well.

Filling the economic bathtub is accomplished through something called “monetary accommodation”, which essentially means credit expansion. That is, market capitalism left to its own devices is inherently suicidal—or at least a chronic underperformer. Households and businesses almost always spend too little and therefore need to be induced to become more exuberant in the shopping aisles and on the factory floor.

In this framework, the blunt instrument of artificially depressed interest rates is the natural policy tool of choice. If cautious households are saving too much for a rainy day or even their children’s education or their own retirement, why club them with ZIPR (zero interest rates); get them shopping until they drop. Likewise, if businessmen do not see the case for opening another store or buying a new lift truck for their warehouse (or expanding same), bribe them with cheap debt financing.