At the Ira Sohn Conference yesterday, many speakers complained about the risks arising from current Federal Reserve monetary policy, and understandably so.
However, I do not think Chairman Ben Bernanke has nefarious goals. I am not sure why anyone would presume that he has negative intentions.
I don’t agree with him on everything (e.g. that 2% inflation is optimal as a buffer against potential deflation, an important issue which I plan to discuss in a later post; although I have discussed my concerns about ‘flation misunderstandings already), but I don’t think he has bad intentions.
But intentions don’t suffice for replacing results, so I’m gonna break down the fiscal, monetary, and free market intertwining issue real quick.
First, monetary policy is questionable right now, but I’m not mad about it. The rest of the world is engaging in monetary easing also, so it’s not as big of a deal as it might be ordinarily…as long as it is normalized sooner than later.
I believe this policy is helping banks out, which isn’t necessarily the worst thing in the world. Though, I think there are more appropriate ways of doing so if that is the societal desire.
Second, and most importantly for the short run, fiscal policy (i.e. gov’t spending and/or tax policy) needs to be improved. I heard CNBC’s Joe Kernan recently say something along the lines of tax reform is never going to happen. Perhaps. But it has to, so I’m gonna keep talking about it.
Churchill said we do everything else before finally doing the right thing. Finally is here, time to do it. I’ve laid out the blueprint, this ain’t rocket science. By implementing the tax reform, increased liquidity into the system from lower taxes on earned income will allow for a decrease in cash to the system from monetary policy, thereby allaying concerns about aggregate demand falling through the floor if monetary policy is normalized.
Lastly, the free market. I hesitate to use this analogy for the alpha-earning (i.e. efficiency enhancing) asset allocators that I know because it may seem negatively connotated (my intention is the opposite) because of the insect chosen for the example, but they are the golden leeches that drink the inefficient blood seeping from the problematic patient that desperately needs their help.
It is their efficient allocation of capital that separates the US from criticisms of regimes such as China where allocation is done at a more centralized level. There are some current temporal allocation issues that need to be addressed (folks should probably be more investing, rather than trading, oriented), but that adjustment is far from impossible to make.
Seriously, this ain’t rocket science. I wrote about behavioral economics earlier this morning. Dallas Federal Reserve Bank President Richard Fisher discussed yesterday that uncertainty is inhibiting the economy (not insufficient monetary stimulus). This uncertainty is leading to a survival mode mentality that leads to an inefficient allocation of human time and energy.
The Fed has provided the liquidity, now its time for Congress to tighten it up and execute the tax reform necessary to ensure longer-term solvency and also provide the substitute liquidity that will allow the Fed to normalize policy which, by the way, I believe the Chairman would prefer.
Believe it or not, it is not impossible for a society to do well. Stop the hate. It’s unproductive and unnecessary.