Wrongheaded moralizing and the Fed

I’m a big believer that morality and ethics play a role in economic outcomes. That’s one of the main purposes of this blog, after all: to show that many economic problems and their solutions have moral and spiritual underpinnings.

But advocating a higher moral consciousness and “moralizing” are two different things. By “moralizing”, I’m specifically referring to unnecessarily injecting one’s own moral views into a debate. It’s usually characterized by patronizing, self-serving, and judgmental speech.

You might say that this distinction is in the eye of the beholder. Fair enough. With that in mind, it’s a good time to remind this blog’s readers that the views expressed here are those of one single individual, and not of the Baha’i Faith itself.

As I see it, there are two great economic subjects that are prone to misplaced moralizing these days. They are the European sovereign debt crisis and the Federal Reserve’s easy monetary policies.

On the first subject, we often hear arguments that the highly indebted nations of Europe have dug their own graves by being lazy and undisciplined. Let’s put aside for a moment the fact that this type of finger-pointing is unproductive; no amount of patronizing rhetoric at this point is going to create jobs for Spain’s youth or provide capital to its banking sector. But it’s also usually just not factually supported. As many authors including this one have pointed out, most of the European governments that now find themselves in trouble were in good shape on the eve of the 2008 banking crisis. The one exception was Greece, the original source of the continent’s current woes.

The other topic that pundits love to moralize over is the Fed, specifically its dovish monetary policies. And within those policies, the recent decision to launch a third round of quantitative easing has drawn the usual vitriol.

What has the Fed actually done? Usually when the economy faces recession, the Fed attempts to stimulate the economy by buying short-term Treasury bills with the aim of expanding the monetary supply and lowering interest rates. But what happens when the hole is so deep that after hitting the lower bound of zero in the Federal Funds Rate, demand still remains sluggish and there’s still a risk of deflation? Then the Fed buys other assets; to this point it has bought mortgage-backed securities and longer term Treasury bonds (rather than the short-term bills). The Fed has done this three times since 2009, with the third round announced earlier this month.

There are legitimate criticisms of QE. You may argue that the risks of deflation are exaggerated; that liquidity is already ample, and growth is being constrained by other factors; that excessively dovish policies prevent needed adjustments in the economy (especially the housing market) from taking place; or that the exit strategy out of QE once the economy starts to recover and inflationary pressures build will be too difficult to carry out.

These are legitimate points, regardless of whether or not they turn out to be correct. We should be having this discussion.

But a great deal of criticism over what the Fed is doing does not seem to be built on scientific grounds. Rather, among some in the banking and finance community, QE and the dovishness of the Fed in general are simply offensive to certain moral sensibilities.

Here’s a great example, written soon after the Fed’s QE3 announcement last month:

Albert Einstein reportedly called compound interest ‘the most powerful force in the universe.’ He didn’t live long enough to experience Ben Bernanke…For those of us who are slightly older, it seems as if Mr. Bernanke is on a mission to convince us that everything our grandparents told us about household economics was wrong…Call it the honest-saver’s dilemma. It’s one that unelected central bankers don’t have the right to force on us, no matter how much their models may tell them low rates will goose the market or ease the deflation of the housing bubble. That latter rationale is an admission of what serious economists have always known easy money to be: a redistribution of wealth to debtors from savers. Or, as a general rule, from the more virtuous to the less virtuous.

In a sense, the commonly heard voice of Wall Street, clamoring for both the Fed to stop pumping out money and for supposedly lazy pensioners in the European periphery to tighten their belts, are one and the same. Rather than approaching solutions to economic crises as an open-minded scientific debate over how to maximize our collective welfare, important conversations are framed in moralistic terms. As the argument goes, easy monetary policy is bad not just because it leads to poor economic outcomes, but that it somehow gives legitimacy to the actions of the morally backward at the expense of the virtuous, industrious rest.

I think this also explains why many critics of the Fed latch on to the redistributive impacts of QE when crafting their arguments. There’s some actual research on these side effects within the academic community. But no central bank’s monetary policy board actually seeks to redistribute wealth from one class of individual to another, let alone savers to borrowers. This type of language simply does not exist in the common conversation of central bankers. Listening to the questions asked of Bernanke by certain members of Congress during his periodic testimonies, you’d think Bernanke’s overarching goal was to play Robin Hood, stealing from the poor old grandma living off her fixed income investments, and giving to the delinquent home owner.

At the end of the day, the Fed aims to maximize employment outcomes while sticking to a long-run inflation target. It’s really that simple. It may or may not get the economics wrong, but there really is no surreptitious plot behind that mandate.

So what motivates such an emotional response to the Fed’s actions from Wall Street types? The banking and finance community is filled with people who are, for the most part, 1) employed, 2) more likely than others to be owed debt (hold bonds) rather than owe debt, and 3) wealthy. QE may help this community through #3, if you believe that it pushes up the prices of the financial assets that wealthy people own. But higher inflation does in fact hurt the savers and benefit the debtors. And if you’ve already got a job, there’s zero benefit of a policy that risks higher inflation in order to boost employment.

The same thing is true of QE’s potential impact of weakening the dollar. Decrying “dollar debasement” (once again, a politically charged euphemism for devaluation that I had never heard before joining the banking industry) is now a pastime among the investor class. You don’t hear many manufacturing workers complain about it, of course, given the fact that a weaker currency should be good for American competitiveness in international trade, and thus US manufacturing employment. Never mind the fact that economic theory suggests a country with a consistent current account deficit (eg. the US right now) needs a weaker, not stronger, currency.

The point is, the people who typically criticize the Fed’s dovishness are not the ones it primarily aims to benefit (namely, the unemployed). And that has been one of my great frustrations in my short time in banking; the inability, or maybe the lack of desire, for us as a community to sympathize with those who have lost their jobs, their houses, or their healthcare. It’s not just unseemly; had we actually tried to collectively achieve this sense of sympathy, we may have better understood the severity of the US employment situation rather than dwelling on the specter of inflation, and thus how the Fed would react. In that case, many banks’ and investment houses’ embarrassing sky-is-falling cries to sell US Treasuries over these past few years probably could have been avoided.

You may think the aim of what I’ve written above is to criticize Wall Street. It’s not. The characteristics of the Fed’s critics I’ve listed above are to try and explain the motivation for the criticism, but not the underlying problem. In the end, this is about human beings’ inadequate commitment to understanding the suffering of others. That’s a problem which spans many different types of people, and which requires a spiritual approve if we are to solve it.

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4 thoughts on “Wrongheaded moralizing and the Fed

  1. FYI this was a little over my head. I may just be exposing my ignorance but if I consider myself the average Joe this could take a little dumbing down…

    • Point taken. I got the same feedback directly from another reader. This is a subject that’s tough to discuss in plain, simple language. Curious to hear any of your specific thoughts/comments/questions.

  2. Perhaps the point being overlooked is that many of those staging complaints of excessively loose monetary policy earned their places in society by virtue of a lack of sympathy. What more is striking a hard deal than striving to see as little of your negotiating adversary’s perspective as possible?

    I would argue that these people advocate free market fundamentalism because it benefits them, and they advocate hard money for the same reason. They aren’t too slow to understand that debt alleviation is necessary; they’re too attached to their wealth to accept that its mass is at odds with a functional economy/society.

    Moreover, creditors simultaneously resisting principal write-downs and inflation are engaging in magical thinking. The bottom line is that they underestimated the risk involved in their lending, and now they’re trying to force payment from people who cannot provide it.

    Take Greece as an example. In large part, Germans lent Greeks money to the Greeks could buy German goods. Obviously that’s not a sustainable balance, but now that the time for balancing has come, the Germans will accept neither default nor devaluation. That serves only to make a difficult problem insoluble.

    • Excellent point. In the US, the housing bubble that burst in 2008 was largely driven by a scramble on the part of lenders to get whoever they could a mortgage so that this debt could be packaged and sold off as financial derivatives. At the very beginning of that supply chain was the borrower, who in many cases was poked and prodded to take on more debt than he/she could realistically handle, such that this scheme might continue. When the bubble burst, the same class of individuals on the lending and financial packaging side decried any efforts to come to the aid of the borrowers or loosen monetary policy to help them stay in their home, refinance, or just go out and get a job. I’m not saying that the lenders only and not the borrowers were responsible for the crisis. But there is a hypocrisy here that shows a lack of regard for the welfare of the people whose lives have been devastated. Not to repeat a cliche, but that is more a spiritual problem than anything else.

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