Federal
Reserve Chairman Ben S. Bernanke is threatening us with "further
action" if the economy does not do something or other. (He cannot remember
his objective from one press conference to the next, so there is no reason
anyone else should.) One view holds the chairman has done all he can, but this
underestimates his options. First to follow is a summary of what he proposed in
advance and what he delivered. Second, there are some options floating through
central-banking channels that should not be dismissed. In conclusion, the
consequence may be the end of central banking.
Reviewing then-Federal Reserve board member (not yet chairman) Ben Bernanke's printing-press
speech, he has delivered on his promises. On November 21, 2002, he proposed to
drive interest rates down to zero percent. He considered interest rates at the
"zero-bound" a solution to a not-as-yet visible deflation (although
he and Greenspan trumpeted it). Bernanke delivered the zero-percent rates.
Should the zero-bound solution fail at the short end of the yield curve,
Bernanke "would... try to stimulate spending by lowering rates further out
along the Treasury term structure--that is, rates on government bonds of longer
maturities." This describes Operation Twist, his current gambit.
"A more direct method," claimed Simple Ben, "which I personally
prefer, would be for the Fed to begin announcing explicit ceilings for yields
on longer-maturity Treasury debt...." This is the current worldwide
central-banking process of issuing far more sovereign debt than can be absorbed
by functioning markets, so is bought by other central banks to hold government
bond rates down. The result is dysfunctional bond, stock, commodity, and
currency markets with central banks needing to absorb greater wads of currency
reserves since the world's economies are growing more unbalanced, less
productive, and use more government financing to fill the larger voids.
The Federal Reserve governor continued: "Yet another option would be for
the Fed to use its existing authority to operate in the markets for agency debt
(for example, mortgage-backed securities issued by Ginnie Mae, the Government
National Mortgage Association)." Bernanke did not, in his 2002 speech,
foresee the Federal Reserve's absorption of an investment bank's (Bear Stearns)
bad mortgages (Maiden Lane) in 2008. By doing so, the Federal Reserve and Tim
Geithner's Treasury Department broke the law. Since they were praised rather
than tossed in the clink, it is probably not a good use of time to consider the
legality when evaluating what the Fed might do next.
On May 9, 2012, the Dutch-born, American economist Willem Buiter, who holds
British citizenship, published proposed monetary measures that were nutty
enough for all of his citizenships to be revoked. He previously served on the
Bank of England's Monetary Policy Committee and is now Citigroup's Chief
Economist.
"He's a monetary nut," opined an email after the publication of
Citigroup's May 9, 2012, "What More Can Central Banks Do to Stimulate the
Economy?" Well, sure he is. Bernanke's 2002 speech was not thought to pose
an immediate threat, by most. It was taken seriously by those on their toes, a
nearly extinct species these days.
The monetary nut is distinctly American
and should never be dismissed. Near seventy years ago, George F. Warren,
Cornell farm economist, came up with the beguiling theory (it beguiled FDR)
that the price of gold controlled the price of commodities. John Brooks wrote
in Once in Golconda: "To orthodox economists, most of Roosevelt's
economists included, the Warren syllogism was a false one. Commodity prices had
usually moved with gold prices, they conceded, but the catch was that commodity
prices were the cause of this conjunction and gold prices the effect. Warren
then, was to orthodox economists just another example of a hardy, perennial,
and surprisingly numerous American species, the monetary nut."
Note that, as kooky as this Cornell
economist was thought to be by establishment economists (Farm Management (1913),
in the Rural Text-Book Series, was his greatest contribution to literature)
Warren's false cause-and-effect held sway in the White House. Across the
Atlantic, the devalue-dollars-against-gold-and-wheat-prices-will-rise theory
was belittled. According to James P. Warburg in The Money Muddle (1933):
"Keynes, upon whom [Irving] Fisher [Warren's accomplice - FJS]... leaned
heavily for support, described the 'gyrations of the dollar' as 'more like a
gold standard on the booze' than an ideally managed currency. And, horror of
horrors for Warren, [Keynes] characterized as 'foolish' the idea that there is
a mathematical relation between the price of gold and other things."
Yet, it was this crackpot nostrum used by
President Roosevelt and Professor Warren to devalue the dollar against
gold. It did not raise commodity prices.
Back to the
Dutch-American-British-Citigroup monetary nut, Buiter proposes that all of the
major central banks set nominal interest rates at zero. That is not very
interesting anymore. He would also tax currencies. This is not new. Irving
Fisher, a monstrous monetary nut, proposed the same in 1933.
Fisher meddled in everything, invoking the
"science of economics" as justification for purifying the world:
"The most vital problem of the world today is the problem of preventing
racial deterioration."(1915) In 1930, he expressed satisfaction before the
American Eugenics Society that 6,000 forced, surgical sterilizations were
performed in California. This was "breeding out the unfit and breeding in
the fit." (A phrase he often repeated). Fisher generally invoked the
science of economics to quantify "the value of human capital" and
"to protect the existing elite." If not, "then surely the dark
ages lie ahead...for the Nordic race."(1921) Fisher is still revered
today, often considered the greatest American economist. One can understand
why.
A more exciting proposal by Buiter falls
on page six of his 18-page blueprint for human annihilation. We should move to
a "cashless society with E-money
only." Buiter concedes: "There undoubtedly are legitimate reasons for
households and businesses to wish to preserve anonymity in their financial
dealings." Buiter liquidates these qualms, along with human privacy since
"some of the main beneficiaries of the existence of state [currency]...
are the grey, underground and black economies." Citigroup's chief
economist goes on to blame state currency for "inadvertently subsidiz[ing]
those engaged in such illegal activities as money laundering, tax evasion and
funding terrorism and other criminal activities, at home and abroad. It would,
in our view, be worth getting rid of currency." In other words, we are all
terrorists, now.
This Nordic wonder misses the point that the very reason he is proposing such
abstract solutions is the failure of state currencies, and the reaction to
taxing or eliminating them would probably be a complete break in trust. The
most obvious question that seems never to be asked would rise front and center:
"Why does the government hold a monopoly on money? Why is it even
involved, since dollars are simply a means to buy and sell things among
ourselves?" An abundance of activities would move to the black market.
Buiter's plan could be enormously liberating. Buiter's and Bernanke's human
capital would trade at the zero-bound.
Buiter's digital money contains a practical aspect. He wants real interest rates
to be negative. They already are, but the Flying Dutchman wants really
negative interest rates. To accomplish this, the state would manage two
currencies, the "dollar" and the "rallod," in Buiter's
description. Read it if you like, but time would be better spent collecting
your own alternative currencies:
"Clearly, the abolition of currency and the taxation of
currency would take time and involve
non-trivial administrative and implementation costs. But introducing a floating or managed exchange rate between commercial bank
reserves with the central banks (dollars, say)
and a new currency (rallod, say) could be implemented overnight. A minus 5% interest rate (annualised) on
commercial bank dollar reserves with the
central bank, for instance, would require the forward exchange rate of dollar reserves in terms of rallod bank notes
(which carry a zero interest rate), to be five
percent (at an annual rate) stronger than the spot exchange rate. If the
authorities fix the next period's spot exchange rate at the same level as this
period's one-period-ahead forward rate, then the certain appreciation of
the dollar in terms of the rallod would make up for the interest differential
in favour of the rallod. So there would be no pure arbitrage
opportunities."
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