Friday, December 13, 2013

Mr. Hyde and Mr. Hyde

           Stanley Fischer is in the pipeline for the vice chairmanship of the Federal Reserve Board of Governors. In this capacity, he would bang heads to gather FOMC votes for (Presumptive) Fed Chairman Janet Yellen. According to the New York Times, Fischer would "exert a moderating influence on Ms. Yellen," (" For No. 2 at Fed, White House Favors Central Banker in the Bernanke Mold.")

            This is neither the job of the vice chair nor the inclination of the man.

            First, Fed vice chairmen do the dirty work, clearing the path for the chairman.

            Following are comments by Vice Chairman William McDonough at FOMC meetings in 1998 and 1999. The Chief Whip hectored FOMC members just after Chairman Greenspan told FOMC members how to vote:

August 18, 1998: "Thank you Mr. Chairman. I think your analysis was exactly right in regard to where we should be with the federal funds rate; that is Alternative "B."

September 29, 1998: "Mr. Chairman, I want to agree with your proposal to cut the fed funds rate by 25 basis points."

November 17, 1998: "Thank you, Mr. Chairman. I agree fully and rather enthusiastically with your recommendation."

December 22, 1998: "Mr. Chairman, I interpret that, as I'm sure you intended, as a recommendation for "B," symmetric, which I heartily endorse...."

February 2-3, 1999: "Mr. Chairman, I fully support your recommendation."

March 30, 1999: "Mr. Chairman, I not only support but applaud your recommendation."

May 18, 1999: "Mr. Chairman, I fully support your recommendation."

June 29, 1999: On page 64 of the transcript: "Mr. Chairman, I fully support your conclusions." On page 91 of the transcript: "Mr. Chairman, I fully support your conclusions."

August 30, 1999: "Mr. Chairman, I fully support your recommendation."

November 16, 1999: "Mr. Chairman, I fully agree with both the reasoning behind your recommendations and with the recommendation itself."

            The new vice chair will do the same. Stanley Fischer has midwifed the inflationary endgame for nearly 40 years. He will be sitting just where he belongs to prevent missteps in the grand plan. This does not mean he will succeed, but he understands the Greatest Flood since Noah's Ark must keep rising or we are sunk.

Second, Chairman Yellen will face formidable foes at the FOMC meetings in 2014. There are 12 Federal Reserve districts, 12 Fed district Presidents, but only five votes by Presidents at each meeting. (The seven Governors always vote.) Chairman Bernanke could not suffer dissention in 2013, even if he wished."Dissention is Overrated" on January 10, 2013, made this clear. Fed talk-show banter before FOMC meetings is unnecessary in 2013.

In 2014, Presidents Fisher (Dallas) and Plosser (Philadelphia) will fight the Fed chairman. A (Presumptive) Vice Chairman Fischer will press to gun inflation at a faster clip than even Janet Yellen would dare. Stanley Fischer is the most influential money printer in the world. His former students include Ben Bernanke, Mervyn King, Frederic Mishkin, and Mario Draghi. He is where he belongs.

            Fischer is not a man of half measures. He has received much attention here, such as on October 13, 2011, "The 8% Solution." The more salient comments from that diatribe:

The following sequence is a lesson in how bureaucracies insinuate their failures into accepted policy.

Stanley Fischer, current Governor of the Bank of Israel, doctoral Ph.D. thesis adviser to Ben S. Bernanke and to Greg Mankiw (at MIT), with stops at every institution of impeccable prestige among the anointed (chief economist at the World Bank, Vice Chairman of Citigroup) professed in 1997 that: "The fundamental task of a central bank is to preserve the value of the currency." That is the first sentence in "Maintaining Price Stability," a paper published when Fischer was First Deputy Managing Director of the International Monetary Fund. Five paragraphs later (wasting no time) Fischer wrote: "Barro (1995) and Sarel (1996) do not find clear negative relationship below 8 percent inflation..." [For the incredulous and perplexed reader, Fischer believes price inflation can run at an 8% rate, interest rates can hibernate at zero, and the real economy will be sound. This was back in 1997. Knowing how these creatures work, 16% inflation with no interest is probably the equilibrium rate today. - FJS]

We can be sure the conclusion rested on the result of some computer model. Barro (1995) and Sarel (1996) cited as their authority Fischer (1993), which is noted later in Fischer (1997).

In 2001, IMF economic researchers Mohsin S. Khan and Abdelhak S. Senhadji wrote a staff paper "Threshold Effects in the Relationship between Inflation and Growth." The authors declare "[F]irst identified by Fischer (1993)" [addressing inflation below an 8 percent rate], "inflation does not have a significant effect on growth, or it may even show a slightly positive effect." Note the change since the (1997) Fischer, from whom they quote: from "do not find clear negative relationship below 8 percent inflation," to "it [8% inflation] may even show a slightly positive effect." This sequence was arranged by Sheehan (2011).

The press blurbs that appeared the morning of December 12, 2013, were designed to relieve the wary of concerns that Professor Fischer might be an inflationist. The Washington Post fell in line: "[B]y September 2009 Fischer was raising interest rates." This was as head of the Bank of Israel. What was happening in Israel at that moment has not been investigated, but Israel does not have the ability to print money with abandon. (It has in the past, and suffered.) The United States is the reserve currency of the world that lifts all ships during a storm (so far), including Israel's.

In fact, on March 17, 2008, Bank of Israel headmaster Stanley Fischer offered Ben Bernanke advice in a Bloomberg interview. "You can inject liquidity into the economy and Ben Bernanke is an expert on this issue."

Later: "That the Fed will get on top of this, I don't doubt."

And: "Ben Bernanke is an outstanding economist."

We might surmise Ben Bernanke would only remain a great economist if he conjured a few trillion dollars into existence. (He has.)

The Bloomberg reporter expressed concerns to which the central planner replied in central-banker jive: "Fischer rejected the view that the Fed was orchestrating a bailout that would encourage investors to take greater risk in the future."

There is not a chance Fischer believed this. What else were they going to other than chase bond, stock, and post-human art markets?
The theoretician loftily claimed Bernanke would raise interest rates "long before inflation got out of hand." Of course, Fischer had no idea what Bernanke would or could do, since no central banker (nor anyone else) knows how to exit. At first, Dr. Jekyll could change back from Mr. Hyde, but then, could only remain Mr. Hyde.

            The Bloomberg story was published at a dire moment. Bear Stearns had failed. Its carcass was purchased by J.P. Morgan on March 16, 2008. It is not a coincidence the professor who understood the inflationary end game in 1980 reminded his lifelong tenured servant of what to do. (Go forth and multiply.)

            The most celebrated economist MIT ever produced expressed misgivings about Ben Bernanke's scholarship, specifically, the Ph.D. thesis anointed by Stanley Fisher. (It is my understanding that Robert Solow was primarily responsible for Simple Ben's paper.)

Not too long before he died, Paul Samuelson - the man who established MIT as a magnet for economics, was interviewed by The Atlantic (June 17, 2009). Samuelson wrote the best-selling economics textbook in history. In the interview, Samuelson reflected: "The 1980s trained macroeconomics - like... Ben Bernanke and so forth -- became a very complacent group, very ill adapted to meet with a completely unpredictable and new situation, such as we've had....  I looked up Bernanke's PhD thesis, which was on the Great Depression, and I realized that when you're writing in the 1980s, and there's a mindset that's almost universal, you miss a lot of the nuances of what actually happened during the depression." [My italics. - FJS]

Samuelson, having administered a failing grade to the trainees, must have been appalled by the trainers. (Paul Samuelson was among the most intelligent economists of the twentieth century. After Samuelson defending his Ph.D. thesis, one of the professors, Joseph Schumpeter, turned to the other two, and asked: "Well, gentlemen, did we pass?" What happened after might help explain how economics went off the rails around mid-century. The American Keynesianism that Samuelson espoused was beneath him and certifiably incorrect.)

Simple Ben's Essays on the Great Depression ignore all economists who wrote before 1980. In the book, Bernanke mentions 139 names - 135 of whom are economists, mostly macroeconomists, and most having written after 1980. Their papers cross-reference each others. His essays never cite Benjamin Anderson (who was Chase Bank's in-house economist, writing about the mistakes being made a decade before the Depression), Ludwig von Mises (who also predicted a depression), as well as many others who wrote "on-the-spot," analyses in the 1930s.

            If Binyimin Appelbaum's "Young Stanley Fischer and the Keynesian Counterrevolution," is correct, the Vice Chairman Apparent sowed the seed that burned history and economics books written before 1980. Appelbaum, in the December 12, 2013, New York Times, writes that a 1977 paper written by Fischer led to a "counterrevolution." Fischer asserted "[c]entral banks...have the power to stimulate economic activity. Monetary policy can help economies recover from recessions.... [T]he new school [built on Fischer's paper - FJS] came to dominate central banking. Monetary policy makers, embracing its justifications of their powers, use New Keynesian models to plan and assess their campaigns."

            It is natural to ask "why" Fischer has been chosen to join the Fed. Without being there, it is impossible to know. The Obama administration's record of ad lib decisions is such a delightful packet of whimsy.

            "What" is more important. Fischer has no better idea how to "taper" (i.e.: extract the central banks from shoveling larger quantities of speculating, leveraged, uncollateralized credit across the globe). The Bernanke Fed cares most about stock market levitation. We can be sure Stanley Fischer knows this. He allocated 10% of the Bank of Israel's balance sheet to U.S. equities in 2012.  "Central Banks, Faced With Paltry Bond Returns Buy More Stocks" The new vice chairman will not be shy to introduce imaginative asset implosion prevention measures at the FOMC.