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Parsing the Federal Reserve’s FOMC Statement: A Lone Dissenting Voice |
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Written by Walker Todd
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Friday, 27 February 2009 00:00 |
The Fed’s own statements show that it is attempting to underwrite all the losses of the biggest players in the banking system while simultaneously abandoning any pretense of monetary control. The paragraph quoted below is found toward the end of the Federal Open Market Committee (FOMC) Minutes of the meeting of January 27-28, 2009, an unusual two-day meeting.
The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. The focus of the Committee's policy is to support the functioning of financial markets and stimulate the economy through open market operations and other measures that are likely to keep the size of the Federal Reserve's balance sheet at a high level. The Federal Reserve continues to purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand the quantity of such purchases and the duration of the purchase program as conditions warrant. The Committee also is prepared to purchase longer-term Treasury securities if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets. The Federal Reserve will be implementing the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Committee will continue to monitor carefully the size and composition of the Federal Reserve's balance sheet in light of evolving financial market developments and to assess whether expansions of or modifications to lending facilities would serve to further support credit markets and economic activity and help to preserve price stability. (Emphases supplied.) Voting for this action: Messrs. Bernanke and Dudley, Ms. Duke, Messrs. Evans, Kohn, Lockhart, and Warsh, and Ms. Yellen. Voting against this action: Mr. Lacker.
The lone dissent of President Jeffrey Lacker of the Federal Reserve Bank of Richmond is noteworthy. His remarks were reported in the FOMC Minutes as follows:
Mr. Lacker dissented because he preferred to expand the monetary base by purchasing U.S. Treasury securities rather than through targeted credit programs. Mr. Lacker was fully supportive of the significant expansion of the Federal Reserve’s balance sheet and the intention to maintain the size of the balance sheet at a high level. However, while he recognized that spreads were elevated and volumes low in many credit markets, he saw no evidence of market failures that made targeted credit programs, including the forthcoming TALF, necessary. Moreover, he was concerned that such programs channel credit away from other worthy borrowers, amount to fiscal policy, would exacerbate moral hazard, and might be hard to unwind. He supported, instead, maintaining the size of the balance sheet at a high level through purchases of U.S. Treasury securities. In his view, such purchases would limit distortions to private credit flows, minimize adverse incentive effects, and maintain a clear distinction between monetary and fiscal policies. (Emphases supplied.)
President Lacker has identified the nub of the issue. The Fed’s Board and FOMC have misidentified an underlying solvency or capital adequacy problem as a liquidity sufficiency problem instead. Through its extraordinary liquidity-supplying actions in recent months, especially since Labor Day 2008, the Fed has (a) underwritten enormous foreign exchange risks in Europe and elsewhere that traditionally were shared 50-50 with the Department of the Treasury; (b) expanded its supply of credit to the economy using repeatedly alleged emergency powers under Section 13(3) of the Federal Reserve Act that were intended to be of limited and exceptional use; and (c) expanded Federal Reserve credit so rapidly and extensively that serious questions exist about the Fed’s capacity to withdraw that credit from the economy if and when the time for greater monetary restraint returns. Essentially, Lacker argues, the Fed has begun to perform fiscal operations of the government instead of confining its operations to the proper field of monetary policy. If the Fed did not exist, the Treasury would have to fund the activities that the Fed currently is funding. But the Treasury is properly politically accountable (if you do not like what the Treasury is doing, you can vote against the current administration and congressional members of its same party), while the Fed is basically unaccountable politically (if you do not like what the Fed is doing, how do you go about voting against Chairman Bernanke, for example?).
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Many thanks Mr. Todd for your digging and sharing, I too could use some more precise naming as I do not understand the difference between Monetary and Fiscal policy as they are used in the above context.
Many thanks.
Specifically, what is the difference between "fiscal policy" and "monetary policy."
If you could expand on the implications of the different actions taken under each of those policies and the results, in both the long term and short term consequences, we "lay" persons could get a better grasp on what's really happening instead of merely a "feeling" that something's wrong.
I will appreciate anything you can do along that line.