One Man's Critique Of A Loose Monetary Policy
It seems these days everyone is happy to blame Greenspan for creating the biggest housing/credit bubble in American history, yet few have the same problem when it comes to voicing their support of Ben Bernanke, who is repeating exactly the same monetary steps (mistakes) as performed by his predecessor. Proponents will say that this time the justification was to prevent a full financial systemic collapse, and the trillions of excess liquidity (an approach that even Greenspan did not embark on full bore) that drowned the capital markets were just what the doctor ordered. Whether that is true or not will be debated by historians who analyze the 2009 as the year when China, the US and the Eurozone let loose the most unprecedented monetary loosening in the history of the non-gold standard world.
Yet is today really that different? Objectivists will agree that every single time there is an excuse for any action. Alan Greenspan no doubt felt justified in his actions to keep interest rates low for as long as he did (incidentally, higher than they are now). The fact that those around him voiced their support for his actions is eerily reminiscent of the widespread acclaim that Bernanke seems to be enjoying currently.
However, not all agreed with Greenspan. A paper by BIS economist William White presented at the 2003 Jackson Hole Symposium, argued for a monetary policy that was diametrically opposite of what central banks were accustomed to in fighting bubbles (using relaxed credit to fight credit bubbles, or colloquially, using future stupidity to fight precedent stupidity).
The paper is a must read for all who believe that this time is in no way different from every other "response" that merely effectuates a much more adverse economic reaction years or decades down the line (and with the level of credit concentration, one may even add months).
An excerpt from the White paper:
On the monetary side, it would imply being alert to the possibility that financial imbalances can also build up when inflation is low and stable and standing ready, occasionally, to lean against those imbalances as they develop even if near-term inflation pressures are not apparent. Current frameworks should be capable of accommodating such a monetary policy response. In most cases, a lengthening of the policy horizon and greater attention to the balance of risks in the formulation of policy may be all that is required.
Alas, Obama does not have a lenghty "policy horizon" - in fact, whether it is midterm elections, or the next presential one in 3 years, the policy response by the Central Banks are always contingent on political contexts. And while a slow, protracted unwind in both the early housing boom, and currently, would undoubtedly be the preferred route, it is a practical impossibility, as even one more year of comparable market volatility and unprecedented economic deterioration would result in the President vacating his position even before his first term's maturity. Which is why the politico-financial block is always, and will be always, willing to push for immediate responses which manifest themselves by such liquidity driven indicators as the capital markets, while the underlying economy flounders under the burden of exponentially growing leverage.
Every modern leveraged corporation has to operate under the limitations of leverage covenants imposed on it by its creditors. Why the US is any different is simply a function of the fiat currency system, of China's symbiotic relationship with the US, and the two countries' closely intertwined economic, monetary and fiscal fates. This will only change, when the 8% required growth rate for social stability in China is discovered to be the artificial construct it is, courtesy of a freely definable GDP number, and the Chinese communist-capitalist experiment goes awry, which on a long enough timeline, it inevitably will.
But by then, it will not be Obama's problem (or so the administration hopes). But, and as always, maybe this time it (the timing event horizon) really is different, courtesy of unprecedented tens of trillions in gratuitous pieces of paper floating and supporting global asset bubbles.
Amusingly, in 2003 as now, few dared to critique Greenspan, except for the occasional outlier such as White. The reason: not only is there a political constraint, but the very essence of the argument goes to such core, human failings as feeling, and hubris in particular. Der Spiegel reported the reaction by Bernanke to this critique:
The Jackson Hole paper was an assault on everything Greenspan had preached and, as everyone knew, he was not fond of being contradicted. Other members of the audience glanced surreptitiously at the Maestro to gauge his reaction. Greenspan remained impassive, his face expressionless behind his large spectacles, as he listened to White. Later, during a more relaxed get-together, he refused to even look at White.
Historians will likely forgive Bernanke for his flawed policies if, as expected, they are dictated by political "rationalizations." They (and we) will, however, just as in the Greenspan case, not forgive his hubris.
The full William White paper is attached.