Ambrose Evans-Pritchard always has something interesting to say about economic policy. Some observers have called him sensational, but he often is spot on in his analysis of U.S. monetary policy. His latest piece doesn’t disappoint. It is a reply to Kartik Athreya’s now infamous essay that tells readers to ignore economic commentators on matters of monetary policy and only listen to the high priests of the Federal Reserve System. What is really great about this reply is that it summarizes many of my own views on the evolution of U.S. monetary policy over the last 10 years: monetary policy was too loose in the first half of the decade and has been effectively too tight in the latter half. It also does a good job highlighting how the Fed’s inordinate focus on stabilizing credit markets has come out the expense of stabilizing aggregate demand. Here is Evans-Pritchard:
Dr Athreya’s assertions cannot be allowed to pass…
Central banks were the ultimate authors of the credit crisis since it is they who set the price of credit too low, throwing the whole incentive structure of the capitalist system out of kilter, and more or less forcing banks to chase yield and engage in destructive behaviour.
They ran ever-lower real interests with each cycle, allowed asset bubbles to run unchecked (Ben Bernanke was the cheerleader of that particular folly), blamed Anglo-Saxon over-consumption on excess Asian savings (half true, but still the silliest cop-out of all time), and believed in the neanderthal doctrine of “inflation targeting”. Have they all forgotten Keynes’s cautionary words on the “tyranny of the general price level” in the early 1930s? Yes they have.
They allowed the M3 money supply to surge at double-digit rates (16pc in the US and 11pc in euroland), and are now allowing it to collapse (minus 5.5pc in the US over the last year). Have they all forgotten the Friedman-Schwartz lessons on the quantity theory of money? Yes, they have. Have they forgotten Irving Fisher’s “Debt Deflation causes of Great Depressions”? Yes, most of them have. And of course, they completely failed to see the 2007-2009 crisis coming, or to respond to it fast enough when it occurred.
The Fed has since made a hash of quantitative easing, largely due to Bernanke’s ideological infatuation with “creditism”. QE has been large enough to horrify everybody (especially the Chinese) by its sheer size – lifting the balance sheet to $2.4 trillion – but it has been carried out in such a way that it does not gain full traction. This is the worst of both worlds. So much geo-political capital wasted to such modest and distorting effect.
The error was for the Fed to buy the bonds from the banking system (and we all hate the banks, don’t we) rather than going straight to the non-bank private sector. How about purchasing a herd of Texas Longhorn cattle? That would do it. The inevitable result of this is a collapse of money velocity as banks allow their useless reserves to swell.
And now the Fed tells us all to shut up. Fie to you sir.
Read the entire piece here.