The Hubris in Monetary Policy Award
Due to some incredible competition over the last two weeks, this year's Hubris in Monetary Policy award will go to someone other than Alan Greenspan.
To be sure, it looked like Greenspan would retain his trophy after his now-notorious speech in Jackson Hole, Wyo. It was here that The Chairman pulled out the big guns by arguing that monetary policy is impotent to deflate sector-specific bubbles that lead to long-lasting recessions.
Sure, it can keep government price indices in line, and in his mind, this is the equivalent of taming inflation. But proscribing yet more fiduciary stimulus to address persisting bubbles beyond what has already been proscribed can end up damaging the economy as a whole. In such a situation, Greenspan argued, any Fed chairman’s hands would be tied. The only monetary cure available would kill the patient in the process.
With an alibi such as this, we all thought that Sir Alan would retain his title. Greenspan surely knew that many economists were already discussing his recently released remarks at a 1996 Fed meeting about possible cures to the asset bubble that had then been identified.
In the subsequent years, Greenspan punted on implementing any of these cures for reasons at which we can only guess. Did they obstruct his ability to help out his friends at Long-Term Capital? Did the Monica scandal require extra liquidity to allow the Feds to shore up political support on economic grounds? Or was it simply the case that Greenspan was enjoying his run as Master of the Universe and wanted to extend it?
Who knows; but the Jackson Hole remarks were indicative of a master hubricist. We were in awe of him. Again.
That is, until 12 days later, on September 11, when New York Fed Governor William McDonough gave a little speech at Trinity Church in New York City, just a short walk away from the World Trade Center site. Governor Bill packed a one-two punch that leveled Greenspan and let the world know that there is now an aspiring Master on the block.
Bill argued that the current recession continues to linger because of excessive CEO pay, so CEOs should volunteer to cut their pay to reasonable and justifiable levels. "We must recognize that the leadership of the American economy has made a large number of American citizens, and countless more around the world, question our judgment and/or our ethics," McDonough said in his speech. The inflated levels of executive pay, in particular, require corrective action.
"It is hard to find somebody more convinced than I of the superiority of the American economic system, but I can find nothing in economic theory that justifies this development," McDonough said. Even worse (he later said), this development reflects "bad morals."
Needless to say, the engraver of the 2002 trophy was given new instructions after these remarks hit the airwaves. If Chairman Alan’s remarks were brilliant, then these remarks were exquisitely so. It appeared that it was time for the Great Alan, who had outwitted three presidents and counting, to take a bow.
The reason is simple. Many who follow the economy were slowly focusing attention on Fed policies throughout the late 1990s, taking their cues from popular business writers such as The Street's Peter Eavis and CNBC’s Bill Fleckenstein.
The idea was taking root that increasing the money supply beyond the point necessary to facilitate transactions confers no social benefit. While this practice may cause the economy to look good around election time, as extra liquidity finances business expansion, it soon looks bad when consumers decline to purchase the added output. After all, why should they save to purchase this output when it was facilitated with low interest rates?
So, in the midst of a recession, and with the credibility of central banking itself being called into question, what is a central banker to do? Why, blame executive pay, of course, and impugn the morality of anyone who might believe that Fed governors are a greater threat to economic stability than shareholders that make wage decisions. In so doing, McDonough realized what Greenspan hadn’t: the present climate required hubris to protect the system as a whole.
The Greenspanian response is weak. It says, "Don't blame me. I never had the power to deal with this in the first place."
The McDonoughan response brings hubris to a new level, not only because it provided intellectual cover to those whose goal is to re-establish federal wage boards, but also because it says, "The recession has everything to do with greedy guys in charge of big companies. It has nothing to do with the doubling of broad monetary aggregates from 1996 to 2001. And, by the way, wouldn't I make a good Fed chairman in 2004?"
Such statements raise the award standards to heights unheard of. Bill McD., you are our new champion. Please come to the federal sewage treatment facility in Washington to claim your prize.