FOMC’er Richard “Inspector Clouseau” Fisher and His Excellent Rare Book Price Clue to Proper Monetary Policy

- The PCE Deflator Ignored

- Fisher: QE is an “Intoxicating Brew”

A Guest post by Benjamin Cole

Dallas Fed President and again voting FOMC member Richard “Inspector Clouseau” Fisher is back from fresh sleuthing, and in-hand has a key clue as to proper monetary policy going forward.

It’s rare book prices.

An avid antiquarian bibliophile, Fisher enthused about the depression-type prices on collectible books around the 2008 bust, in a speech delivered to the National Association of Corporate Directors in Dallas on Jan. 14.

“During the financial debacle of 2007–09, I was able to buy for a song volumes I have long coveted, including a mint-condition first printing from 1841 of Mackay’s Memoirs of Extraordinary Popular Delusions, which every one of you should read,” enthused Fisher.

But happy hunting in book-land is over, Fisher complained. “Today, I could not afford them. First editions, like paintings, sculptures, fine wines, Bugattis and homes in [exclusive] Highland Park or River Oak” are too expensive.

Loose monetary policy is to blame, and investors in the collectible world are running around with “beer goggles,” grumped Fisher.

Now, others might have a different take on the reason for rising prices in the word of collectibles, or more importantly (at least to most economists, if not Fisher), in real estate and the stock market.

The reason for higher asset prices since 2009 is a so-so economic recovery prodded by a mildly expansionary monetary policy, or so might say many economists. Prosperity, even if limited, is helping asset prices.

As to the collectible and art side of “investing,” skyward prices can probably be laid at the feet of global class of super-wealthy, who meet their material needs with the smallest sliver of their wealth and income, and have ready mountains of cash to acquire fancies.

The Fed and nominally low interest rates made someone pay $127 million (at recent auction) for a triptych of rather blah paintings by Francis Bacon?

No, this is not a rant against income inequality. I prefer free markets, and you take the good with the…questionable.

Tighten Money Now!

No matter, Fisher wants the Fed to stomp on the brakes and quit Quantitative Easing (QE) now, and preferably yesterday. Indeed, Fisher proudly told his audience he would have been a bulwark against QE, if he could have been.

“I basically said so [no more QE] publicly on March 26, 2009, in a speech to the RISE Forum, an annual student investment conference,” said Fisher in Dallas.

But he was outvoted on the FOMC, glumly noted Fisher. The $2 trillion in QE since then was not wise, he said.

Since 2009 the S&P 500 is up more than 50 percent, and real estate markets have partially recovered.

Having become uncomfortably obsessed with Fisher over the last three years (it’s like watching those youtube clips of car wrecks or building demolitions), I can tell you that for Fisher, the right time for tight money is like the right time to have a drink, for an alcoholic.

After all, Fisher is the central banker who visited Japan in April 2009 and delivered a speech that included this: “I consider inflation an evil spirit that rots the core of economic prosperity and must never, ever be countenanced.”  Did I mention Fisher said that in Japan?

Were not for the ramifications of Fisher’s perspective, some aspects of Fisher’s tight-money fixation would be comical: In his entire Dallas speech, Fisher mentioned not once the inflation index used by the Fed, the PCE deflator. Oh, that?

Well that it is that Fisher does not talk abut price indexes, as opposed to the booming rare-book market: The PCE deflator is now below 1 percent and falling. That is less than one-half the Fed’s target rate.

Moreover, for the last 30 years Western economies have seen a secular swoon in inflation, along with interest rates. Japan, and now Europe, and the USA are all close or in the zero lower bound, or ZLB.

It is hard to believe that with global economies struggling for five years running and prices flat as a board (excepting mainland China), that any central bankers would still be obsessed with inflation.

Well, there is Fisher. He told the Dallas assembled that the “velocity of money will accelerate,” in a recovery, and that would set up conditions to “create inflation or financial market instability or both.” The bogeyman inflation has a new sidekick, that of “financial instability,” we note.

The Fed’s QE program, Fisher further darkly warned the assembled, has “made for an intoxicating brew as we have continued pouring liquidity down the economy’s throat.”

It is a curious trait of inflation-hysterics that they are often contemptuous of private investors operating in free markets, otherwise touted as a basic and strong fundamental of capitalism. The Fishers of the world suggest that private-sector investors will drop like avalanches into unwise schemes, if only interest rates are too low.

Indeed, many of today’s investors are foolish, even those belonging to sophisticated institutions, according to Fisher.

In Dallas, Fisher roundly dismissed current investors in distressed enterprises, held that they are badly overpaying for assets, and sneered, “Today, I would have to hire Sherlock Holmes to find a single distressed company priced attractively enough to buy.”

But not Inspector Clouseau?

Fisher’s position is akin to economist John Cochrane’s sentiment that in a low-interest rate environment, corporate managers will over-allocate funds to plant and equipment.

Thus, free enterprise is an inherently unstable platform easily upended by feeble-minded money managers and buffoon corporate chieftains, in this gloomy vision held by Fisher and people who are ostensibly right-wingers.

And so Richard Fisher, Dallas Fed Chief, must ever-vigilantly guard the nation against excesses by people with money to throw around—that is to say, private-sector investors, corporations and rare-book collectors.

It is a strange world when right-wingers and central bankers affirm that prosperity and free enterprise…do not mix.

Funny, I rather like the combination.

13 thoughts on “FOMC’er Richard “Inspector Clouseau” Fisher and His Excellent Rare Book Price Clue to Proper Monetary Policy

  1. “It is a curious trait of inflation-hysterics that they are often contemptuous of private investors operating in free markets, otherwise touted as a basic and strong fundamental of capitalism. The Fishers of the world suggest that private-sector investors will drop like avalanches into unwise schemes, if only interest rates are too low.

    Indeed, many of today’s investors are foolish, even those belonging to sophisticated institutions, according to Fisher.”

    I am sure you have heard that Bernanke thinks QE works through the portfolio balance channel and what that implies*. Yet you refer to “private investors operating in free markets”. Your free market assumption is clearly questionable. I do not want to defend Fisher’s views on inflation, but I do want to defend his view that market participants are not acting the way you assume. To my ears, Fisher and Bernanke agree on what is happening, they only disagree on the consequences.

    It shocks me that someone can make the statements above about investor behavior so quickly after 2008.

  2. Andy B-

    First, thanks for reading and thanks for your comment.

    Bernanke and the Fed may raise or lower (short-term) rates, or conduct QE.

    But the private-secrtor investors call the shots–they are not compelled to invest in anything, and indeed many have chosen to set aside funds in banks. I do not think the private-sector becomes bereft of their senses at 1 percent interest rates, or 2 percent interest rates.

    Bubbles: As many have noted, what constitutes a bubble is difficult to say, and impossible in advance.

    Sheesh, the hardcore rightwing American Enterprise Institute had a “serious” scholar (Jim Glassman) who put out a book (1999) entitled “Dow 36,000.” BTW: AAA corporate bonds were yielding 7.5 percent then. So, if we had a bubble, we had it with high interest rates.

    The “Internet bubble”—yet many Internet firms did end up gigantic winners, such as Google, Amazon, Facebook, and others. (No doubt a lot of Wall Street huckstering preceded the collapse of dozens and possibly hundreds of I-stocks).

    But there was a reason to bet on i-stocks, just hard to know which ones.

    On real estate (in general, but with many exceptions), it now appears to have been “overpriced” in 2007 (and I have reservations about underwriting practices)—but if the Fed had not created a sudden 2008 plunge in the economy, would we have seen such a wash-out in real estate values? Other countries have had plateaus in real estate prices.

    But my main point is this: I trust free markets, I trust private-sector investors (in general) to allocate resources well (or better than any other way we can devise).

    I do not think low, medium or high interest rates dissolves the ability of private-sector investors to evaluate risks. Indeed, we saw plenty of risky (or entrepreneurial) behavior in 1999, when corporates were yielding 7.5 percent.

    I prefer robust, strong economies, and that might tend to moderate inflation (still under 3-4 percent) and a lot of risk-taking, and maybe soon booms and busts. Losing money is part of free markets too!

    But if the Fed can keep nominal GDP growth steadily rising, we can avoid deep recessions.

    The Fisher solution is chronic monetary asphyxiation. Yes, monetary suffocation will solve “bubble” problems. You might have some other problems….

    But thanks for your views. I tend to write with an edge, but in general I like my fellow monetary thinkers, even when I disagree. I even like Inspector Clouseau!

    • We should distinguish between the opposition to Fed actions in 2012 and Fed actions in 2008-2009. I think the Fed did the right thing in 2008-2009, after completely messing up their supervisory duties in the years prior. Overall a C grade from 2005-2009. I think the application of QE and extraordinary measures to tweak the economy in subsequent years is what will prove to have been foolish. Yes, nominal GDP growth is lower than we would like. But, show me the mechanics of how QE influences nonimal GDP growth without blatantly distorting asset prices and debt levels? It cannot be done in my view because QE ‘works’ in any environment, 2008 or 2013, by stimulating asset prices and debt and then maybe real economic activity. Why is growth slow anyway? Who cares, throw some QE at it and change expectations. Boom, problem solved.

      Leaning on QE is lazy.

      I also don’t think you can use the rarity of bubbles to support the heroic modeling assumptions underlying macro-models. Yes, investors may not be batshit crazy all the time. Is your model robust to irrational but not batshit crazy investor behavior? Or, does it need rational behavior? Maybe investors are rational but they are not trying to maximize the same things you assume they are (economic value vs. tracking error to friends/peers).

      It looked like the easy money in response to the tech bubble was pretty costless in 2006, but the view changed when the bill came due in 2008. Did we roll the cost of misallocated capital into another boom bust cycle post-2008? Can we wait until the next recession until we make any conclusions about that one? There will be a next recession at some point and we will see whether the debt deflation cycle continues or if we have cleared it.

      Btw, not a fan of the Austrian school or Fisher.

      • AB-

        Thanks for commenting.

        Well, I guess we have to agree to disagree.

        My take is the Fed overtightened in 2008 (fearing inflation, as it always does), and caused the Great Recession, and then was much too slow coming to a open-ended, results dependent QE program (QE3). They did the stop and start thing with QE1 and QE2 thus signaling to the market they would quit even if results were not obtained.

        The Fed is still fighting the last war, and that is the one on inflation.

        Of course, every economist would like supply-side improvements. But as a practical matter, they are very difficult to do in any sort of time frame, and beyond that you have 50 state governments and 100s of local government with their own supply-side constraints.

        Try building an airport in Orange County CA, a GOP stronghold. Or even any building with more than 250,000 sf in Newport Beach—it requires approval by city voters! I cited just two of 107,841 supply-side constraints in the USA.

        On the other hand, today the supply side is global, as opposed to domestic in the 1970s.

        My fear is we hit the next recession while still very close to ZLB. The Fed can’t cut rates below zero…but won’t won’t to go back to QE, as that will look like retreat or they made a policy error in giving up on QE.

        The United States of Japan.

      • AB = Andy B (just to clarify)

        I think we do have to agree to disagree. To me you are describing the last grain of sand to fall on an Abelian Sandpile before it collapses.

        To add to our disagreements, I reject Say’s Law. I feel that we are experiencing a demand side problem on a global scale.

        We both worry that the next recession begins at the ZLB. I think QE will help reduce the negative slope of the recession. But, QE only adds fuel to the fire of demand for and supply of loans. That is, the banking system gets in the way. Normally it is good that the banking system is in the middle to more efficiently allocate capital. But, this won’t be normal. The Fed will have to experiment with methods to circumvent the banking system and inject money directly into the economy (Rogoff’s Fed ATM).

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  4. “But my main point is this: I trust free markets, I trust private-sector investors (in general) to allocate resources well (or better than any other way we can devise). ”
    I would assume then that you believe that price controls don’t work and lead to perverse outcomes. Can you tell me why, in economic theory terms, why the Central Banks should be immune from said perverse outcomes as they apply a price control scheme to interest rates, which are actually just prices, in a mixed economy? Also, on the subject of bubbles, malinvestment of capital, and the intelligence of investors and corporate managers are you familiar with the Austrian Theory of the Business Cycle as put forth by von Mises, Rothbard, Garrison, and others? If you were perhaps you would give more thought to the conditions that could generate stable growth.

    • Brad W—

      Very interesting comment by you, and thanks for commenting.

      The Austrian theory is interesting, but unpersuasive in my view.

      Remember when Jim Glassman wrote his book (1999) “Dow 36,000.” Corporate AAAs yielded 7.5 percent. We had an dpi equities boom—the NASDAQ went to 5,000!

      That said, the idea of FDIC insurance and too much savings is an interesting topic. As you know, in a free market, savers would be entitled to returns—and also to losses.

      Banks could fail (do we allow “free banking?).

      Okay, you say, banks fail but there is private deposit insurance.

      Fine, but that could fail—see AIG.

      Or, the covenants of deposit insurance might be breached. As in, the bank shall only use bonded employees, but they did not. And someone swiped the gold. No insurance.

      Or, savers could “lose” money as the value of gold could fall, or stay flat but they have to pay bank frees.

      Ironically, the only way savers are guaranteed deposit safety is with a central bank and national deposit insurance. Oy maybe TIPS bonds. But I wonder if this results in too much savings.

      In pure free markets, thus, we might have a smaller supply of savings, and much higher interest rates, due to much higher credit risks. We might also have self-feeding snowballs of disintermediation, in periodic busts.

      Lastly, I am not sure interest rates are “low” today.

      Many are asking if traditional inflation measures overstate inflation. I can use my smartphone in a field in Thailand to send a photograph to London, full color, instantly, and then answer you comment, and then find out the price of silver in 1872. Or just about any other information.


      • Mr. Cole,
        Interesting comments, however, you seem to be skirting the question at the Crux of the issue and the central theme of my assertion. Do price controls ever have a salutary effects on markets? To believe that Central Banks controlling the rate of interest and quantity of money is a necessary function then you have to believe a lot of other things, all of which common sense and classical economics will tell you are of dubious verisimilitude.
        Market based interest rates are somehow “not legitimate” and need to be “helped” by the Central Bank.
        Lowering the rate of interest is necessary to stimulate real growth.
        The money supply needs to grow to support real growth.
        Lowering the interest rate below the rate set by the “market” is without consequences.
        I could go on, but these are just a few of the problems that come to mind.
        I will assume that you are versed in the “Austrian” school tenets and reject them, but it seems logical that we are seeing the consequences of a classic boom/bust cycle brought about by an attempt by the Fed to hold interest rates below market rates for years, starting in 1987 with the Long Term Capital fiasco, continuing through the ersatz 2000 computer glitch non issue, re-inflating after the partial liquidation brought on by the Tech bubble/bust, and then culminating in the housing bubble blown by Greenspan/Bernanke’s taking Krugman’s advice of 2001 to blow a housing bubble to replace the tech bubble. I don’t buy the “oversaving” hypothesis. The Fed sets rates and controls the monetary base. The Austrians would say that as soon as the Fed holds interest rates below the market (meaning the amount of savings available for investment at interest) rates then the malinvestments of the boom are set in place. Market participants are “fooled” into thinking there are more savings available for investment than there really are leading them to embark on more capital intensive projects than can be supported by the true amount of savings available for investment, and henceforth requiring the Fed to hold interest rates lower than the pool of available savings would signal, essentially forever. You see, the problem is the boom, it can’t go on forever, eventually the Fed has to tighten “too much” in most participants eyes and then those investments that were made under the boom assumptions of manipulated interest rates forever are shown to be non-sustainable in a “tightened” environment. To argue that the Fed can somehow moderate the whole thing once it has set it in motion by lowering rates by pulling the levers of monetary policy is just naive. The economy is not a machine and it just doesn’t work that way, no matter what the masters of the universe in the macro departments across the world think. The die is cast in the boom.
        Now, the question is: Can the Bureaucrat/politicians at the Central Bank ever tolerate a liquidation of the malinvestments of the boom? My short answer is, NO WAY. They will respond with QE forever at any whiff of credit deflation. So, I happen to agree with you, welcome to Japan 2.0. I also agree with you that getting major productivity enhancing projects done in the political/local/regional realm is well nigh impossible. That’s why most of our big breakthroughs in the past 20 years have been in the tech world where you don’t have to get anyone’s permission to increase computing power or cell phone technology.
        My opinion, Sound Money, No price controls, Less Regulation of voluntary contractual behavior, Lower Taxes, Less government intrusion into the business of business, I think doing away with the Central Bank, ditching legal tender laws, and enforcing the right of voluntary contract would do wonders.
        There is nothing magical about the government assuring everyone’s savings, protecting them against all losses, etc. It just gives people the illusion that nothing bad can ever happen to them, that big brother will take care of them, that they are entitled to have an easy life and if something bad does happen then all they need to do is call their friendly attorney who blankets the airwaves and he will get them what they are entitled to. Sorry for the rant.

  5. I think you also need to be careful about how you define loose lending. There are loan terms that can be far more important than the interest rate. Negative amortization, 100% LTV, stated income subprime loans had higher interest rates, but were incredibly loose. The Fed should have looked beyond the interest rate to see how truly loose money was. But, they didn’t. They were lazy and only looked at interest rates and PCE inflation.

  6. AB/Andy B–

    Well, I am open to “Federal Express,” that is shooting money straight into the economy, and David Beckworth has an idea along these lines to credit taxpayer accounts with money created by the Fed.

    My own idea is for a national lottery with more winners than losers, mostly small winners.

    But in terms of the practical, we know the Fed can target NGDP and do QE and do it now, no approvals needed….

    Brad W—

    Love the rant, bring it on.

    It may be in a perfect world, the ideas you and Austrians have will work. My advice is more along the lines of what can be done now today. We know that QE and NGDP targeting will probably work.

    I think the 1982 to 2008 was a period of real economic expansion in the United States, and it happened with low to moderate inflation. That is not ancient history, so I have some faith in the current set-up.

    As for inflation, I do not worry about it that much.

    As a sidelight though, let me point out that many people, including George Mason types, are suggesting that living standards are much higher than often credited, as inflation is improperly measured. On the high side that is!

    You see this with a smartphone, an amazing device that would have cost hundreds of thousands of dollars or millions of dollars only a generation again, with skads of equipment.

    Businesses and consumers constantly migrate to better deals. I do not know if the BLS can capture what happens with Craigslist. Sheesh, buy a one-year old computer for half price.

    It may the PCE deflator is overstating inflation,and we have been in deflation since 2008!

    In which case the Fed is not preserving price stability! You can see that bowing to any inflation index begins to seem a bit nutty.

    I have no fight with Austrians, but I wish they would concede that even under free markets and the gold standard, you would have long stretches in which savers and investors lost money and periodic economic busts. Lending out gold is not risk-free and private-sector insurance systems will sometimes also fail.

    In any system, people build houses lower than the high water market after 25 years, so to speak. In 50 years you have whole neighborhoods are below the high-water mark. That is human nature.

    I do have one complaint about Austrians: I get the sense an Austrian would prefer absolute price stability at 1 percent real growth for the long run, compared to five percent inflation and five percent real growth for the long run.

    They hate the question, but I will ask you: Would you enjoy an economy that had five percent inflation and five percent real growth in the long run?

    • Benjamin, or is it Ben, or Mr.Cole?;
      I have read Mises and Rothbard extensively and I don’t think your assumptions stand up to scrutiny. Austrians never assume any specific “growth” number positive or negative, that is your construct and I must say it is a straw man at best. Neither do they assume that people don’t make poor decisions in all areas of their lives, economically or otherwise. So, I’m not sure where the argument that “you would have long stretches in which savers and investors lost money and periodic economic busts. Lending out gold is not risk-free and private-sector insurance systems will sometimes also fail.” has relevance. Of course some people build below the high water mark, probably fewer would if they had to rely on private insurance to indemnify them fully instead of the Fed Gov but that is another issue, and some savers would lose money entrusted to intermediators such as banks, and the temptation for banks to create credit (simultaneous and multiple claims on the same dollar) are always there, after all humans are imperfect, greedy, and sometimes dishonest. Austrians don’t argue that all of these conditions don’t apply. I believe what they are saying is that let the individuals decide for themselves, free of force or fraud what they will do with their private property and resources free of a third party in the scheme, e.g. Central Bank or other counterfeiters, who would skew the market by their schemes to “boost commerce, or target NGDP, or support real growth, etc.
      Back to the question of “inflation/deflation” etc, with a somewhat stable money supply, the natural tendency of prices should be to fall over time as increases in technology and productivity brought about by capital investment (fueled exclusively by net savings), see the period 1873 – 1903. Why should the advantages of falling prices be hijacked by the money printers instead of accruing to the consumers and savers in general? The Austrians argue for market based money, not specifically the gold standard, free contract, enforcement of laws against fraud, and against fractional reserve banking, although with no govt. bailouts, and strict adherence by every entity to the laws of the land fractionally reserved banks probably couldn’t survive, and the end of the Central Banks. Look at the history of the Central Banking movement, it is cronyism and cartellism at its core. The Fed was founded on the pretext of “stabilizing prices” but really was just a mechanism for the banks to create credit with a lender of last resort to make them immune from runs when they got overextended. Sure, there were boom/bust cycles under the gold standard of the 19th century, but if you look into every one of them you will find fractionally reserved credit creation by the banks, followed by booms and then inevitably by a credit squeeze as market participants realized that the banks were insolvent resulting in runs that exposed the credit creation schemes of the banks (i.e. counterfeiting on a large scale), followed by either bank closure/busts or political intervention to suspend specie payments by the banks. In other words fractionally reserved banking is based on fraud at its very core which the Fed just institutionalized. The real tragedy was the English 17th century court ruling that is at the heart of modern fractional reserve banking that held that gold deposited with the goldsmith (precursors of banks) was a liability of the goldsmith and not the property of the depositor. This really changed a deposit receipt from a warehouse receipt to a promissory note and left the bankers/goldsmiths free to issue more receipts than gold deposited without fear of criminal prosecution for theft. A major legal defect.

      • Brad–
        Excellent commentary by you. As I say, I am not anti-Austrian.
        My monetary views accept the reality of central banking (it’s not going away) and what is practical now.
        I am skeptical about totally free banking for the reasons mentioned. Additionally, I think sustained deflation is dicey–who lends money out on deflating assets?
        I do like Austrian insights into who benefits from money creation…although if new money is created by QE, that seems fair…call Ben if you like and thanks for reading my post…I don’t think my blogpost will change the Fed anyway!

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