A guest post by Benjamin Cole
Slated to be No. 2 at the Fed is Stanley Fischer, former central bank kingpin in Israel, where he amassed an enviable record of guiding the Mideast state through the global Great Recession with only a scrape or two.
Though he espouses adjustable inflation-targeting more than the locally preferred shooting for steady increases in nominal GDP (Market Monetarism), who knows?—it may amount to the same thing in practice.
That is to say, one central banker may say, “Inflation is too low, and we need to be a little flexible anyway, let’s do $85 billion a month in QE,” and the next may say, “NGDP is too low, let’s do $85 billion a month in QE.”
In practice, the same policy, despite all the complicated arguments behind each approach.
We can hope that Fischer is, at least, not peevishly fixated on obtaining microscopic rates of inflation, or even zero inflation, an idea now zealously touted by such monetary thinkers as John Cochrane of University of Chicago or Charles Plosser, the Philly Fed bank chief. With the PCE deflator at 1 percent, the stiff-necked “no inflation” crowd has near-guttural blood-lust to savage that last yet initial digit, economic growth be damned.
But Hopes May Be Dashed
So, Fischer may offer hope for a more growth-oriented Fed policy—but remember, the Market Monetarist community has been long disappointed with current Fed Chief Ben Bernanke, who wrote so intelligently about the Great Depression in the United States, and even more cogently about the recession-deflation quagmire that has been Japan since 1992
In short, Bernanke—as an academic—told the Bank of Japan to print money and buy bonds, and keep doing it until results were in hand, much as Milton Freidman did in his 1998 seminal piece, “Reviving Japan,” written for the Hoover people at Stanford.
Market Monetarist don Scott Sumner more than once has lamented that Bernanke the academic has been AWOL or even MIA as Fed leader.
Why Bernanke the Changeling?
As an independent public agency (self-financing at that) the Fed has been fortifying and ossifying an institutional culture since it won formal independence in 1951. Starting in the 1980s the Fed began muscling up, by hiring a small army of on-staff PhD economists and a serious support staff, holding conferences and developing powerful ties to academia and industry publications. With perhaps 700 economists at HQ or at the 12 branches, the Fed dominates the craft.
As early as the 1990s, Milton Friedman complained that the Fed was “stifling” debates about monetary policy. Wrote Friedman in a letter, “having something like 500 economists is extremely unhealthy. As you say, it is not conducive to independent, objective research. You and I know there has been censorship of the material published. Equally important, the location of the economists in the Federal Reserve has had a significant influence on the kind of research they do, biasing that research toward noncontroversial technical papers on method as opposed to substantive papers on policy and results….”
In a sense, the basics of Fed culture were fired like clay in an oven in the triumphant 1980s days of Fed Chairman Paul Volcker, when he successfully tightened the money supply and busted inflation, then in low double-digits. Volcker left the Fed ring in 1987 hailed as a champ—forgotten today is that inflation as Volcker departed was about 5 percent, and people were happy with that.
Brandishing the Volcker escutcheon, the Fed seized its defining moment of glory to craft and hone an exalted mission statement—the brave if genteel protector of price stability, as opposed to, say, the spendthrift weaklings in US Congress or the White House.
It is into this Fed culture that Fischer will find himself enveloped, and into which Bernanke entered, never to be seen again in his original incarnation.
Indeed, all over the developed world, major central banks become independent, and have become fixated on inflation, from the ECB to the Bank of Japan.
Teams of organizational theorists and sociologists might be able to explain this obsession, but suffice it to say central bank staffs probably do not have a lot in common with bar operators, real estate developers or entrepreneurs. It would be unfair to say bankers have a fetish for currency or secretly genuflect to gold.
There is also the reality that central banks know they can flatten inflation—the Bank of Japan did it, and operationally crushing inflation is easy to do. A smart public agency defines the goalposts down and close enough that scoring is easy. “Our only job is price stability,” has a nice ring, and then everyone can go home at 5 pm, no worries.
In contrast, managing monetary policy so that inflation is moderate but there is prosperity—that takes skill, judgment and nerve, and a thick skin.
It must be conceded that with a dual mandate, the inflation-hysterics will ever bash the Fed, while others will chant for more growth. To agree to a dual mandate is to enter the ring against two boxers, for an infinite number of rounds.
Central banking types, in their wing-tipped shoes, are not fond of stepping into crossfires. Indeed, the recent Fed embracing of a third mandate—to “prevent bubbles”—is perhaps but a scrim to reduce the emphasis on prosperity, and to effectively get to a single anti-inflation mandate.
The Big Question: So will Stanley Fischer succumb to the global and Fed central banker cult of immaculate price stability?
The Good News
The good news is that Fischer is 70 (an alter cocker, look it up) and has already been a central banker, meaning (we hope) he perhaps will not be intimidated by the marbled hall, large eagle statues and glorified mission statements and exalted prerogatives of the Fed—nor its rising predilection to seek a single mandate, legally or in practice, of straitjacketing inflation to infinitesimal levels.
As an Israeli, my guess is that Fischer has a thick skin, as in rhinoceros epidermis.
So shooting for dual mandates and taking heat from both sides should be easy for him. But mostly, let us hope Fischer brings a practical, Israeli settler perspective to his job: “Inflation, schmaflation, people need to live and prosper too.”