Fed Up by Danielle DiMartino Booth

Author:Danielle DiMartino Booth
Language: eng
Format: epub
Publisher: Penguin Publishing Group
Published: 2017-02-01T10:58:41+00:00

“INFLATION OR DEFLATION?”

As we go through this recession

As farther down we slip

Will our central bank get traction soon, or

Will it lose its grip?

It’s a mini-Great Depression

Our markets went berserk

The Fed is printing trillions now, but

Will their efforts work?

Inflation or deflation?

Tell me, if you can

Will we become Zimbabwe

Or will we be Japan?

Credit markets came undone

And still are in distress

Will the dollars in my mattress

Buy much more next year or less?

It’s a desperate situation

When you’re at the zero bound

If a tree falls in a forest,

Is it making any sound?

New money makes inflation

If folks who have it spend

But if it only sits there,

Then the misery will not end.

Inflation or deflation?

The choice is looking grim

I wonder what John Maynard Keynes would say

If we asked him.

Inflation or deflation?

Tell me, if you can

Will we become Zimbabwe

Or will we be Japan?

Rosenblum joked that the Fed should sell T-shirts emblazoned with the motto: “We Manufacture Moral Hazard.”

The September 2009 FOMC meeting would be a testing ground for yet another battle between what had evolved into the Yellen faction and the Fisher faction, with a few moments of thigh-slapping humor.

“I agree with Presidents Evans and Yeltsin—Yellen,” said Boston Fed president Eric Rosengren at one point in the discussion. Getting the white-haired little lady with the Brooklyn accent mixed up with the vodka-swilling Russian president Boris Yeltsin provoked guffaws all around.

“I’ve gone drinking with Janet,” Fisher interjected. “She’s no Yeltsin.”

More laughter. “Okay, the last two minutes will be struck,” Bernanke said.

All still collegial. But the frequent clashes on the FOMC and the high-profile opposition Fisher was mounting against QE and ZIRP grated below the surface of the FOMC’s cordial interactions.

At the beginning of every FOMC meeting, Fisher greeted Yellen with a kiss. She always responded with good humor and grace, maybe a giggle. But they represented the opposite ends of the spectrum. One camp within the Fed included those bank presidents from Boston, New York, Chicago, and San Francisco, which were home to big financial firms. The other camp included bank presidents from Dallas, Kansas City, St. Louis, and Philadelphia, which had more diverse economies. They wanted to look at costs versus benefits of each program.

After the September meeting, Fisher and Rosenblum published an op-ed in the Wall Street Journal called “The Blob That Ate Monetary Policy,” contending that banks that the Fed deemed “too big to fail” had rendered the Fed’s traditional monetary policy tools ineffective.

“While the list of competitive advantages TBTF institutions have over their smaller rivals is long, it is also well-known,” they wrote. “We focus instead on an unrecognized macroeconomic threat: The very existence of these banks has blocked, or seriously undermined, the mechanisms through which monetary policy influences the economy.”

The interest-rate channel was gummed up. Rates that mattered for the recovery of the economy—those paid by businesses and households through mortgages, auto loans, credit cards—had risen rather than fallen. The banks with the most toxic balance sheets restricted their lending activity to shore up their own margins.

“Japan paid dearly for propping up its troubled banks in the 1990s,” wrote Fisher and Rosenblum.

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