Making sense of the economy is challenging amidst so many varying opinions from people who understand far more than I do. It’s hard knowing what to think, so it’s refreshing to encounter someone who is both extremely well informed and also capable of communicating his worldly insight to someone as unfamiliar with economics as I am. On Tuesday, Federal Reserve Bank of Richmond president Jeffrey Lacker delivered a compelling lecture about the Federal Reserve’s missteps in coping with the financial crisis of 2007. While his opinions are debatable, his credibility is not, being intimately involved in that decision-making as a voice in the famous meetings where Fed Officials and bankers decided how to react to the ensuing financial crisis.
In the beginning of his talk, I was immediately surprised at the depth and sophistication of his speech, wrongly assuming he would speak in generalities in order to hold the interest of laymen like myself. In reality I think there were few people like me in the audience, but luckily what he said was fascinating enough that I had no problem maintaining the close attention necessary for me to keep up. The main point I came away with was twofold, his first assertion was that the Fed’s initial choice to intervene in the banking crisis was wrong and laid a path for policy decisions designed according to the original, erroneous assessment. And, secondly, that the Fed’s alternative reaction, not to extend credit to the banks, was a missed opportunity to discount the widely held, and now proven, expectation that our Central Bank won’t let massive corporations fail in the interest of market stability. He explains, this has been a growing expectation since the 70s, when the government began to act outside of explicit law by extending credit to private entities, which would later be deemed “too big to fail.” Lacker maintains the perceived assurance of government support in the event of default increases moral hazard and emboldens banks to engage in risk-seeking investing.
I don’t personally evaluate such complex economic situations as the one Lacker describes in 2007; I just listen to experts like him, but then the question is who to believe. That depends on not only the rationality of someone’s argument but also his or her track record. In an interview on Charlie Rose that aired Aug. 24, Lacker displayed some impressive foresight into the reasons for the slow recovery. He claimed that monetary policy generally has little material effect on growth or employment, but throughout the 80s and 90s central banks around the world were restructured and given autonomous funding reserved for averting recession in the event that a failing institution poses a systemic threat.
Arguably, that safety mechanism has been repeatedly misused, so around the world it’s led to an inflated conception of what Central Banks can and should do in the marketplace. Lacker proposes instead that decisive fiscal policy (legislative action) would do more to promote recovery. He went on to cite the situation of a business owner in the manufacturing industry who has ideas for innovative new products which would generate a significant number of jobs and tax revenue in his region, but he continues to stall expansion based on the uncertain outcome of potential government reforms.
Rose questioned whether Lacker’s apprehension is based on that uncertainty or a lack of confidence in market demand for his new products. In response, Lacker contended that American households are still spending conservatively and businesses are delaying growth in-part because of the unpredictable implications of pending laws regarding pivotal changes in areas like healthcare, tax rates, and labor costs. Regardless of the outcome of these debates, the debate itself is perpetuating the ubiquitous sense of ambivalence Lacker refers to. “Everything that could be part of the solution; that’s part of the uncertainty facing people in America.”
Just hours after Jeffrey Lacker’s lecture here, in the State of the Union Address, while rattling off the reforms on his agenda, President Obama threw out some unexpected, radical propositions, the most notable being an increase in the federal minimum wage to nine dollars an hour. I absolutely support the notion of establishing a universal living wage, but as a pragmatist, it’s frustrating to see another static debate forming when Congress is struggling with deciding how to keep the nation solvent.
Showmanship is one of the President’s greatest assets, but I think it got the best of him. The timing and delivery of that ostentatious announcement may have made for a stirring speech, but it also completely justified concerns about a unpredictably changing business environment. In August, Lacker warned against that type of capricious legislative goal because it startles businesses and paralyzes growth, while validating anticipation of more unexpected reform.
Despite these setbacks, Lacker and many other critics of government action still believe in American ingenuity and the potential for our economy to thrive again. At the end of his interview, Jeffrey Lacker reaffirmed his hopefulness, “Manufacturing is coming back… the innovation is there, the entrepreneurial spirit is there, [and] the willingness is there.”
MAYBE THE BEST THING GOVERNMENT CAN DO FOR THE ECONOMY NOW IS TO DEMONSTRATE CONSISTENCY AND FOCUS ON TACKLING THE UNRESOLVED DEBATES THAT LOOM OVER WASHINGTON BEFORE ADDING MORE.
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