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24.09.2002, 18:04

The Hubris in Monetary Policy Award / Artikel mises.org, engl.

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The Hubris in Monetary Policy Award
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by Christopher Westley

[Posted September 19, 2002]

[img][/img] 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. 

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Christopher Westley is an assistant professor of economics
at Jacksonville State University. See his Mises.org Articles
Archive and send him MAIL.