Fed chairman Ben Bernanke over the weekend gave a big speech at the American Economic Association annual meeting in Atlanta. He defended his and and Alan Greenspan’s unprecedented easy money through the 2000’s and acknowledged no connection between monetary policy and the financial crash.
Economist David Malpass, however, had the whole thing nailed back in 2002. Here’s Malpass in a note today:
Today’s New York Times front page has a David Leonhardt article on the Fed entitled “If Fed Missed Bubble, How Will It See New One?” It criticizes Chairman Bernanke’s Atlanta speech: “This lack of self-criticism is feeding Congressional hostility toward the Fed.”
I’ve attached my 2002 WSJ article on the same topic (The Fed’s Moment of Weakness). It argued that Chairman Greenspan was “letting himself off the hook” in 2002 by saying that the Fed couldn’t anticipate asset bubbles. The 2002 article concludes that: “If the value of the dollar is allowed to fluctuate as wildly in the future, then momentum will dominate the global economy as it did in the 1990s, creating constant boom/bust cycles.”
We expect Chairman Bernanke to be reappointed and the Fed’s lagging monetary policy to continue for at least one more cycle. For now, this feels good to financial markets (everything is up today except the dollar — gold, oil, the euro, U.S. equities and especially foreign equities in dollar terms.) However, this gradually channels capital away from the U.S. and especially from the many small businesses (and yet-to-be-created businesses) left out of Washington’s aggressive credit rationing process. This undercuts U.S. growth and leaves unemployment much higher than it should be.
We often say hindsight is 20/20. Monetary policy is in a sorry state when the hindsight of the insiders lags the foresight of the outsiders. By eight years and counting.
