PANEL 3: MONETARY POLICY AND THE KNOWLEDGE PROBLEM

Moderator: George Melloan
Former Deputy Editor, Wall Street Journal

Gerald P. O?Driscoll Jr.
Senior Fellow, Cato Institute

Alex J. Pollock
Resident Fellow, American Enterprise Institute

David Malpass
President, Encima Global LLC

Melloan introduces Gerald P. O?Driscoll Jr.

The Knowledge Problem — Hayek argued that knowledge is dispersed — impossible to aggregate it without incentives. ?What everyone knows is more than what regulators know. ?There is no way that a central planner (or banker) could know what the right answer is for economics. ?As such, socialism morphed to become social democracy. ?USSR collapsed.

Rules encapsulate important knowledge gained by society over time, which enables actors to have a better idea of what to do. ?Disclosure reduces fraud.

Monetary policy discretion gives too much power to a small group of men.

Pollock says that the Fed does not know what it is doing, and can’t know what it is doing. ?The problem is too complex, and the knowledge to get and interpret to too hard. ?Fed biggest SIFI of all, and creates more systemic risk than anyone. ?The Fed as a result has not done well in the past, and is unlikely to do so in the future.

Financial instability was not destroyed by the Fed; experts are often given to aggressive actions from bad theories. ?Faith in experts is a secular religious problem.

Prices quintupling in a lifetime is considered price stability.

“The Fed must be independent.” But if the Fed is not competent, then should it be independent? ?How and to whom should the Fed be accountable. ?No part of a democratic government should be unaccountable. ?The Fed must be responsible to Congress. ?That said, the Fed has often been a useful lapdog to the Congress… funding deficits, etc. ?Congress in 1963 agreed with this idea at the 50th anniversary of the Fed.

Humphrey Hawkins does not help accountability. ?Financial Accountability Improvement Bill — FOMC would have to make detailed reports to the Congress, including dissenting opinions.

Banking committees in both houses captured by the housing industry.

Calls for a joint committee on the Federal Reserve; should also be able to audit the Fed in any way appropriate.

“The money question” affects so many things that it needs to be broadly discussed.

David Malpass — Post-monetarism: the Fed’s Growth Options

Negative effects of Fed policy on the economy. ?Fed is huge and distortive.

ECB — buy anything at any time.

ZIRP will weigh on growth for decades.

Post-monetarism — direct regulation of the financial system. ?Monetary and credit policies merged. ?Credit growth is slower as a result. ?Required bank reserves have fallen and are rising now. ?No transmission of M0 into other aggregates. ?Fed buys long bonds and advantages them — benefits government and corporations.

Core capex orders are weak. ?Employment to population ratio at a low, forget the unemployment rate. ?Median household income is declining — increased inequality.

Fed has four options to boost growth:

a) move rates above the zero bound. ?Aids savers and would be a loosening of credit. ?Maybe the interbank laon market would increase.

b) taper reinvestment, and free up Treasuries for liquidity and collateral. ?Fed assets at $4.5T. ?Banks assets currently at Fed.

c) Increase repo borrowing. ?Fed Liabs at $4.4T. ?More credit gets pushed out to banks. ?Would be more idle cash to lend.

d) Fed has a severe bunching of maturing assets in the short run. ?Presently would invest maturing assets long. ?Should the Fed own long duration assets?

Q&A — 1) no one has the interests of everyone else at heart. ?Central bankers have poor incentives — they maximize for themselves

O’D: even with good motives, they can’t get it right

M: Quis Custodes Custodiet.

2) Freedom: gold can’t be counterfeited, debased, maximize freedom.

P: American dollar good as gold — Bretton Woods. ?Silver Certificates were repudiated.