Been There, Done That
by Joseph Joyce
President Barak Obama has nominated Stanley Fischer to the Board of Governors of the Federal Reserve Board, where he will succeed Janet Yellen as Vice-Chair of the Board. Fisher’s accomplishments are well-known. But he also brings an interesting set of credentials to the Board at a time when it has been criticized for ignoring the impact of its policies on other countries.
Fischer received his doctoral degree from MIT, and returned there after a stint on the faculty at the University of Chicago. During the 1970s and 1980s he taught or advised such future luminaries as Ben Bernanke, Greg Mankiw and Mario Draghi. He served as Vice President and Chief Economist of the World Bank from 1988 to 1990. He was the First Deputy Managing Director of the IMF from 1994 through 2001, a period when financial crises recurred on a regular basis in the emerging market countries.
Fisher’s experience with those crises gives him a perspective that macroeconomists who work only on the U.S. economy do not possess. Paul Krugman has written about how the financial instability of the post-Bretton Woods era has affected the views of those who follow these events. In 2009, for example, when our profession was castigated for not foreseeing the global financial crisis, Krugman wrote: “
…the common claim that economists ignored the financial side and the risks of crisis seems not quite fair – at least from where I sit. In international macro, one of my two home fields, we’ve worried about and tried to analyze crises a lot. Especially after the Asian crisis of 1997-98, financial crises were very much on everyone’s mind.
Similarly, in 2011 Krugman wrote:
Indeed, my sense is that international macroeconomists – people who followed the ERM crises of the early 1990s, the Latin American debt crisis, the Asian crisis of the late 90s, and so on – were caught much less flat-footed.
The IMF, of course, was widely criticized at the time for its crisis-management policies and its advocacy of deregulating capital flows. In retrospect, Fischer’s arguments in favor of capital account liberalization appear overly zealous, and he has drawn criticisms for those positions. The IMF has recently adopted a more nuanced position on the use of capital controls as a macro prudential tool.
And yet—in 2000, after the resignation of the IMF’s Managing Director Michel Camdessus, Fischer, who was born in Rhodesia (now Zambia), was nominated to be Camdessus’ replacement by a group of African nations. (Miles Kahler presents the story in his Leadership Selection in the Major Multilaterals.) This was a challenge to the European governments that had always claimed the prerogative of naming the Managing Directors of the IMF since it commenced operations in 1945. But the nomination was also an indication of the respect that Fischer enjoyed amongst the African and other developing countries. In the end, it was impossible to change the IMF’s traditional governing procedures, and Horst Köhler of Germany became the new Managing Director.
After Fisher left the IMF, he went to work at Citigroup. In 2005 he was appointed Governor of the Bank of Israel, and served there until last year. Under his leadership the Bank received praise for its policies. Fischer was widely admired and received an “A” for his stewardship from the magazine Global Finance. Those pouring through his recent speeches and writingsfor indications of what he might do as a Federal Reserve Governor believe that he endorses the Fed’s accommodative stance, but may have a nuanced approach on the benefits and costs of forward guidance.
Stanley Fischer, therefore, brings several attributes to the Federal Reserve. First, he has an unquestioned command of macroeconomics, and in particular, monetary policy. Second, he has a wealth of experience in dealing with financial calamities. And third, he earned the trust and respect of policymakers in developing nations while he served at at the IMF. Those qualities will be much appreciated as foreign officials and financial markets deal with the Federal Reserve’s policy pivot.
cross posted with Capital Ebbs and Flows
The Fed has done an increasingly better job smoothing-out business cycles over the past hundred years, to facilitate growth, particularly since we’re no longer constrained by the gold standard.
The problem hasn’t been the Fed, although Bernanke had to prove he wasn’t an inflation dove, which caused the recession, in 2007, initially.
However, we were on the path to a mild recession, with the help of the Bush tax cut in early 2008, which gave the Fed time to catch-up easing the money supply, until Lehman failed in Sep 2008, which caused the economy to fall off a cliff.
It’s uncertain if even economists have the wisdom to micromanage a large, diversified, and dynamic economy. However, economists have proven they can manage, or direct, the economy effectively in a crude way.
From Commanding Heights:
“Keynes intended government to play a much larger role in the economy. His vision was one of reformed capitalism, managed capitalism — capitalism saved both from socialism and from itself.
Fiscal policy would enable wise managers to stabilize the economy without resorting to actual controls. The bulk of decision making would remain with the decentralized market rather than with the central planner.
…fiscal policy — spending, deficits, and tax. These tools could be used to manage aggregate demand and thus ensure full employment.
As a corollary, the government would cut back its spending during times of recovery and expansion. This last precept, however, was all too often forgotten or overlooked.”
The problem has been fiscal policy, and other economic policies, controlled by politicians. Perhaps, fiscal policy, and major economic policies, should be managed by economists.
Those policies created an expensive “recovery,” because one foot has been on the brake and the other foot has been on the accelerator.
Yellen and Fisher are excellent choices. They’ll continue to direct the economy in a general way as the Bernanke Fed.
Here’s what Bob Brinker said about the Fed (Dec 2012):
“It’s only because the Federal Reserve has been active that we have any growth at all in the economy….The Federal Reserve is the only operation in Washington doing its job.
The only person that would criticize Ben Bernanke would be a person who is so clueless about monetary policy and (the) role of the Federal Reserve as to have nothing better than the lowest possible education on the subject of economics….Anybody going after Ben Bernanke is a certified, documented fool….”
Don’t hijack a post again PT.
I think, there’ve been at least four general factors that promoted faster economic growth:
1. The Federal Reserve in smoothing-out both long-wave and short-term business cycles. Economic boom/bust cycles are inefficient both in the boom and bust phases, because of periods of strain and slack.
2. Fiscal policy or Keynesian economics, which also helped smooth-out business cycles.
Average annual per capita real GDP growth:
1913-2012: 2.04% (after Fed)
1813-1912: 1.38% (before Fed)
1936-2012: 2.38% (after Keynes General Theory)
Source: Census data and the BEA.
3. Since the minimum wage was established, per capita real GDP has grown at a much faster rate.
Average annual per capita real GDP growth:
1863-1937 (75 years): 1.33%
1938-2012 (75 years): 2.44%
Source: Census data and the BEA.
4. Globalization, i.e. open markets, free trade, and unrestricted capital flows, which improved U.S. living standards at a much faster rate (although trade deficits subtract from U.S. per capita real GDP growth and add to our trading partner’s per capita real GDP growth).
It be interesting to split the pre fed years into pre and post civil war and the completion of railroads to most locations in the US. Other books suggest that the period from 1875 to 1900 might have been a super growth period of up to 6% (accompanied by a severe deflation, partly in the later stages caused by the discovery of gold in the Yukon and South Aftrica. )
Lyle, from 1875-1900, annualized real GDP growth was 4.50%, annualized per capita real GDP growth was 2.37%, and annualized population growth was 2.08%.
From 1975-2000, for example, annualized real GDP growth was 3.45%, annualized per capita real GDP growth was 2.35%, and annualized population growth was 1.08%.
It should be noted, there was a long-wave bust cycle from 1973-82 (which included three recessions – two severe and one moderate – in a period of inflation). Per capita real GDP growth from 1973-82 was 0.99%.
i.e. annualized per capita real GDP growth was 0.99%.
Annualized per capita real GDP growth from 1929-1938, another long-wave bust cycle, was -0.49% (i.e. negative 0.49%).
Also, there was the Long Depression from 1873-1879. However, annualized per capita real GDP growth was 1.96% from 1873-79.
Is there no end to these leaches? Printing money without end, without backing, creating endless debt for America AND the rest of the world, DOES NOT solve any problems, it only INSLAVES people. (unless, of course, the problem is “not enough slavery in the world”)
PT: Have YOU ever thought about looking out of YOUR window at the real world instead of a government generated graph???
Mike, you make no sense.
The Fed creates and destroys money to achieve sustainable growth (of goods & services), which is optimal growth. Money is just a tool to achieve that goal.
You can praise the Fed later.
Yes, the U.S. Industrial Revolution, from 1871-1914, was one of the greatest eras of prosperity.
However, there were frequent and severe economic boom/bust cycles, demand, or mass consumption, was weak, compared to after WWII (causing disinflationary growth and slowing improvements in living standards for the masses), and there were more barriers to trade (e.g. tariffs, quotas, and other restrictions).
The height of the U.S. Information Revolution, from 1982-2007, was a greater era of prosperity. As a result, living standards, labor standards (or working conditions), and environmental standards were much higher in the 2000s compared to the 1970s.
Actually, there was strong DEFLATIONARY growth in the Industrial Revolution, and strong disinflationary growth in the Information Revolution. However, growth could’ve been stronger in the Industrial Revolution.
Here’s part of a Bill Gross interview in Jan ’07 about a Keynesian idea “animal spirits:”
Bloomberg’s Tom Keene: “…As you know, I’m a big fan of nominal GDP – this, folks, is real GDP plus inflation. It’s the ‘animal spirits’ that’s out there. You say be careful, Bill Gross. It looks real good to me, Bill. I see 6% year-over-year nominal. You say that’s going to end?”
Pimco’s Bill Gross: “…Ultimately, the inflation component affects the real growth component. To the extent that you have nominal GDP – in my forecast 3 to 3.5%, that’s really not enough growth in terms of the economy itself to support asset prices at existing levels. And so, declining assets prices ultimately factor into eventually lower real growth. But that’s not for mid-2007 but perhaps for later in the year.”
Tom Keene: “When we look at six months of low nominal GDP, is that enough to link directly into the ‘animal spirits” of the business investment component of GDP – the “animal spirits” of business men and women?”
Bill Gross: “Well sure it is. When you realize that the average cost of debt in the bond market – and therefore in the economy and this includes mortgages – it is about 5.5%. If you can only grow your wealth and service that debt at 3.5% rate, then that has serious implications.
When you go back to 1965, Merrill [Lynch] did this study – in terms of asset prices during periods of time when nominal growth grew less than 4%. Risk assets have been negative in terms of their appreciation and actually bonds have done pretty well.
The question becomes why hasn’t that happened yet, and I think we’re simply in a period of time where there are leads and lags that are much like the leads and lags of Federal Reserve policy.”
Here’s what one economist said in 2012:
“The decline and lackluster recovery in business investment has a wide range of causes, including globalization, regulatory barriers, and weak demand.
Many companies are investing overseas rather than in the United States. Multiple layers of regulation, even if well-intentioned, have the impact of discouraging capital investment and innovation. And the continued weakness in demand at home makes it difficult to justify building new factories.
Government has to invest in infrastructure, education, and research. Households have to invest in their own human capital. And businesses have to invest in buildings, equipment, and software.”
He also wrote this article in 2006 “Why The Economy Is A Lot Stronger Than You Think:”
The fact remains the deregulatory position of the Fed since 1970s has brought the Nation to the position of the greatest debtor in the world; as opposed to before deregulation being the greatest creditor Nation in the world.
Beene, globalization has allowed the U.S. to consume more than produce, up to $800 billion a year, in the global economy and in the long-run.
The U.S. offshored low-end manufacturing, imported those goods at lower prices and higher profits, and shifted limited resources into high-end manufacturing and emerging industries.
Also, I stated before:
…the U.S. is able to maintain trade deficits in the long-run, mostly, because foreigners lose through changes or differences in inflation, interest rates, and currency exchange rates. For example, over the past few decades, the Japanese yen appreciated from 360 to 100 per dollar, which means Japan received fewer and fewer yen per dollar.
Here’s an article by the Fed:
Income Flows from U.S. Foreign Assets and Liabilities
Federal Reserve Bank of New York
November 14, 2012
Foreign investors placed roughly $1.0 trillion in U.S. assets in 2011, pushing the total value of their claims on the United States to $20.6 trillion. Over the same period, U.S. investors placed $0.5 trillion abroad, bringing total U.S. holdings of foreign assets to $16.4 trillion. One might expect that the large gap of -$4.2 trillion between U.S. assets and liabilities would come with a substantial servicing burden. Yet U.S. income receipts easily exceed payments abroad.
As we explain in this post, a key reason is that foreign investments in the United States are weighted toward interest-bearing assets currently paying a low rate of return while U.S. investments abroad are weighted toward multinationals’ foreign operations and other corporate claims earning a much higher rate of return.
U.S. investors earned a much higher rate of return on multinationals’ foreign operations and similar corporate holdings than did foreign investors here, 10.7 percent versus 5.8 percent, respectively.
The superior U.S. rate of return on FDI, as well as the greater tilt in U.S. foreign investments toward FDI, accounts for the $322 billion income surplus recorded in this category in 2011…The United States has earned a substantial premium on FDI investments at least since the 1960s.
Moreover, I may add, because the U.S. shifted from low-end manufacturing into high-end manufacturing and emerging industries, the U.S. has much more market power than its trading partners.
The U.S. not only leads the world in the Information and Biotech Revolutions, it leads the rest of the world combined (in both revenue and profit).
“The U.S. not only leads the world in the Information and Biotech Revolutions, it leads the rest of the world combined (in both revenue and profit).” PeakTrader
Still does not change the fact the Nation as a hold is not profiting from present system; or it would not be the greatest debtor Nation in the world. The Nations system may be creating more billionaires, its’ not helping the Nation or the majority of its citizens.
PT: Yes money is a tool. HOWEVER Federal Reserve Notes are an instrument of DEBT. There is a difference.
Mike Meyer, why would debt not be a tool? It is, when used as one.