Sunday, September 21, 2008

Monetary policy matters

For years, candidates for both Congress and POTUS have discussed war policy at great length. And they pay lip service to fiscal policy (the two most common economic theories are "tax n spend" or "borrow n spend"). But there's scant attention paid to monetary policy.

From Reuters on Friday (by Jeff Mason):

Obama supported efforts by the Fed and the Treasury to work out a financial rescue package and said he would like to see the government adopt an emergency economic plan to help working families cope with rising gasoline and food prices.

Asked why he was not offering a plan of his own to address Wall Street's meltdown, Obama told reporters it has to be done in an "intelligent, systematic, thoughtful fashion."

"I'm much less interested at this point in scoring political points than I am in making sure that we have a structure in place that is sound and is actually going to work," he said.

This raises the obvious question of the ability of Obama (and his thousands of advisers) to craft a rational, responsible, intelligent monetary policy. But I haven't heard McCain's campaign offering any thoughtful policy initiatives either.

Furthermore, it seems everyone running for office wants to hear from the Administration. Yet this is the same Administration that is getting blasted for creating this mess. So who is dumber?

As I've been saying, I firmly believe any good monetary policy must include a return to sound money (a gold standard could work). As I understand it, that would prohibit the Fed / Treasury from issuing trillions of dollars in new credit... all of which will devalue the dollars that you and I currently hold in our bank accounts, etc.

I sincerely hope that during the upcoming debates, McCain and Obama are asked about their views on monetary policy.

Tim White


Anonymous said...

With Obama in, the Fed will need to print money to offset the accelerating fiscal deficit

"Obama made it clear that he considered the deficit to be only one of the long-term problems requiring immediate attention, and he sounded more worried about the others, like global warming, health care, and the economic hangover that could follow the housing bust. Tellingly, he said that while he admired what Clinton did, he might have been more open to Reich's argument—even in 1993. "I still would have probably made a slightly different choice than Clinton did," Obama said. "I probably wouldn't have been as obsessed with deficit reduction."

Yep, "not obsessed" = "couldn't give a rip"

tim white said...

There are many problems facing America. But I truly believe that a collapse of the dollar is the only thing that could mean the end of the republic.

Anonymous said...

McCain made this speech in Green Bay Thursday, for what it's worth

First, to deal with the immediate crisis, I will lead in the creation of the Mortgage and Financial Institutions trust -- the MFI. The underlying principle of the MFI or any approach considered by Congress should be to keep people in their homes and safe guard the life savings of all Americans by protecting our financial system and capital markets. This trust will work with the private sector and regulators to identify institutions that are weak and fix them before they become insolvent. The MFI is an early intervention program to help financial institutions avoid bankruptcy, expensive bailouts and damage to their customers. This will get the Treasury and other financial regulatory authorities in a proactive position instead of reacting in a crisis mode to one situation after another.

The MFI will restore investor and market confidence, build sound financial institutions, assist troubled institutions and protect our financial system while minimizing taxpayer exposure. This is an important step, but it is not enough. I will also take the additional actions needed to make sure a crisis like this is never allowed to build and break over the American people again.

Second, I will propose and sign into law reforms to prevent financial firms from concealing their bad practices. An inexcusable lack of financial transparency allowed Wall Street firms to engage in reckless behavior that padded their profits and fattened executive bonuses when times were good, but now imperil the financial security of millions of Americans when their bets turned sour.

So much of the damage to our economy could have been avoided if these practices had been exposed to the light of day. Americans have a right to know when their jobs, pensions, IRAs, investments, and our whole economy are being put at risk by the recklessness of Wall Street. And under my reforms for the financial sector, that fundamental right will be protected.

Third, we need regulatory clarity. The lack of transparency in our financial markets went unnoticed by the regulatory agencies scattered throughout Washington charged with protecting the common good. We've got the SEC, the FDIC, the CFTC, the SIPC, the OCC, the Fed. At best, this confusing assortment of regulators and institutions was egregiously lax in carrying out their responsibilities. At worst, they engaged in the old Washington game of guarding their bureaucratic turf, instead of safeguarding the public interest and protecting investors.

Many in the financial services industry also either forgot or neglected their duty to act ethically and honorably. This shortcoming was aided and abetted by the creation of financial instruments that allowed lenders to escape any responsibility for the risk of their loans. In the past, lenders had to pay a price if they made a bad loan. Today, Fannie Mae and Freddie Mac worked with Wall Street to bundle together all these dicey subprime loans and then pushed them off on investors who didn't have the tools of transparency needed to assess or even understand the risk.

The current system promotes confusion, encourages bureaucratic infighting and creates incentives for financial firms to cut corners. We need to enhance regulatory clarity by holding the same financial activity to one regulatory standard. We don't need a dozen federal agencies doing the job badly -- we need the best federal agencies to do the job right.

Fourth, we must ensure that consumers and investors are protected. Our regulatory system must protect consumers and investors by punishing individuals who engage in fraud, break contracts, or lie to customers -- like the predatory lenders who know you can't afford an adjustable rate mortgage, but mislead you into signing one. These actions are criminal and the people who commit them should be behind bars. And corporate governance rules will be reformed so that shareholders have a clear say in determining the pay of CEOs and other senior executives. On my watch, the consequences for corporate abuse will not be more enrichment, but more likely an indictment.

Fifth, in cases where failing companies seek taxpayer bailouts, the Treasury Department will follow consistent policies in deciding whether to guarantee loans. It must have well developed remedies for a financial crisis. With billions of dollars in public money at stake, it will not do to keep making it up as we go along.

Finally, the Federal Reserve should get back to its core business of responsibly managing our money supply and inflation. It needs to get out of the business of bailouts. The Fed needs to return to protecting the purchasing power of the dollar. A strong dollar will reduce energy and food prices. It will stimulate sustainable economic growth and get this economy moving again.

tim white said...

Sounds like McCain wants more regulation (which isn't inherently bad).

I suggest he insert this regulation-supporting phrase in his stump speech:

When I'm President the "Congress shall... coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures."

That's regulation I wholeheartedly support!

(Article 1, Section 8)

Anonymous said...

McCain's proposals sound like a real plan. Lack of regulation allowed over-speculation and bad investments in the first place.

We need sound regulation in the shortterm to pull us back from a 1929 collapse, and hard money in the longterm. McCain's regulatory proposal along with his lifelong inclination as a deficit-hawk are good, balanced approaches.

tim white said...

I agree that McCain makes some good points and generally has opposed deficit spending (very important), but I'm still uncertain about points five and six.

I've got mixed feelings on five, but really do take issue with six and the apparent acceptance of The Fed to continue with out any serious debate on the merits of its very existence.

McCain has offered some ideas though... and some with merit. I have yet to hear anything from Obama. And while I'd normally be ok with someone wanting to collect the fact... this whole discussion is reminiscent of the Jefferson / Hamilton battles. By that I mean this is a highly philosophical argument. And Obama wants to wait for the Fed and Treasury to weigh in.

IMO, there's no need to wait to speak to the philosophical view of government's role in monetary policy.