Reader Question: What Would I do Differently Than the Fed?
Irrational Exuberance History Lesson
To understand what I would do, let's review a history of what the Fed did.
In 1996 former Fed chairman Alan Greenspan delivered a speech on the burgeoning internet bubble in the stock market which he labeled "irrational exuberance".
In 1999 he goosed the stock market by lowering interest rates in response to his absurd fear of Y2K global computer breakdown regarding date handling at the turn of the century.
US Banks made massive loans to worthless dotcom companies as well loans to Argentina and other countries that defaulted.
At the peak, just before the bubble bust, Fed minutes show Greenspan bought into the "productivity miracle" of technology and the internet reversing his call on irrational exuberance.
To bail out the banks from the Doccom bust and bad South American loans, Greenspan slashed interest rates to zero and held then too low, too long at that rate.
The process spawned the housing bubble.
Housing Bubble Denial
Greenspan then Bernanke denied the brewing housing bubble.
Bernanke looked more than a bit foolish when the housing bubbled collapsed and homeowners walked away from their mortgages en masse starting the Great Recession.
When things did collapse, the Fed again bailed out the banks and zombie corporations.
Once again this reinforced moral hazard policies and more reckless behaviors.
Lessons Learned and Not Learned
The Fed never learned its lesson about the need to not blow bubbles.
But speculators learned the Fed likes to blow bubbles. And once again everyone seems to think they can get out of the way when the collapse comes.
They can't and won't because it is mathematically impossible. At the individual level a few people can cash out, but in aggregate, someone must hold every share of every company on the way up and down.
For every seller there is a buyer so escape in aggregate is impossible.
Let the Free Market Work
I would let the free market work. I would have let corporations go bankrupt in 2008 and 2001.
Of course, I would not have been manipulating interest rates in the first place that created the prior two bubbles.
The Fed frequently moans about income and wealth inequality, it is the largest contributor to both.
The Fed has proven to be no better than Russian central planners attempting to set the supply and price of steel.
2% Inflation Target
The Fed's 2% inflation target is monetary insanity.
Full speed ahead with the stimulus in search of inflation that would be visible to anyone who was not wearing groupthink blinders.
I have a set of questions for Fed Chair Jerome Powell on inflation. Please read them: Hello Jerome Powell We Have Questions.
He would not recognize inflation if it jumped off the table and spit grapefruit juice in his eyes.
As discussed previously, Inflation is Poised to Soar, 3% by June is "Almost Certain"
Historical Perspective on CPI Deflations
A BIS study of deflations shows the Fed's fear of deflation is foolish.
"Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive," concluded the study.
For discussion, please see Historical Perspective on CPI Deflations: How Damaging are They?
Japan has tried what the Fed is doing now for over a decade, with no results.
Yet, Powell hell bent on producing more than 2% inflation until the strategy "works".
I discuss numerous ways Powell is on the Bank of Japan's path in Is the Fed Blindly Following Failed Policies of the Bank of Japan?
My Course of Action
Micromanaging the economy is a proven failure. The global economy cannot be steered like a truck.
If I was appointed Fed chair, I would set a transition to free market interest rates including elimination of fractional reserve lending.
Going one step further, I would have a free market in currencies as well, confident the market would settle on gold as it has for thousands of years.
The result would be a 100% gold-backed dollar instead of a dollar backed by nothing.
I would then fire all the Fed members including myself.