The August 29th New York Times had an op-ed by William D. Cohan entitled, “Show Some Spine, Federal Reserve”. It is a wonderful case study in how to write from a biased point of view. Let’s go through it in a bet of depth, shall we? Our tour starts at the title itself. The basic thesis is that the Fed (which seemingly is one entity, not a collection of people with individual points of view) is making it’s decisions out of fear, not reason.
THE financial markets and the Federal Reserve Board have been playing out a tragicomedy in three acts. Here’s how it works: Initially, a flurry of news stories appear about how, a few months hence, the Fed intends to raise short-term interest rates for the first time in years. Second, the predictable market swoon, as Wall Street traders ponder the fact that the morphine drip of free money that they have been enjoying since the aftermath of the 2008 financial crisis might be pulled out of their arms. Finally, the Fed backs away from its much-overdue policy change, causing traders to rejoice and the artificially stimulated bull market in both stocks and bonds to continue. The curtain comes down, and the audience roars its approval.
Note the inequality between the stated aims and actions. “News stories appear,” second-hand interpretations of what the Fed intends. Then the Fed itself does something different. This is not interpreted to mean that any news stories could be incorrect, the obvious answer. No, the Fed “backs away”. And what are they backing away from? “much-overdue policy change.” Mr. Cohan infers that the Fed is acting cowardly when it acts differently than a particular position. Perhaps they just disagree with the policy Mr. Cohan prefers? No, they are being spineless!
…Some background: At end of the 2008, the Fed dropped its benchmark short-term interest rate to around zero. It also began a program with the Orwellian name of quantitative easing — buying huge sums of bonds to suppress long-term interest rates and stimulate lending and spending. Thanks to Q.E., the cost of borrowing money was pushed to next to nothing. This was a bonanza for those who make money from money — hedge-fund managers, private-equity moguls, banks — and a disaster for savers, retirees and anyone on a fixed income. (Have you checked the interest your bank pays you on your savings account? Mine: .06 percent per year.)
Obviously “Orwellian” is a loaded term, but the sin here is the myopic focus on one impact of the policy. Inflation.
Inflation is a word that doesn’t appear anywhere in this editorial, but is really at the core of it. You see, QE is logically connected to inflation, the more QE there is. The more inflation there should be. Do you know who hates inflation? People with money in the bank. Creditors. Rich people. Wall Street. When money you lend/save/invest can be paid back with cheaper dollars, you have lost. Do you know who loves inflation? Debtors. People who borrow. By the same logic, they can pay back with cheaper dollars. Inflation is great for borrowers.
With all this as background, re-read this paragraph. Here is the translation: “QE was a bonanza for those who borrow (hedge-fund managers, private equity and poor people) and a disaster for creditors (rich people on Wall Street).”
…The case for raising rates is straightforward: Like any commodity, the price of borrowing money — interest rates — should be determined by supply and demand, not by manipulation by a market behemoth. Essentially, the clever Q.E. program caused a widespread mispricing of risk, deluding investors into underestimating the risk of various financial assets they were buying.
So many problems in this one short paragraph!
1. QE distorts the market for sure. That is the whole point. It is the point of the whole Federal Reserve Board and Federal Banking system. If there was no desire to distort the price of borrowing money, these institutions would not exist.
2. QE is a very well known distortion of the market, the numbers are widely and precisely known. That means their impact is known. The QE system does not misprice risk. Uncertainity about the future is what misprices risk. Here is one of the few things Mr. Cohan gets correct even though he doesn’t say it. The more the Fed acts differently than it says it will, the more risk is mispriced. Good thing the Fed barely ever says what it will do and constantly hedges its statements.
3. So what? So risk is mispriced some. (Not by much, since QE is a small part of the market.) Big deal. What exactly is the harm from this? And how is the harm different from the mispricing of risk from not knowing how Apple will do, or another 9/11, or China’s market crash, or any of the other many unknowns that go into risk. The future is uncertain, that’s how the world works. If the future was known, there would be no Wall Street.
4. A complete blindness to the idea that QE serves any other goals. The program wasn’t started to somehow mess with Wall Street. The program had goals that are never mentioned here. They have nothing to do with traders, they have to do with a little thing called the 2008 recession, insufficient demand, and the economy as a whole.
The only way to return the assessment of risk to something resembling normalcy is to stop the manipulation. That requires nothing less than serious intestinal fortitude from the Fed and a willingness to raise interest rates in the face of determined opposition from Wall Street.
Again, the market is always being manipulated by the Fed. He just doesn’t like this particular manipulation. Again, the implication that the Fed takes these (in-)actions because they are spineless, not because they disagree. Mr. Cohan seems to believe that if Wall Street wants something, you would have to a superhero to do something different. And by the way, the Fed are wimps for not agreeing with Wall Street.
In a few paragraphs, he quotes Larry Summers and another Wall Street titan as agreeing with the Fed. Maybe there isn’t “determined opposition from Wall Street” in the first place.
By now, you may have noticed another theme. The myopia about Wall Street. Except for one rhetorical flourish to avoid saying the word “inflation”, there is no mention of the recession, the economy, of anybody but the 1% and Wall Street. He seems to feel they have the only opinions that matter.
…Thursday was also the first day of the annual central-banker retreat in Jackson Hole, Wyo. The gathering’s theme is the boring-sounding “Inflation Dynamics and Monetary Policy,” but it’s the perfect setting for these supposedly brilliant economists to figure a way out of this perennial Catch-22 once and for all. The right answer is self-evident: End the easy-money addiction, raise rates in September and begin the healing.
What Catch-22? There is no Catch-22. There is disagreement about what to do. The “right answer” is not “self-evident”. Vast portions of the administration, the public, the economics profession, and Wall Street itself disagree with Mr. Cohan. And of course, the members of the Fed itself. Unless you believe they would rather destroy the economy than stand up to the supervillian of Wall Street that Mr. Cohan believes it is.
Is Mr. Cohan wrong? I think he is. Maybe he’s not. Reasonable people can, and do disagree. You would never get that from this editorial, which presents every aspect of the case in the most biased way possible. This is an opinion piece, but opinions should be supported by reason, and presented in a fair way. This is not.