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On September 20, 2005, Mark Olson did something ordinary that’s since proved to be extraordinary. Never heard of him? You’re not alone. Nevertheless, the banking expert had the gumption to lob a dissenting vote in his capacity as a governor on the Federal Reserve Board. He joined the estimable company of Edward “Ned” Gramlich, a fellow governor who dissented at the September 2002 Federal Open Market Committee meeting. Gramlich is best known for sounding an early warning on the subprime crisis, and being resolutely dismissed by Alan Greenspan.
The two gentlemen represent central banking’s answer to the “Last of the Mohicans,” the sole two dissents that have been recorded by governors since 1995. And that’s a problem. At last check, ‘No” was not a four-letter word.
It’s no longer a secret that an abundance of anger is churning among many working men and women who feel they’ve been excluded by the current economic recovery and the longest span of job creation in postwar history. The funny thing about a sense of abandonment is that more often than not, anger follows.
What too few Americans appreciate is how directly the inability to say “no” at the Fed has determined their station in life. But that’s just the case. The Fed directly impacts a slew of the most important decisions we make — the values we instill in our children, the things we buy and how they are financed and how we best prepare for what follows after a lifetime of laboring in the trenches.
Stop and think for a moment about the first time you discovered the miracle of compounding interest, that first bank statement that proved savings does pay. Can your children experience that same sensation?
What about the roof over your head and the car you drive? Can you afford the payments or did you stretch to buy more than you could afford, out of sheer necessity?
What about your mom and dad’s retirements? Do they say their prayers that the stock market will hang in there and that the safety of their bond holdings will protect them if that’s not the case?
All of these dysfunctional dynamics lay at the feet of an academic-led Fed being hellbent on launching unconventional monetary policy with the false prerequisite that interest rates had to be zero before quantitative easing (QE) could be deployed.
Much detritus lies in the wake of the fateful December 2008 decision to reduce rates to the so-called “zero bound.” An entire generation has been denied the incentive to save. Many of those in their prime working years have bought more than they can afford under the guise of low annual percentage rates.
Meanwhile the nation’s retirees are akin to so many sitting ducks. Whether their financial fates are wound up in pensions or 401(k) plans, their lifetime of savings lay vulnerable to siege in some of the most overvalued asset markets in history. But what’s the alternative? It’s been a mighty long time since prudence has paid.
As for the nation’s employers, in far too many industries, an overabundance of capacity constrains the impetus to compete, innovate and grow. Imagine a bell curve sliced right up the middle — that’s what the default cycle looks like for the past downturn.
Fearful policy makers were warned about the dangers of preventing the weakest players being culled via bankruptcy. But these admonitions were dismissed despite the Japanese experience.
The long-term economic damage that will be wrought by Fed policies prolonging the lives of the walking wounded strewn across the corporate landscape remains to be seen. The interim consequence, however, is plain. For years, overcapacity, undue regulations and the inability of creative destruction to make way for new entrants have acted as natural governors on high-paying job creation.
The current U.S. economic recovery is the third-longest of the modern era. There’s no doubt that the new administration and Congress’ plans to stimulate growth and foment job creation are ambitious. Still, high debt levels are sure to stalk their every move. This is no new dawn of the next Reagan era.
The question is: What did all of the Fed’s unconventional monetary policy achieve? The beneficiaries have given new meaning to flaunting their wealth. For those who’ve been left behind, victims of some abstract insistence that a “wealth effect” would trickle down to the masses, well they’re just plain pissed. And they have every right to be. Their indignation at being robbed of their financial dignity is wholly justifiable.
The solution is clear: It’s time to reintroduce dissent to the Fed, to make “no” acceptable once more. Fewer academic economists. More pragmatists who’ve been on the receiving end of the Fed’s disastrous and misguided policies. We coexist in a complex global financial system. It’s not feasible to thus “End the Fed!” as attractive as it sounds. But it is high time the Fed was taken down to the studs, that the original institution envisioned in 1913 torn down and built from the ground up.
Commentary by Danielle DiMartino Booth, a former advisor to the president of the Dallas Fed, and the author of “Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America” (Portfolio: February 2017). She also founded Money Strong LLC, a consulting firm. Follow her on Twitter @dimartinobooth.
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