Easy money will end in tears, Allan Meltzer says
Commentary: Foremost expert gives a history lesson on economics
Stories You Might Like
-
Sponsored: this site If The Market Falls, Try These Low Beta ETFs
-
Sponsored: MarketWatch - Trading Deck Bond links: Bill Gross's March outlook
-
Sponsored: MarketWatch - Economy & Politics Boehner tells Democrats to pass sequester bill
new
Want to see how this story relates to your portfolio?
Just add items to create a portfolio now:
Just add items to create a portfolio now:
PITTSBURGH (MarketWatch) — It was a cloudy day in Pittsburgh,
but light streamed through the tall windows of Professor Allan Meltzer’s
condominium overlooking Carnegie Mellon University, where he has taught
economics for 56 years.
At 85, Meltzer’s mind is ever-brilliant, but his mood was cloudy. “We’re in
the biggest mess we’ve been in since the 1930s,” he told me. “We’ve never had a
more problematic future.”
As America’s foremost expert in monetary policy, Meltzer should know. He’s the author of the three-volume “A History of the Federal Reserve.” For over 25 years he was the chair of the Shadow Open Market Committee, a group that meets regularly to discuss the policy of the Federal Reserve.
American Enterprise Institute
Older people, many of whom rely on income from savings and investments, are moving into riskier assets in order to be able keep up their standards of living. Many have no choice. Low interest rates discourage savings and encourage people to take high risks, as well as dampening bank lending. This does not lead to a healthy economy. It ends in tears and regrets.
When interest rates rise, as they will have to do at some point, the value of these risky investments will decline, and these older investors will be hurt. Plus, interest payments on the public debt will rise, increasing the budget deficit, which has been a trillion dollars a year for the past four years. And farmland is rising rapidly and unsustainably.
The question is, how high will interest rates have to go to head off future inflation? No one knows, and the Fed isn’t inclined to start raising rates anytime soon, as Fed Chairman Ben Bernanke told House and Senate committees earlier this week.
Bernanke’s position is that the economy is weak, unemployment is too high, and so he will keep interest rates at near-zero levels. But zero-interest rates have disadvantages too.
Governments by nature are more concerned about what happens today than what happens in the future, Meltzer told me. So there is little pressure on the Fed to unwind its positions and raise rates. Former Treasury Secretary Timothy Geithner believed in taking care of today’s problems today, and letting tomorrow take care of itself. The Fed suffers from the same myopia.
In contrast, George Shultz, who was secretary of Labor, director of the Office of Management and Budget, and secretary of the Treasury in the Nixon administration, and secretary of state in the Reagan administration, had a long-term objective and got there through a series of small steps. He accomplished a lot — like ending the cold war.
Meltzer recalls only one economic recovery as slow as this one, and that’s the recovery of 1938, under President Franklin Delano Roosevelt. Roosevelt attacked business, and continued to do so until the onset of World War II. Then he needed economic expansion, and appointed two Republicans to his Cabinet and stopped the anti-business rhetoric and actions. Many businessmen and women are convinced that President Barack Obama is hostile to business.
What's better, and what's worse, since recession
With the latest gross domestic product figures released Thursday, MarketWatch's Rex Crum looks at which areas of the economy are better, and which ones are worse, since the recession. (Photo: Getty Images)Take Japan — it’s expanding its currency because it’s really hurting from the devaluation of the dollar and the euro. Soon, Meltzer predicts, Korea will join Japan and let the won decline. Korea won’t have much choice to keep its exports competitive.
Then, take Europe. Productivity looks higher there, but that’s only because Greece and others laid off many low-wage, low-productivity workers. Greece shows no signs of selling off or privatizing any national services, nor of cutting the number of civil servants.
Meltzer sees Egypt blowing up too. The Muslim Brotherhood has given the economy to the military, just as did former President Hosni Mubarak.
“I don’t see any bright spots of importance,” he told me. “Just dead ends.”
Surely, I suggested, House Speaker John Boehner’s strong stand against tax increases is positive. At least there’s certainty in the tax code.
Meltzer disagreed. Boehner is doing his best, but Obama doesn’t lead and doesn’t compromise. Both sides need to compromise, he said, but many don’t want to do so. Meltzer once told Newt Gingrich that he needed to get as much spending cut as possible per dollar of tax increase. Gingrich replied that he didn’t see any need for a tax increase. In Meltzer’s view, this approach ends in stalemate.
The federal funds rate is close to zero.
What would Meltzer do? If it were up to him, he would reduce tax rates, put
the Fed’s mortgage debt into a lockbox to preserve its balance sheet, and then
gradually start raising rates. During the Reagan recovery, interest rates were
between 5% and 7% after adjusting for inflation. Commodity prices declined,
helping to move the economy to a stronger growth path. Now those rates are
negative.
No chance of a more sensible policy now, though. Bernanke will keep the Fed to its current path, and his potential replacement, Janet Yellen, is likely to prime the pump even faster. University of California professors Christina and David Romer (Christina Romer was Obama’s first chair of his Council of Economic Advisers), suggested in a recent paper that Fed chairmen were too humble, and needed to use more nontraditional methods to stimulate the economy.
Many in government believe that Fed actions can allow the government to continue indefinitely with deficit spending. History shrieks “no way,” and Allan Meltzer is a student of history
No comments:
Post a Comment