I recently read a fantastic book by Danielle DiMartino Booth. Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America was published back in 2017 and from the name of the book you know the author is not a big fan of the Fed. Ms. Booth worked at Dallas Fed (aka Free Market Fed) from 2006 to 2015 where she gained the insider experience of the people, the organization and the challenges of the institution. From her understanding of the Fed, she had some tough but important feedback. She was especially critical of the indefinite ZIRP/QE policy the Fed initiated after the 2008 financial crisis, which produced dismal returns for pension funds and created over-inflated asset prices in stocks, bonds, real estate, art, cryptos and various alternative assets. Ms. Booth published this book in 2017. What she described in this book makes a lot of sense today but back in 2017, many people would disagree with her and ignore her prescient advice. Well, she is probably still being ignored by the Fed eggheads but there is no doubt we are currently dealing with the brutal aftermath of the prolonged ZIRP/QE policy.
It was a fairly long and entertaining book but if I were to summarize why the Fed made such a grim mistake on the infamous QE/ZIRP policy according to Ms. Booth, here are the three main points:
Ivory Power People: The Fed has been led by PhD economists who live in their own ivory power doing research with out-of-date data and making inaccurate predictions based on complex academic models which are not necessarily grounded in reality. They also look down on people who don’t have PhDs and as a result, they don’t heed warnings from business leaders, professional investors, bankers and people who are doing real work in the trenches. They live in their own world and only admit fault when major blowups happen.
Too Much Power: The Fed sets interest rates, adjusts money supply, oversees the US banking system and greatly influences the global financial system through the US dollar. They are supposed to be an independent entity which could make sound decisions without political pressure. Power is not an issue by itself. The issue is how the Fed wields its power, which gets us to the next point.
Free-Market Meddling: Since Greenspan, the Fed has engaged in multiple bailouts beyond their usual mandates of setting rates and adjusting money supply. From the 1998 LTCM fiasco, the systemic bailout of the US financial system in 2008 to the most recent SVB depositor bailout, there’s an increasing risk of moral hazards and market’s strong belief in the Fed Put. Namely, when s**t hits the fan, the Fed will come out and prop up the market. This encourages excessive risk taking that privatized profits and socialized losses. Some people might argue this is necessary given the abysmal situations. Fine. But it doesn’t appear that the Fed has good excuses for the prolonged ZIRP/QE policy from 2009 to 2015 with the eventual extension to 2022. This is purely meddling with the free-market in the hope of easy money policy stimulating the economy and employment, which didn’t actually work in the end. But we are all suffering the consequences of that policy now with high inflation, overinflated asset prices, and a banking system that’s hanging on a thread.
I am sure by now, the Fed realized their prolonged ZIRP/QE policy is a grave mistake. I hope the Fed leaders read this book and ask themselves if what they are doing is net positive for America and if not, what they need to rectify to make it work. Many people are calling for reforms for the Fed system, which I think is a great idea. The Fed’s performance in the past few decades has been embarrassing. One silver lining I got from the book is that the previous Fed Chair Janet Yellen was very pro QE/ZIRP. Had she not been replaced in 2018, our current situation could have been worse. It does appear that JPow is determined to normalize interest rates and the Fed’s balance sheet. But a lot of damages have been done and American taxpayers will unfortunately have to foot the bill for bad decisions made by the Fed.
It was definitely an interesting read.
The fed has pretty crude tools it gets to use to hit its dual mandate of maximum employment and 2% inflation (which was changed to 2% asymmetric inflation in 2020 to get caught up on a decade of under inflation & avoid potential depression/deflationary event)
Polticians on the other hand have much more precise tools available. They can raise taxes, change prices, restrict corporate profits, etc.
I personally blame the politicians for their theatrics and their superpac influence more than the fed. But many would disagree.
The fed absolutely made mistakes (funny enough at last fomc press meeting Powell admited to this). I suspect when Powell said inflation was tranistory he was hoping for 5% peak not 10%. But the Polticians also then went out and started a war which accelerated/entrenched inflation.
I also enjoyed Lord's of Finance. Set back in the 1930s 😁