Tuesday, September 8, 2015

Is Abnormal the New Normal?

Allow me to introduce...A box of particularly
dense hammers...
The Federal Reserve Open Market Committee will meet on September 16th. There is an increasing clamor for, and increasing indications of an interest rate hike. Unemployment is down to 5.1%, they say, the economy is growing, and this darn zero percent interest thing is just downright weird. We are looking for a way to get rates 'back to normal'. There are English language words for this position, words that include 'specious' and 'stupid'. Interest rates remain well below even the meager target of 2% and wage growth is flat, indicating additional slack in the labor market. And yet the Fed is itching to raise rates, despite tremendous risk, because they are just plain uncomfortable with the zero rate.

Their lack of 'comfort' with the Zero Lower Bound, and their desire for something arbitrary that they choose to define as normal, is a ridiculous basis to undertake something so fraught with risk and second-order ramifications as an interest rate hike. If the economy is indeed growing, low cost of capital is a good reason for that to be the case, and with below target inflation and minimal wage growth, it's clear that the economy is nowhere near overheating, that unemployment has farther to fall, and that putting on the brakes at this point with the weakness in both Europe and Asia risks giving back all the slowly earned gains of the last two years. All because they're uncomfortable with a number.

Think about that - the people who run American monetary policy, who are supposed to be some of the most accomplished an thoughtful economists in the world, these people are going to do something that is at a minimum controversial, and beyond that is widely recognized to be stupid and destructive. All because they want things to be 'normal' as they've experienced it over their lifetimes.

So many catastrophic decisions in the US have been self-inflicted wounds. Iraq, Guantanamo Bay, the government shutdowns - stupid decisions made for stupid reasons and yet they keep calling them governance. The lesson we've failed to learn is that ideology is not a governing principle, because governing requires negotiation and compromise, and ideology by definition prevents compromise.

Yes. Interest rates are at zero. And they ought to be, as inflation is well below target and wages aren't rising. This is the textbook reason for keeping rates low. And the Fed lunatics don't dispute that - they just want to raise rates because that would make them 'comfortable' that things are moving towards 'normal'. And this is what we've come to call governance in the 21st century.

Is it sad or frightening? It's very hard to believe, but the Federal Reserve - an independent entity not subject to control from the political leadership - is willing to point a gun to the head of the recovery for no quantifiable reason. There's something particularly chilling about the self-inflicted wound, the economic equivalent of cutting or suicide. A clear understanding on an intellectual level that what you're doing is wrong, but an equally clear personal and ultimately meaningless reason for doing it. All the while, secure in the knowledge that it's not the Board of Governors that will suffer for their misguided attempt to find their own economic comfort zone, it is millions of Americans who's jobs and futures are at immediate risk from this selfish and disreputable decision.

It's not too late, but they've made it pretty clear. This is something they're going to do, sooner rather than later, not because the numbers call for it - quite the contrary - but because they WANT to and regardless of the havoc that results, they've made it very clear that at least THEY will feel better for it.

THIS is the state of governance in 2015.