Dear Chuck Plosser, It's Over
Chuck Plosser, I'm not sure I like you anymore. It might be over. No, it is.
The conditions in financial markets have improved over the last year, even though the environment remains tough, Philadelphia Federal Reserve Bank President Charles Plosser said Tuesday.
Plosser, in a speech delivered at Stanford University, also called for the Federal Reserve to strike a deal with the Treasury Department that would allow the Fed to swap its non-Treasury securities for U.S. Treasurys. He also said no firm should be too big to fail, but that an authority other than the Fed should be in charge of winding down troubled financial firms.
"Uncertainty remains about the Fed's role in bank bailouts 18 months after the collapse of many of Wall Street's largest banks," Plosser said. "That uncertainty still remains and must be one of the prime objectives of policy reform going forward."
Plosser called on the Fed to provide a clearly understandable approach to the decisions it makes about when it will provide assistance during periods of financial distress. The "confusion and uncertainty" over Fed policy, he said, impacted the markets during the height of the recent financial crisis.
"The markets will take care of some of these problems," he said in a session with journalists after his remarks.
"We have to think of ways to use markets."
Plosser said a systematic approach needed to be applied to both its traditional monetary policy and its function as lender of last resort. He also advocated that the Fed adopt an explicit inflation target.
His preference is somewhere between 1% and 2%, he said in the journalists' session, but the range is unimportant to him. "Publicly announcing a commitment of what you want is what's really valuable," he said.
Plosser's comments come as capital markets scrutinize Fed speeches and statements for insight as to how and when it will change its accommodative policy. In addition to maintaining low interest rates, the Fed has also purchased financial instruments to provide support to markets. Plosser specifically mentioned the Term Asset-Backed Securities Loan Facility, known as TALF, which was created in late 2008 to support markets for securitized student, auto and credit card loans.
The Fed president suggested the central bank should exchange the securities with the Treasury for U.S. Treasurys in order to secure the Fed's independence. That would "return control of the Fed's balance sheet to the Fed, so that it can continue to conduct independent monetary policy," he said.
Such an agreement would put recent extraordinary credit policies "under the oversight of fiscal authority, where such policies rightly belong."
The accord would face a "challenging" political environment, he added in the journalist session. "Everyone has different incentives," he said.
Plosser also called on central banks to recommit to ensuring price and inflation stability to help "prevent inflation expectations from rising or falling, which promotes more sustainable and robust economy."
Previously our boy Chuck said the Fed should jack up rates and soon, and his track record sort of sucks though it is my humble opinion that he has good intentions. At least that's what I thought until I read this.
Chuck gets a downgrade. Don't think of ways to use markets, Chuck, get your fingers out of them.
I mean look at this fluff (Demystifying the Federal Reserve Presented by Charles I. Plosser, President and Chief Executive Officer, Federal Reserve Bank of Philadelphia, Lafayette College Policy Studies Program, Farinon College Center, Lafayette College, Easton, PA, September 29, 2009) (and also WTF?!):
First, a little history about central banking in the U.S. Just a few blocks from the Philadelphia Fed stand the vestiges of our country's two earlier attempts at a central bank. The intellectual father of central banking in the United States was, of course, Alexander Hamilton. He spoke out fervently for the creation of the first Bank of the United States, which became our nation's first central bank. It received a 20-year charter from Congress and operated from 1791 to 1811. Although its charter was not renewed, the War of 1812 and the ensuing inflation and economic turmoil convinced Congress to establish the second Bank of the United States, which operated under its own congressional charter from 1816 to 1836. However, as with its predecessor, Congress did not renew its charter. Public distrust of centralized power was an important factor that led to the demise of both banks. Both became entangled in politics and failed to find the balance and independence necessary to serve our vast and diverse country.1
It was almost 80 years before the nation was ready to try again. When President Woodrow Wilson signed the Federal Reserve Act into law in 1913, it included an ingenious compromise — a decentralized central banking system. This unique structure helped overcome political and public opposition that stemmed from fears that this new central bank would be dominated either by political interests in Washington or by financial interests in New York.
To balance political, economic, and geographic interests, Congress created the Federal Reserve System with 12 regional Reserve Banks throughout the country, overseen by a Board of Governors in Washington, D.C. The Philadelphia Federal Reserve Bank is the Third District, which includes Delaware, the southern half of New Jersey, and the eastern two-thirds of Pennsylvania. The Reserve Banks distribute currency, act as bankers' banks, and generally perform the functions of a central bank, including serving as the federal government's fiscal agent.
The Reserve Banks have many features of private-sector corporations, including stockholders, in the form of private banks in each District that pay in capital. Each Reserve Bank has its own board of directors drawn from its District's banks, businesses, and the public in a nonpolitical process. One very important responsibility of these directors is to select the Reserve Bank's president, subject to the Federal Reserve Board of Governors' approval. Because of this structure, Reserve Bank presidents have direct links to the public — the men and women on Main Street and the business communities within their Districts. Through this interaction, each Reserve Bank seeks to keep informed about its region's economic and financial developments.
The Fed Governors, on the other hand, are political appointees, nominated by the President and confirmed by the Senate. In order to insulate the central bank and the Fed Governors from short-term political pressures and to encourage them to take a long-term perspective on the economy, Congress limits each Fed Governor to one full 14-year term.2 Congress also made the Board of Governors independent from the Treasury and the administration.
Reserve Bank presidents and the Governors come together every six to eight weeks for meetings of the FOMC to make monetary policy decisions. As I prepare for these meetings, I receive a lot of information about business and financial conditions from contacts throughout the mid-Atlantic region, as well as from contacts in the national and international business communities. At the FOMC meetings, my fellow Fed presidents and I share the information we have gathered with each other and with the Fed Governors. As you might imagine, a variety of views are expressed during these meetings. The diversity of views regarding both the state of the economy and appropriate policy results in a vital and healthy discussion that shapes the FOMC's monetary policy decisions and, I believe, leads to better policies.
This mix of private and public governance makes the Federal Reserve System uniquely American. It provides a valuable form of checks and balances — between centralization and decentralization, between the public and private sectors, and between Wall Street, Washington, and Main Street — all to ensure that policy decisions are balanced and independent. I might add that the Fed receives no government appropriations from Congress. In fact, the System turns over any excess earnings on its portfolio of securities and loans above the cost of its operations to the U.S. Treasury, which in 2008 amounted to nearly $35 billion.
The independence of the Fed is critical to its ability to achieve the monetary policy objectives that Congress has established: maximum employment, stable prices, and moderate long-term interest rates. Research has shown that countries with more independent central banks have lower rates of inflation on average, without sacrificing real economic growth.
Why is independence so important for monetary policy and the central bank's ability to achieve its objectives? The easiest way to see this is to recognize that monetary policy decisions affect the economy with a long and variable lag. Actions that policymakers take today will likely not have much impact on the economy or inflation for many quarters. Consequently, monetary policy must be forward-looking. Policymakers must anticipate what the economy will look like over the next one to three years.
Despite the best of intentions, the political environment tends to be focused much more on the short-term and has great difficulty looking beyond the next news cycle, let alone beyond the next election. Thus, political interests are likely to encourage policy decisions that place undue weight on the very short-term consequences of those choices relative to the long-run interests of the economy. The Fed's independence is correctly intended to provide the opportunity for central bankers to take that long-term perspective, unencumbered by short-term political pressures. It also helps prevent the government from using the central bank to fund off-budget spending plans or to more directly fund budget deficits. And, as I mentioned, evidence from around the world and through history demonstrates that monetary policies set by central banks with less political interference or influence yield better economic outcomes.
Fed independence, however, does not mean the Fed is unaccountable. Ultimately, the Fed is accountable to the American people as it seeks to ensure price stability and promote sustainable economic growth. The Fed reports regularly to Congress about its monetary policy goals and its efforts to achieve them. It also regularly produces a wealth of data on its balance sheet and financial positions. In a democracy, our independence requires that we be as transparent as possible, consistent with fulfilling our mandate. We have made great strides at becoming more transparent in the last two decades, and we will continue to seek ways to do so.
I need a shower after reading that. I've read Creature from Jekyll Island, Chuck, you might have to do better than that.
Meanwhile, more politicians are up the Fed's ass. Win.