Tuesday, August 24, 2010

So Close, And Yet, So Far: Stephen Roach Doesn't Get Monetary Economics

Below is an interview from CNBC's Squawk Box today with Morgan Stanley Asia's Stephen Roach, discussing the "Fed's Next Move":

What can be said of Mr. Roach and his "minority view" on the Fed and monetary economics? Simply put-- he doesn't get either one.

As our own Robert Wenzel has been pointing out repeatedly recently, various members of the Fed member banks seem to be experiencing rising alarm about Ben "Money Crank" Bernanke and his Wonderful Flying Market Machine. And Roach is correct to point out that their alarm is appropriate given that Bernanke has essentially hit the monetary policy "replay" button and seems bent on re-releasing (straight to DVD, no doubt) a digitally-remastered, SFX Director's Cut edition of the 2000 Tech Bubble crash-reinflation. Further, Roach is correct to point out that it was the extended periods of exceptionally easy money that fueled the ensuing, recently-deceased Housing and Credit Bubbles.

But that's as far down the tracks as Conductor Roach is able to take the Sound Logic Express before quickly and suddenly derailing the rush hour commuter and somehow rolling it right off a nearby cliff, where, after falling nearly a mile straight down, he manages to land it directly inside the cooling tower of a nuclear reactor, setting off a chain reaction that leads to an explosion which instantly incinerates every passenger on board and is so spectacular and magnificent to watch that the body of Harry Truman sheds a tear of appreciative envy.

I mean really, lobbing the rhetorical "Is this the right way to run a central bank?" and then proceeding to blow long and hard about it for the next eleven minutes and twenty seconds is pretty damn abusive of logic when the whole enterprise really begs the question, "Is there any 'right' way to run a central bank?" or even "Can any good, in an economic sense, come from the existence of a central bank, versus a world without one?" Now there's a question worth discussing on air for twelve and a half minutes.

However, that's my world, a world which will likely remain a fantasy for as long as I and most of humanity live, so in the meantime I'll try to be of service to the good, non-executive Yale professor in another way, by serving as the emergency first responder to his aforementioned logical train wreck disaster.

So, in response to his own question, Roach posits that the Fed should be more proactive rather than reactive-- rather than responding, haphazardly, to the crises of yesterday (that it created, Roach seems to grasp), the Fed should be thinking "strategically" about the crises of tomorrow and taking steps to ward them off. A great idea, Mr. Roach, but wouldn't it be much simpler to just take the Fed out of the equation entirely? There is no sense in saying, the Fed makes messes, instead of making messes, the Fed should be thinking about how to clean up the messes it will inevitably make.

Roach, like many other pseudo-critics of the Fed a la mode, then suggests that "financial stability" be added to the Fed's congressional mandates of "price stability" and "unemployment". There's a teensy little problem with that: as the Fed's own Fed Chairman Game demonstrates, price stability and unemployment suppression are often mutually exclusive goals and unfortunately, as this crisis as well as every one before it have shown, so, too, is financial stability.

The root of the problem, again, is the Fed itself. Facing a business cycle downturn, the Fed can lower rates, fuelling a new boom. In the short term, the Fed gains for itself financial stability and low unemployment -- I am not even going to try to keep putting the skeptic quotes around these terms, please, read generously and know that I don't approve of these terms, their common definitions and the idea that the Fed is able to successfully provide even one -- but it trades it for future price instability and future financial instability. Then, in response, the Fed tightens, trading price instability and financial instability, for future high unemployment and, get this, further financial instability. The cycle goes on and on and on until it reaches the inevitable point where it can't go on any longer and we witness Mises' crack-up boom, the end of which brings with it all three of the dreaded Instabilities simultaneously.

(Some observers would point out that we seem to be in that period now, and even Mr. Roach himself hints that this is where things are going via grandiose double-dips, but most reasonable people agree that those tin-foil hat-wearers are total bummers and zero fun to have at dinner parties and therefore their opinions and observations, can, will and should be safely ignored.)

So, back to Roach, it doesn't do any good to have Congress give the Fed a formal mandate to ensure financial stability. Keep in mind, the Fed has demonstrated, since December 23rd, 1913, that it royally sucks at carrying out its first two mandates. When you see a half-wit 8-year-old trying to learn how to juggle with two balls and he just keeps dropping them over and over, sometimes into your bowl of Cheerios as you read the paper, sometimes onto the head of the family dog (sending it yipping all around the house, again while you're trying to read the paper), is that the point at which you'd go find a bowling ball and toss that into the mix and see how the little tyke does with his juggling trick?

Testing, testing, 1...2...3. Is anyone out there? Stephen Roach, can you hear me? Is this thing on?

Not to mention the whole Hayekian pretense of knowledge thing, whereby that kid is never going to juggle one ball nor three. Guys, they don't pay me enough here to give you the full, Yale-quality lecture on this topic so you're going to have to do a little homework yourself and click the link I made for you (think of my link building as a little pre-lecture note handout freebie) but here's the gist of it for those people who are more interested in drinking beer and getting laid and less interested in passing my blog-class final: it doesn't matter how many ubermensch Ben Bernanke types the Fed employs, they will never be able to collect, measure and extrapolate "proper" policy from all the data about all the preferences and possible courses of action available to all the individuals in the US economy, therefore their efforts are doomed to failure from the outset and their policy pronouncements, far from being scientific and objective, will instead be permanently reduced to arbitrary, hope-and-pray guesstimation-based spaghetti-tossing.

In other words, they'll just try stuff and see what sticks.

Oh, and never mind the fact that every time the Fed intervenes, all the individuals in the economy will change their preferences and courses of action in response to this new set of incentives, meaning whatever data and patterns the Fed managed to collect beforehand will be instantly depreciated to zero value because they will be evidence of an economic structure that has vanished.

None of this seems to be of any significance to Roach, however. He's too busy talking about the need for Fed transparency (the first instance of which would be a precedent-setter, looking at the historical record), explanation of the Fed's exit strategy (doesn't have one, for all the reasons mentioned above) and the need to "normalize" interest rates. Yet again, this begs the question, "What is a 'normal' interest rate?"

Everything the Fed does is, ultimately, arbitrary. This means that so long as the Fed exists and is in control of interest rates, "normal" interest rates will reflect arbitrary Fed decision-making for whatever period of time the Fed arbitrarily decides upon. For one period of time, normal could be 10%, for another (extended!) period of time, they could be 1%, as we've seen recently. Look at ZIRP in Japan, which has been going on for decades-- has it been long enough for those interest rates to be considered "normalized"?

People like Roach find themselves floundering around in a confused manner in these debates, constantly contradicting themselves, because they never start with defining their terms. Obviously, that's because defining one's terms doesn't fit in a twelve and a half minute CNBC news "clip", nor the confined space of an Ivy League professor and Wall Street under-boss' head. Properly defined, "normal" interest rates would be whatever an actual, non-central bank regulated free money market would say they are, and there's a lot higher probability that under such a regime they'd be entirely more "stable" and predictable, as well.

More question begging from Roach's various collected Fed inanities: what on Earth/Planet ZIRP does Roach think the Fed is waiting for at this point? Does Roach think the Fed, mandate or not -- remember, Bernanke is an adherent of the "beg forgiveness, rather than ask for permission" school of policy-implementation -- is not trying, from it's point of view anyhow, to enact financial stability? Does Roach think that Bernanke has some bag of super-tools or a binder full of Madden-style exit plays (down, up, X, right, A, left, R1 for the Hail Mary) that he's keeping secreted away, refusing to tell anyone about them lest the market get too confident that he actually has this one under control and too many people get their jobs back?

It truly defies all imagination how Roach's pontificating could be anything but vacuous, ineffectual whining. One thing's for sure, the man really learned his stuff when he did his tour of duty at the Fed. Maybe he's practicing for a second run at the title?

Roach says Dodd-Frank was a "necessary" reframing of regulatory issues. EPJ's Bob English spits at the idea. As he's wont to do, though, Roach again swings and just barely misses. He says that as long as the monetary policy situation ain't fixed, the regulatory bill patch jobs aren't going to be enough to avoid another blow-out down the road. Problem is, ol' mechanic Roach doesn't seem to notice the engine block is cracked as he's tinkering with the timing valves.

So, in the end, what is this monumentally and eminently respectable doofus left with?

Well, his heart is certainly in the right place, and on this count I can't badger the man but rather I must applaud him: Roach doesn't trust the Fed to do the right thing. He knows that, given the chance, the Fed will start screwing the pooch again just as soon as the head of the house turns back to his morning newspaper.

But beyond that, he just can't seem to open his mouth without making a complete fool of hisself. According to Roach, the Fed is supposed to get a new homework assignment from the Congress (proven illustrious and enlightened economic champions, one and all, couldn't think of a better group of people to assign this particular task assignment task to) and then write a book report on "The Tale Of The Financial Instability" every six months. Everyone at the Fed will have another chance to be busy pumping out mindless research and this process will ensure that nothing will go wrong any more, like in Europe. See, Roach wants a system like the Bank of England's where they... oh, crap, wait, they ended up nationalizing their banks, too.

And as our helpful CNBC bobble-head news anchor is quick to point out, Roach's proposed solution is "very different" from what other critics want. Other critics are talking about removing responsibilities from the Fed and putting them inside new federal agencies. Roach is a member of the Second Chance club, he wants to add new responsibilities.

One group wants the government to regulate the financial markets and the economy. Another group wants the government to regulate the financial markets and the economy. Nobody in their right mind wants the financial markets and the economy to regulate themselves.

See, this is America, and in America, we have choices. God bless this wonderful democracy of ours, and god bless great patriots like MoStan's Stephen Roach.


  1. Excellent points. And to add a little more gas to the pilot light, with all the central banks operating independently throughout the world, the world of central banking doesn't seem so central. It seems there are plenty of policy options available/being thrown against the wall. Hell, Bernake has years worth of trying stuff. What a pathetic conundrum. As they taught us when I was in grade school, duck and cover!

  2. Stanley,

    Exactly. It's the only option you have left when the country is morally, financially and logically bankrupt.

  3. Pretty depressing... And coincidentally, just today Scott Sumner lectures the poor, dumb student that sees Fed monetary policy as being government intervention ...

  4. Silas,

    2. Now let’s think about monetary policy. The first misconception is that the Fed “controls” interest rates. In fact, the Fed controls the monetary base, and targets interest rates. Rates are always allowed to find their free market values, given the setting of the monetary base. So if the Fed wants to reduce rates, it might increase the monetary base until the equilibrium free market rate falls to the desired level.


    What can you say to a person like that who basically says, "Black is not white. Those are opposites. Agreed. Now, black is white."

    I've always wondered what could be the explanation for the vast number of morons who consider themselves to be thoughtful intellectuals these days. It seems too easy to just blame an institution like public schools or a movement like government subsidies for higher education. Any thoughts?

    Scott Sumner definitely qualifies for my "Eminently, Scholarly Jackass" title.

  5. If you believe that the natural human condition is enlightened self interest and that incentives play a particularly important role in determining economic activity, then it seems you would have to conclude that, outside of your immediate family, dependency is a learned behavior. Government schools are the most prolific indoctrinators of dependency. Thus one of the fastest growing areas of education, for those who give a crap about their children, is home schooling.