Trouble … With a Capital T
And that rhymes with P, and that stands for Poole. Bill Poole, that is, president of the St. Louis Federal Reserve. At least, that’s the hue and cry being raised by a few rabble-rousers who don’t understand the Fed’s role in maintaining stable monetary policy.
Yesterday, I intended to link to this excellent Post-Dispatch piece about recent controversy over Poole, written by David Nicklaus — but I just didn’t have the time to say anything substantive about it. The article is still worth highlighting, though, because it makes a few points that deserve ongoing public attention:
When people start calling Bill Poole names, you know things are getting rough in the financial markets sandbox.
The amiable, bearded president of the Federal Reserve Bank of St. Louis makes an unlikely villain, but he’s become a regular whipping boy for market commentator James Cramer, and now Sen. Kent Conrad is calling for Poole to resign.
His sin? All Poole has done is to advocate the same careful, data-driven approach to monetary policy that has served the nation well in recent years.
Being cautious with Federal Reserve policy is no small thing. Any good student of 20th century economics knows that Fed policy was one of the largest factors (among many others) contributing to 1929’s Wall Street crash and the onset of the Great Depression. Any number of books on the subject reveal variants of this extreme example of cause and effect — the important thing is, the people running the Federal Reserve today understand the damage that irresponsible Fed policy can bring. Ben Bernanke, current Fed chairman, outlined the role of the Federal Reserve in spurring the Great Depression in a 2004 speech:
The market crash of October 1929 showed, if anyone doubted it, that a concerted effort by the Fed can bring down stock prices. But the cost of this “victory” was very high. According to Friedman and Schwartz, the Fed’s tight-money policies led to the onset of a recession in August 1929, according to the official dating by the National Bureau of Economic Research. The slowdown in economic activity, together with high interest rates, was in all likelihood the most important source of the stock market crash that followed in October. In other words, the market crash, rather than being the cause of the Depression, as popular legend has it, was in fact largely the result of an economic slowdown and the inappropriate monetary policies that preceded it. Of course, the stock market crash only worsened the economic situation, hurting consumer and business confidence and contributing to a still deeper downturn in 1930.
Bernanke acknowledged the Fed’s role in causing the Great Depression even more explicitly in an earlier speech from 2002:
The best thing that central bankers can do for the world is to avoid such crises by providing the economy with, in Milton Friedman’s words, a “stable monetary background”–for example as reflected in low and stable inflation.
Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.
Current Fed leaders tend to credit economist Milton Friedman as the intellectual source for much of today’s practical monetary policy. As Bernanke said in yet another speech:
In preparing this talk, I encountered the following problem. Friedman’s monetary framework has been so influential that, in its broad outlines at least, it has nearly become identical with modern monetary theory and practice. I am reminded of the student first exposed to Shakespeare who complained to the professor: “I don’t see what’s so great about him. He was hardly original at all. All he did was string together a bunch of well-known quotations.” The same issue arises when one assesses Friedman’s contributions. His thinking has so permeated modern macroeconomics that the worst pitfall in reading him today is to fail to appreciate the originality and even revolutionary character of his ideas, in relation to the dominant views at the time that he formulated them.
And Bill Poole, of the St. Louid Fed, gave the keynote speech at a July 31 event honoring Milton Friedman’s legacy, co-sponsored by the Show-Me Institute:
Although Milton did not prevail in his quest to have the Fed maintain a constant money-growth rate, he did prevail in his insistence that policy be apolitical and rely to the maximum possible extent on market judgments. He lost a battle but truly did win the war.
It’s remarkable the extent to which Friedman’s views have influenced today’s Federal Reserve, but Friedman himself was so acutely aware of the potential danger Fed policy can cause that he’s on record as wanting to abolish the Federal Reserve altogether:
[… T]hough I want to know what my ideal is, I think I also have to be willing to discuss changes that are less than ideal so long as they point me in that direction. So while I’d like to abolish the Fed, I’ve written many pages on how the Fed, if it does exist, should be run.
Bill Poole and other Federal Reserve leaders deserve tremendous credit for standing up to demagogues who call for intervention by central banks in every momentary fiscal crisis. As David Nicklaus said in his Post-Dispatch column:
Someone needs to remind Conrad what the Fed’s real job is. As the nation’s central bank, it’s supposed to keep inflation under control while creating a climate that allows for steady employment growth. It’s not, or at least it shouldn’t be, in the business of propping up stock prices or bailing out hedge funds that invested in subprime mortgages.
[…] Poole’s point was that the Fed shouldn’t act rashly just to placate Wall Street, and it was a point that needed to be made.
This is exactly right. Bailing out market players who face the prospect of financial loss only reinforces the poor decisions that led to economic crisis in the first place. The Fed is there to help stabilize the economy as a whole, not smooth out bumpy rides for particular investors.