PhillyTablet Inquirer Daily News
Mobile
Home Delivery
philly.com

email
font size
options
 
Tuesday, February 14, 2012

U.S. should let interest rates rise: Philly Fed boss

Philadelphia Federal Reserve Bank president Charles Plosser, a conservative who doesn't believe the central bank has the power to do much more than try to control inflation, told a crowd at the University of Delaware this morning he's worried Fed chief Ben Bernanke's cheap-money policy risks over-stimulating the (election-year) U.S. economy. Speech here. Excerpts:

"In January, the Federal Open Market Committee announced that economic conditions were 'likely to warrant exceptionally low levels for the federal funds rate at least through late 2014'— that’s almost three years from now... 

"You may know that I dissented from the FOMC decisions in August and September because it was not clear to me that further monetary policy accommodation was appropriate. After all, inflation was higher and unemployment was lower" than in 2009 or 2010.

"Yet, despite the extraordinary steps taken to support the economy, many argue that monetary policy should do more. The argument is that while inflation may be close to our target, unemployment remains elevated, and thus, monetary policy must act more aggressively if it is to meet its mandated employment objective.

"I disagree and believe that doing so would lead us down a very treacherous path... The problem is not just inflation risk down the road. Prolonged efforts to hold interest rates near zero can lead to financial market distortions and the misallocation of resources..."

Cheap money is as risky as driving too fast in fog past your I-95 exit, Plosser warned: It leaves you "faced with two very unattractive options. One option is to slam on the brakes to make the exit...  The second option is to continue down the road to the next exit, turn around, and then backtrack... 

"Failing to slow down and exit at the right time risks excessive inflation (and) the misallocation of resources and capital, and perhaps even credit bubbles or other distortions... It is an approach most often driven by an excessive focus on the short run...

"The U.S. economy is continuing to grow at a moderate pace. I expect annual growth of around 3 percent in 2012 and 2013... with job growth strengthening... gradually over time... We must guard against... risks of inflation... and the potential for distortion," Plosser concluded. No more bubbles.

"Finally, I believe we must also guard against an accelerationist approach to policy — one that calls for monetary policy to do more and more in an attempt to get to our objectives that much faster. The risks to economic stability of such an approach over the medium term could be quite high and could jeopardize our ability to achieve our longer-terms goals."
Posted by Joseph N. DiStefano @ 9:36 AM  Permalink | 11 comments
Comments   
  • 0 like this / 0 don't   •   Posted 3:38 PM, 02/14/2012
    It sounds to me like Plosser understands the economy much better than most economists, but he seems to equate the "inflation" he fears with generally rising prices. This is what the public thinks of as inflation, but true market-oriented economists know that generally rising prices are only a consequence of the *real* inflation: inflation of the money supply. The money supply is more complex than just the number of bills in circulation, which is overwhelmed by the amount of credit in the economy, which the Fed is also in the business of manipulating. Plosser seems to be waiting for near-zero interest rates to begin distorting the economy. Too late! That was one of the major factors creating the housing bubble in the first place, followed by the collapse of mortgage-secured investments and the following widening economic ripples which still paralyze recovery and growth. The first step: remove the Fed mandate to maintain high employment (a free market does that anyway). The final step: disband the Fed (free market economists have many plans for how that can be done).
    — Phillip Schearer
  • 0 like this / 0 don't   •   Posted 10:23 AM, 02/15/2012
    If near zero interests rates played such a large role in creating the housing bubble, why isn't the economy rapidly growing today? When banks originating mortgages could securitize them and sell them to some sucker, why would they need a Fed policy to sustain available funds for future loans? The revenue from the sale was more than sufficient and, in the end, it was that revenue that led to bad loans. They had cash and needed to do something with it.

    In the end, our economy will not rebound until middle class consumer spending increases. Companies won't hire until current staffing productivity can not meet demand for services and goods. Keeping the cost of money low will only be relevant when growth actually starts occuring.
    — MikeP
  • 0 like this / 0 don't   •   Posted 3:40 PM, 02/14/2012
    "Prolonged efforts to hold interest rates near zero can lead to financial market distortions and the misallocation of resources"

    Sounds familiar
    — OhOkay
  • 0 like this / 0 don't   •   Posted 3:58 PM, 02/14/2012
    The only reason they want to raise rates is so banks can raise the rates on mortgages and fleece us out of more money...(i.e. the reason there are few mortgages written is becasue the banks don't want to hold a 30 year piece of paper for such low rates) The fed wants to "give" the banks more money.....But if they would keep them low, the banks would be forced to loan or their profits would be nil....It is the gov't controlling the market place and putting money in the pockets of teh crooks who crated the mortgage mess......
    — nuggett
  • 0 like this / 0 don't   •   Posted 5:33 PM, 02/14/2012
    Considering the death rattle of the American and European economies, the only bubble we are witnessing is the stock market bubble which is the only place cash seems to be going and the commodities futures, oil, gas, rice. It would seem that with insolvent banks, and banks continuing to fail 4 years after the crisis began, 9 failed banks for 2012, we have financial inflation, not wage inflation, not residential or commercial real estate, and not IPOs, but more of the same betting on fictitious assets that got us into trouble in the first place. Unemployment is a legal mandated problem to be mitigated by the Federal Reserve no matter what Mr Plosser opinion is. If he can not support the legal mandate of the Fed, he is an insubordinate employee and should be fired. I can have the Donald or the Mitt handle this tender mercy if you like.
    — Fernando08
  • 0 like this / 0 don't   •   Posted 10:40 PM, 02/14/2012
    '' . . Prolonged efforts to hold interest rates near zero can lead to financial market distortions and the misallocation of resources..."

    Correct. Giving dirt-cheap credit to speculate in this economic drought is a greater temptation now than ever before.

    But the problem isn't credit itself. It is the role of the FED in particular, and the role of Central Banking in general.

    The FED is, and Central Banks are, nothing but a ''middleman'' schleping credit to societies.

    They're a DICTATORSHIP that controls who gets economic activity and who doesn't.

    Benjamin Franklin warned against central banking, and even said that central banking was the reason for the American revolution.

    The colonists were enraged over going hat in hand to the central bank of England for ''credit''. They viewed it for what it is – Slavery to Debt and interest payments to a megalomaniac class of lazy gluttons who do NOTHING and extract massive amounts of wealth for society.

    There is NO REASON people cannot extend ''credit'' to each other - interest free – in the course of their doing business with other.

    This is how the industrious colonists created massive wealth for themselves.

    Continuing central banking domination is to give up one's right to create their own credit at will to anyone who wishes to consume their services, and give it to a group of ''middlemen'' who wedge themselves between us producers of social services and us consumers of those social services.

    And the sickest joke of all is that this international group of middlemen extracts MASSIVE amounts of wealth for doing what each of us can do for ourselves - extend credit to each other as a simple matter of enabling our services for society, and extend our credit INTEREST FREE.


    — THE MEDIC
  • 0 like this / 0 don't   •   Posted 10:27 AM, 02/15/2012
    Posner's assessment appears to be based on his belief that this country is not in crisis. The unemployment rate and loss of tax revenue is dangerous. The longer it continues, the greater risk there is that there will be no recovery for many americans and we need to do everything we can to prevent that.
    — MikeP
  • 0 like this / 0 don't   •   Posted 12:48 PM, 02/15/2012
    TheMediq is right about one thing: Debt helped provoke the American Revolution - cause the most left-wing Founding Fathers, Samuel Adams and the Lees of Virginia, were failed business borrowers; revolution helped them escape what they owed. But his "industrious" early Americans who "created massive wealth for themselves", like Stephen Girard in Philly and John J. Astor in New York, actually borrowed much and successfully from English banks (e.g. Barings), and very much favored the First and Second Banks of the United States -- government-run central banks. Girard so loved the First (central) Bank that when the left-wing Jeffersonians shut it down he bought the bank himself and used it to finance the War of 1812 loan to the US Government. Girard wanted America to grow, but he also knew he and other private bankers weren't willing to extend longerm credit. So he persuaded the government to set up the Second (central) Bank of the United States to guarantee a strong dollar and solvent borrowers. After his death the Second Bank was dismantled by the left-wing Jackson administration, to please their constituents - the subprime debtors of that day. The result was the 1830s-1840s recession, relieved by Mexican War and Civil War spending, followed by the boom-bust cycle of the late 1800s, which led us to the third American central bank: the Federal Reserve.
    — Joe D
  • 0 like this / 0 don't   •   Posted 11:16 AM, 02/16/2012
    If you notice the response of Joe D to my previous comment you'll notice one thing in particular.

    Not ONCE does he address my point that central banking is a socially crippling, wealth robbing, flawed design to producing wealth for the people of society.

    THINK about that. After all, the central banking scam is about the ''money cartel'' making profit – NOT profiting society.

    Not ONCE does he address the facts I posted that private central banking at interest is a wealth extraction process that massively costs every individual in society.

    Instead of addressing these points, Joe D addresses historic figures that used private banking and benefited for their experience. As if these examples alone prove that central banking is good for society.

    I could site millions of examples, both public and U.S. government, of the psychological and social ruin PURPOSELY caused by central banking and the Big Banks that created this social wealth parasite.

    He wonders if my opinion about central banking was skewed by Ron Paul.

    No, Joe D, it was formed by studying the mechanism of banking at interest and the social economic and psychological wreckage it causes. It was formed by seeing the vicious manipulations perpetrated by these thieves.

    I wonder if Joe D REALLY wants to debate the ''merits'' (laugh) of central banking.

    If you do, Joe D, I will post on your Philly.com pages, or give at a public debate with you, facts that can and SHOULD be made public about the vicious ''money cartel'' you appear so eager to rush to defend.

    Even PUBLIC BANKING is better than the private money cartel society is suffering from. But bringing up the benefits of public banking wouldn't make you a popular figure among your banking cartel buddies, would it, Joe D.

    — THE MEDIC
  • 0 like this / 0 don't   •   Posted 12:03 PM, 02/16/2012
    Mediq, I don't support nor deny your claims that central banking is "socially crippling" etc. Those characterizations have little meaning except as compared -- to what? -- to alternate and superior systems. So I question what you would replace central banks with, and I'm interested in your examples of where other systems have been more successful at improving the quality of life for masses of people. In your note you mischaracterize my statements; I wasn't arguing in favor of central banking; I was showing that the most successful early American enterprise owners were strong supporters of central banking, disproving your sweeping and wrong claims to the contrary. I'm eager to see your better examples of how society should function.
    — Joe D
  • 0 like this / 0 don't   •   Posted 1:56 PM, 02/16/2012
    I would enjoy informing you of the successful & superior ''alternative'' credit & debit wealth creation systems currently being used through-out the world. Complementary currencies are nothing new and have been successfully used throughout history.

    It is the ''dumb down'' basic education system that keeps the public ignorant of these alternatives. Private money, corporate interests, and the money cartel want it this way and have worked their wealth throughout history to KEEP the public ignorant.

    Also, I'll put a number irrefutable facts together on how central banking works, and works AGAINST the wealth of any society that it claims to be helping.

    I'll even introduce you to one of co-creators of the Euro currency - that is, if you aren't already familiar with him - who, through his youtube.com videos, articles, and books, is one of the most convincing proponents of ridding central banking.

    I noticed you pulled down the comments I made to your article ''BofA: We'll hire 500 in Wilmington: Update'.'

    So I will email you my material instead, since you appear to be a rather ''thin-skinned'' individual. You may view my material in private comfort.

    It will take me a while getting this information to you but, in the meantime Joe D, enjoy the work of Euro currency co-creator - BERNARD LIETAER.

    Just paste this name in your fav search engine and take your pick of how you prefer to know the ''facts'' - video or words.
    — THE MEDIC


11 comments
About Joseph N. DiStefano
Joseph N. DiStefano writes this blog to feed his PhillyDeals column in the Philadelphia Inquirer. Joe has been a member of Bloomberg LP’s New York Finance Team, wrote the book “Comcasted,” taught writing at St. Joseph’s University, and studied economics and history at Penn. Reach Joe at 215-854-5194 and JoeD@phillynews.com
Advertise Here