Academic Debate
By: Dr. Charles Lieberman
Date: 8/25/2008
The Fed took a lot of criticism at the annual Jackson Hole conference for not focusing sufficiently on fighting inflation, supporting private firms too much, being too sensitive to the needs of Wall Street and assorted other complaints. Implicitly, these critics think domestic unemployment needs to be higher or more firms need to fail. Maximizing firm failures ought not be a goal of policy. I agree with Trichet, head of the European Central Bank, who stated that he would have done the same under the circumstances. Right now, the Fed's mission needs to be to promote a recovery in financial markets and the economy.
This is not the first time policymakers had to choose between fighting inflation and promoting economic recovery. The most storied previous such episode, when policy decided to fight inflation as the higher priority instead, a Great Depression ensued. Herbert Hoover was inclined to raise taxes to balance the federal budget, while the Fed failed to push down interest rates to stimulate capital markets. Hindsight has proven that an extraordinary policy mistake. It makes little sense to repeat that experience in order to relearn that lesson. Fighting inflation now makes equally little sense. While it is not at all certain that lowering interest rates would help much, it is obvious that credit markets require attention, since risk spreads have widened and credit availability has been curtailed. Key credit markets remain somewhat or substantially dysfunctional. This condition must be improved, or the economy will continue to languish, at best.
Mortgage rates have increased counterproductively, which may slow the recovery in housing, while rumors of the worst possible kind surround Fannie and Freddie. Policymakers need to counteract these fears and still the rumors. Credit flows need to be restored. This is all easier said than done. Policymakers have been too inclined to watch and wait, allowing some of the problems to fester and worsen. Far more aggressive actions need to be taken and policymakers should be anticipating, not just reacting after the fact. Instead, fear of promoting moral hazard has encouraged costly waiting. So, we're still waiting for the end of the credit crisis. GDP will be revised upwards, but the economy is hardly out of the woods.
Markets remain nervous and troubled. GDP is growing, while employment is eroding. There is much work to be done. Few doubt that success will be achieved. So it is appropriate to position accordingly. Still, patience is clearly necessary. Download this article in PDF Format
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Advisors Capital Management, LLC (ACM) is a provider of managed portfolios and financial services for industry professionals and their clients. As investment strategist, Dr. Lieberman oversees the company's "Portfolio Partners" investment program. Additionally, he provides guidance to the ACM Wealth Coordinators who integrate the work of financial advisors, financial planning, tax, estate and portfolio management professionals to build, protect, and maintain clients' wealth. Although the information included in this report has been obtained from sources Advisors Capital Management, LLC believes to be reliable; we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
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