There’s an internal argument going on at the Fed. As the Wall Street Journal’s Nick Timiraos reported last week, upon announcing his plan of five different panels of outside experts meant to examine “how the Fed reads the economy and explains itself,” Warsh got pushback from Fed Governor Christopher Waller.
According to Timiraos, Waller asked what the point of the various task forces was. Paraphrasing Waller based on conversations with those familiar with the exchange between Waller and Warsh, the former said “Tell me who you’re putting on these groups and I’ll tell you what they’ll say.” Waller’s implied point was that “There were no brilliant ideas out there that everyone had somehow missed.” Regarding Waller and Warsh, they’re both wrong. Though in different ways.
No doubt Waller is right that he could predict the views of many on the task forces, particularly since so many are economists who come from the world of central banking. Why add to the bureaucratic layers? Furthermore, it sounds like CYA more than anything once you factor in that rate decisions and communication will ultimately be made inside the Fed.
What Waller should have said is that central plans don’t become wiser the more experts you add to the team of central planners. The former Soviet Union, East Germany, and pre-1990s China doubtless had lots of experts on their staffs, surely more than Warsh will, but this didn’t enhance the quality of the central plans.
The problem with the Fed is that the Fed exists to do what, if left alone, markets wouldn’t otherwise do. Until Waller, Warsh, and central bankers in general are willing to acknowledge the problem at the heart of the Fed, no task force can fix what’s wrong. Central planning is bad. Period.
Which means Waller is right in questioning Warsh’s task forces, which are arguably high-end attempts at PR more than anything. Where’s he incorrect is in presuming the Fed product would be better without the task forces.
No, intervention just fails. Which is why we should be grateful that the Fed’s power over the economy is well overstated. According to those who know Waller, he’s long acknowledged the latter but obviously can’t be public about it. That’s because the Fed is a full employment act for economists more than anything else.
Moving to Warsh, he’s of the view that the Fed should revive its inscrutable ways made popular by Alan Greenspan. Utter nonsense. Really, why should a creation of government that has been created to intervene in the markets be encouraged to be opaque? No thanks.
Furthermore, it probably mistakes why Greenspan initially “succeeded.” Was it that he was purposely hard to read, or was policy (including dollar policy from the U.S. Treasury) much better under Reagan, H.W. Bush and Clinton than it was under W. Bush? Hopefully the queston answers itself. Warsh is mistaking the value of quiet that Waller has criticized publicly.
In his words, “In all my years as an economist, I’ve never seen a single theory that says you make people’s lives better or markets work better if you don’t tell people what you’re thinking.” Waller is correct, though incorrect in presuming that market interventions properly telegraphed somehow result in good economic outcomes. No chance. Interventions are the hazard, and the “unseen” is how much better economic outcomes would be if economists empowered by government weren’t trying to influence them.
Which means they’re both broadly wrong, and they won’t be right until they acknowledge that you can’t fix government intervention.
