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Economic Reform Idea: Give Janet Yellen a Wal-Mart Vest

Economic Reform Idea: Give Janet Yellen a Wal-Mart Vest

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Wednesday, 28 September 2016 08:55 AM Current | Bio | Archive



For the world’s top central banks, “Blind leading the blind” isn’t just a proverb any more.

They’re really doing it.

Last week a European Central Bank official said the ECB is eager to see our Federal Reserve hike interest rates, hopefully in December. Why is that? Because in their twisted minds, it will confirm that years of monetary insanity actually worked.

ECB policy is far crazier than anything the Fed has done. We don’t have negative nominal interest rates, at least not yet. Ben Bernanke’s three rounds of quantitative easing were smaller relative to GDP than the ECB’s asset purchases. The ECB is on the wrong track whether the Fed raises rates or not. 

Central bankers have a much bigger problem. Persistent low and sometimes negative rates are proving their core assumption, the basis of everything they do, is simply wrong.

For the last century, the standard response to economic weakness was simple: stimulate activity with lower interest rates. Make it less expensive for consumers and businesses to borrow money, and they will spend more freely and the economy will grow.

That’s the theory. I’m not sure it ever worked, but it sure doesn’t work now. 

Here’s the fatal flaw: Low interest rates motivate people to borrow money only when they are confident they can pay it back.

In 2008-2009, with banks blowing up, home prices cratering and companies laying off workers, very few of us had such confidence.

Those memories still persist. Those who lived through the 1930s Great Depression remained cautious their whole lives. Our generation has learned the same hard lesson.

It gets worse.

The near-zero and now below-zero rates did inspire borrowing - by the very wealthy.

People who didn’t need free cash took it anyway. Then they used it to bid up asset prices and create the current real estate and stock market bubbles. QE blew those bubbles even bigger.

Meanwhile, retirees living off their savings responded to zero yields not by spending more, but by spending less and saving more.

As recently as late 2007, anyone could make a 5% or more no-risk return in plain vanilla bank accounts or Treasury bills. Central banks intentionally killed that opportunity and still haven’t restored it. I doubt they ever will. They yet another chance just last week. 

The longer the Fed waits to hike rates, the more radical will be its response to the next recession. This is why I think we will see negative interest rates and cash controls here in the U.S. The only question is when.

Why, you might wonder, can the Fed and other central banks not see the folly of their ways? 

I think it’s because they look mainly inward. They get their advice from academic economists who live in ivory towers. They do not understand real life for average people.

How can we make them understand?  Here’s a simple idea Congress could pass tomorrow: Require all Federal Reserve governors to spend two weeks a year working in some kind of a blue-collar job. 

They can be Wal-Mart cashiers, airport skycaps, taxi or Uber drivers. They can sling fries at McDonald’s. The point is to show them what economic reality looks like for the people they supposedly serve. 

Do this and the Fed’s leadership will learn what average Americans – and yes, even working older Americans like themselves (Yellen is 70, vice chair Stanley Fischer is 72) - must do to make ends meet. 

I feel very confident the experience would improve Fed policy and help the economy. And if not?  It will at least deliver a little bit of justice.  

Patrick Watson is an Austin-based financial writer and senior editor at Mauldin Economics. Follow him on Twitter @PatrickW 

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For the world's top central banks, "Blind leading the blind" isn't just a proverb any more. They're really doing it.
janet yellen, economic, reform, walmart
Wednesday, 28 September 2016 08:55 AM
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