I’ve recently done several visits to Washington DC. The first was a Mercatus conference called “Instead of the Fed,” and more recently a Cato conference with a similar theme. I also met 5 Heritage staffers for a discussion of monetary policy. The title of this post could refer to the growing NSA/CIA/FBI/INS/IRS/DEA/TSA/HHS octopus that has tentacles everywhere, or the vast right-wing conspiracy, depending on your ideology.
I was pleasantly surprised by many of my discussions. Lots of people seemed interested in my ideas, more than I would have expected. I was also surprised by how much I agreed with the speakers at the conferences. The head of the Cato Institute (John Allison) gave a very good talk on banking, pointing out all the unforeseen side effects of banking regulation, and ended up suggesting that we abolish all banking regulation except minimum capital requirements. Sounds good to me.
In addition to the radical agenda for deregulation, I also agreed with much of the criticism of the Fed. George Selgin gave a very good talk on how the Fed has mischaracterized the pre-Fed banking system in America. Others discussed Bitcoins, etc. I even agreed with the claims that the Fed is trying to do too much: interest on reserves, credit allocation, selective bailouts, policy discretion, etc, etc. It’s drifted far from its previous Taylor Rule approach to keeping NGDP (or something closely related) growing on target.
Charles Plosser gave the opening talk at the Cato conference, and I agreed with virtually everything he had to say, except that he favored having the Fed focus like a laser on inflation targeting, and I favor having the Fed focus like a laser on NGDP targeting.
But . . . .
When it came to the stance of monetary policy, this group which had seemed so sensible on most issues suddenly seemed to be way off track. Not so much because they thought money was incredibly easy, almost everyone thinks that, on both the left and the right. Rather they seemed to think that current policy was highly inflationary, which it clearly is not.
Recall that my only disagreement with Plosser is that he supports inflation targeting. But even if I was convinced to shift to that position, I’d still totally disagree with him about the current stance of monetary policy. If the Fed should focus like a laser on its 2% inflation target and ignore unemployment (which seems to be Plosser’s preference) then they should adopt a far more expansionary monetary policy. But he seems to favor a tighter policy.
One speaker after another talked about policy like we were back in the 1970s, instead of seeing the slowest growth in M* V since Herbert Hoover was president. Why isn’t Bernanke a big hero on the right? The Fed is producing very low inflation. Talking to individual people didn’t help much, as there was a wide range of views. Some thought inflation was actually much higher than reported (it isn’t.) Some pointed to asset price inflation (even though they had not cried “deflation” when asset prices were plunging in 2009.) Some thought the inflation would show up later (it clearly won’t.) In fairness, some favor no inflation at all, or even mild deflation, so for them money really is too tight.
But my overall reaction is that the conservative/Austrian/monetarist/classical liberal/libertarian/RBC schools of thought are too influenced by a combination of massive deficits, massive QE, near-zero interest rates, and simply assume that with all this stimulus we must have high inflation, or else it’s just around the corner. So they end up “crying fire, fire in Noah’s flood,” as Ralph Hawtrey described similar conservative fears in the 1930s. Another period of near-zero rates, QE, big deficits, etc. Another period where (in retrospect) conservatives were wrong.