Help Wanted: Fearless & Grounded Central Banker

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To abrogate is to renege, to put aside, to treat as nonexistent. When history looks back on the current era of extremely easy monetary policy, it is likely to conclude that two supposedly-do-no-harm entities abrogated their responsibilities to our country. Both the Federal Reserve and Congress have failed to do what they could to employ more Americans.

One anecdote and one data point recently illustrated the damage that has been inflicted by Fed policy and Congressional misfeasance. Both started with help wanted postings. The first occurred over Labor Day weekend. Feeling the holiday spirit, I acquiesced to my four children’s and two of their friends’ pleas for an escape-the-heat treat at Baskin Robbins. Pushing into the small space, we were filled with a sense of anticipation at the sheer number of frozen options. That didn’t last long. Not only was the sole employee underwhelmed by the throng of sweet-toothed customers, she was categorically impervious to the building melee as the doorbell dinged time and again announcing more patrons. There was no hurry-up about the crowd control, and this was further punctuated by the taped-on Now Hiring sign I noted a half hour later when I finally emerged with my irritated brood of children and their playmates. Perhaps Baskin Robbins should pay by the scoop.

But that’s just one little instance. And we didn’t emerge any worse for the wear though there were quite a few sticky fingers about. Contrast our ice cream outing with a different type of wait experienced by parents alarmed at discovering pneumonia was hitting some of our Dallas elementary school students the first week of school, which for us happens to be the last week of August in the sweltering Texas heat. Though fortunate enough to not be among those queuing up for lung X-Rays, I was nevertheless concerned about my friends’ extremely long wait times. Then, upon examining the details of the July job openings data, which are released with a one-month lag, I noted the continuation of a trend in a growing demand for X-Ray technicians; openings have more than doubled to one million since bottoming in 2010. This trend speaks volumes to lengthening wait times. While in comparison, openings for other positions such as construction, which while they have improved in recent years, are still relatively flattish reflecting the hangover from the last crisis.

This divide is what some economists believe to be a skills mismatch between labor market needs and the available pool of workers on offer. The disconnect also shines a harsh light on Fed policy nearly seven years after policymakers reduced interest rates to the zero bound. Maximizing employment may well be one of the Fed’s formal mandates but it’s become abundantly clear that low interest rates are the wrong hammer to nail that mandate home. Wax Scandinavian for a moment, a culture known for its retraining bent, and imagine a beautiful labor market renaissance had taken place rather the current morass. Picture for a moment that a decent percentage of the American workers who have dropped out of the workforce had instead been re-trained to be X-Ray technicians or dental hygienists, which require associates degrees, or even home health aides, which only require a high school diploma plus required training.

Now think about this. Though an example in the extreme, the rapidity with which Baby Boomers are retiring is no figment of the collective imagination. If there is one given in this equation, it is that there will be an abundance of future demand for health care workers and their need to be familiar with the innovative technology changing how medical services are delivered as far as the eye can see. Training for these positions wouldn’t have required much more of an investment on government’s part than the monies spent on extended periods of unemployment insurance featured in the early years of the current recovery. Of course, such programs have nothing to do with Fed policy. That’s the point.

In conversation recently with a colleague, I raised this Scandinavian, utopian path. He laughed and said Congress would never do such a thing. It’s just not in our culture to force people to work. While I understood his argument, it didn’t make it any easier to accept, especially in light of how well some of the most in demand and unfilled jobs pay. Forget health care for a moment and consider the last time you paid a plumber or an electrician and felt as if you had undergone and paid for an invasive procedure without ever having been admitted to a hospital.

Retraining programs do not grow on trees. Congress would have to vote them into being. But I can’t help but notice in this political season, politicians do go on and on about apple-pie-in-the-sky plans to create jobs in America. This at a time when the practical Scandinavians, who have proven actions speak louder than empty words, have already provided a neat blueprint for us to follow. But it’s not just Congress and our other political leaders who have failed to push for less convenient programs to incentivize job growth and wage gains. No, the credit for failing the country also rests on the shoulders of central bankers who refuse to recognize the limitations of monetary policy. Consider the last two paragraphs, a de facto footnote, in a Wall Street Journal story about the U.S. deficit narrowing to the lowest level in seven years in August: “Deficits have also narrowed faster than budget analysts predicted in part because the government has enjoyed ultralow borrowing costs. U.S. debt held by the public has increased nearly $7 trillion since 2008, or 120%, but debt-service costs for the U.S. last year were about $20 billion below their 2008 level.”

It’s disgraceful that more has not been done to stimulate economic growth with the debt that’s been tacked onto the nation’s balance sheet. More shameful yet is the public back slapping on full display as politicians take credit for taming the deficit. On the other hand, the obfuscation of the true state of the nation’s finances is easy enough to accomplish with the Fed’s blessing in the form of perpetually artificially low interest rates.

The Fed itself also indulges in its own form of public high-fiving when it comes to the great healing of U.S. household balance sheets. Granted, the congratulatory venue is anything but the Sunday morning news programs. Rather they take the form of brilliant papers published in prestigious economic journals. But the conclusions of many of these papers ring as hollow as politicians’ carefully phrased sound bites. It goes without saying that at 9.9 percent of their disposable income, households’ cost to service debt is the lowest on records dating back to the early 1980s. But that shouldn’t take away from the fact that consumer credit itself, which doesn’t take into account mortgage debt, climbed to a record $3.45 trillion in July. The monthly growth rate is nothing short of magnificent in historic terms. July’s $19.1 trillion gain was trounced by an upwardly revised June level of $27 billion, the largest one-month figure since November 2001.

The household debt figure has been infamously pushed upwards by student and car loans, which are up eight percent over the last year. Even credit card borrowing has again picked up of late; it’s up four percent on an annual basis. It’s no wonder that retail sales have perked up a bit. But the consensual conclusion that the explosion in borrowing bodes well for sustainable economic growth is as flawed as it’s been every other time economists have rolled it out.

It is high paying jobs which catalyze true and self-sustaining economic growth, not borrowing to live beyond your means. No wonder the markets are paralyzed ahead of every Federal Open Market Committee meeting, transfixed on whether the Fed is going to raise interest rates for the first time since June 2006. If low-cost debt growth is all we’ve got going for us as a country, the Fed had better not ever hike rates.

It should go without saying that this line of thinking is ridiculous. Adding insult to the disservice wrought on the country are the risks the Fed is allowing to build in the financial system. To take the most egregious example, public pensions, “braced” for lower returns, are reducing the rate of return they are assuming their portfolios will generate; some return assumptions could fall to as low as 7.0 percent from the current 7.7 percent. Where 7.0 percent fits into reality is as questionable as its predecessors’ return assumptions were it not for the extra monies states and municipalities would have to pony up to make up for what can no longer be “assumed” in returns. In a letter to the Wall Street Journal, American Enterprise Institute’s Andrew Biggs rightly points out the true travesty – that the risk premium pension managers had to earn over safe investments such as Treasurys has grown to 5.3 percent from 3.0 percent in 2001 care of interest rate declines. That’s the real headline – that pensions were forced by ill-conceived Fed policy to load up on risk to compensate for what they couldn’t generate in reasonably prudent investments.

At-risk pensions, hobbled by broken accounting and strapped municipal benefactors, are certainly not the only irrefutable evidence that rates have been too low for too long. Consider a sampling of just one week’s Wall Street Journal headlines:

  • Private Equity Plunges Back into Oil
  • ETF-Only 401(k)s
  • VIX Bets Behaving Badly
  • How a U.S. Visa-for-Cash Plan Funds Luxury Apartment Buildings

And my favorite, which covered individual investors increasingly asking about “unusual and exotic ways to raise the yields on their portfolios,” — What to Ask Before You Reach for Yield

How can policymakers fail to recognize the distortions building in a global financial system starved for yield, in reckless investor behavior that threatens to inflict yet another blow to both pensions and individual investors alike? It’s entirely feasible that global markets are not fully prepared for a rate hike. They never will be. It is thus with eyes wide shut that the Fed has consciously chosen time and again to take no action. When will monetary policymakers comprehend that not making a move is a huge move in and of itself. Perhaps it’s high time we post a new Help Wanted sign on the nation’s front door, one for a fearless and grounded central banker.