Monetary policy is no magic wand. That may not have been the message the Milken Institute Global Conference wanted me to hear. I'm doubtful banks will lend to anyone but big corporates, and one another, anytime soon.
The mission of Milken is to "move capital, policy and momentum toward realistic solutions." Not one, not two, but four current Federal Reserve Bank Presidents were on the conference agenda. Unfortunately, what the four Fed Presidents said in Beverly Hills last week was less exciting than the chance of spotting one of the finance, government or media stars walking the halls of the Beverly Hilton.
Dallas Fed President Richard Fisher, former vice chairman of Kissinger McLarty Associates, a strategic advisory firm chaired by former Secretary of State Henry Kissinger, joined a panel on jobs. He was asked if the tools of monetary policy can be used effectively to improve employment in the U.S. "Monetary policy is necessary but not sufficient." Great. Moving on…
Fed fanboys asked long, drawn-out questions with obscure economic jargon. "We're in a liquidity trap" was a favorite answer to everything. A liquidity trap is a Keynesian term describing conditions where the short-term nominal interest rate is zero. Like now. When that happens, increasing money in circulation has no effect on output or prices. "The Keynesian liquidity trap is therefore only a true trap if the central bank cannot stir expectations, " says the New York Fed.
Good luck with climbing out of that trap.
San Francisco Fed President John Williams joined former Mayor of Chicago Richard Daley and business executives to talk about the sustainability of the economic recovery, such as it is. Williams said there’s moderate GDP growth, hopefully picking up over the next two years. It's been held back in a big way by the housing sector which is "still struggling, still very depressed." He's hopeful we’ll see a rebound in the next two years.
Super. Check back with Williams in two years.
Fed Presidents Charles Evans of Chicago and Dennis Lockhart of Atlanta starred on their own panel. The dual purpose of the Federal Reserve Bank – a mantra repeated at all of the presentations – is to provide financial and monetary conditions to support maximum employment and price stability. Evans and Lockhart dueled, debating more accommodation – a fancy word for injecting liquidity via open market operations to spur growth – versus keeping a lid on inflation.
The articulated Fed goal is to keep inflation at around 2%, plus or minus. But Evans said economists, and their tools, are not perfect. "When you have inflationary trends developing…the power of monetary policy to correct that is not nearly as known a quantity as the power of monetary policy to bring inflation under control."
In other words, economists don't see the semi tractor-trailer coming nor can they avert the crash but once the truck hits they're pretty good at mopping up the body parts.