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George Selgin on Frozen Money Markets & Competing With the Fed in Payments
George Selgin on Frozen Money Markets & Competing With the Fed in Payments
New York | In this issue of The Institutional Risk Analyst, we feature a timely conversation with Dr. George Selgin, senior fellow and director of the Center for Monetary and Financial Alternatives at the Cato Institute and Professor Emeritus of Economics at the University of Georgia. He is the author of a number of books, including Floored! How a Misguided Fed Experiment Deepened and Prolonged the Great Recession (The Cato Institute, 2018) and writes frequently on monetary policy, payments and related topics for Alt-M. We spoke to Dr. Selgin last week from his office in Washington.
The IRA: George, thank you for taking the time to speak with us today. Let’s start with the snafu in the world of repurchase agreements and short-term money markets and then move to the equally important question of payments. First thing, how do you explain the liquidity problems seen in the REPO market over the past year to ordinary citizens and particularly members of Congress? More important, how do you link the policy narrative coming from the Federal Open Market Committee with what the Fed is actually doing in the markets? The two often seem disconnected.
Selgin: Those are some big questions. You start by observing that for some decades now the Fed like other central banks has insisted that its task is to regulate short-term interest rates. So, when interest rates do something that the Fed has not planned for them to do, that’s a problem. If the Fed isn’t able to control interest rates, then what is it doing and what is it able to do? I’d start with that premise, that the Fed is supposed to be able to keep interest rates on the desired target or target range, but in fact has been having trouble doing so. It had trouble keeping rates in line in September and it may soon have trouble doing so again.
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View from the Lake: Deflation & Debt
View from the Lake: Deflation & Debt
Grand Lake Stream | The conversations over the Labor Day weekend at Leen’s Lodge ranged from negative interest rates to the efficacy of a bubble gum colored wacky worm vs live bait in late season bass fishing. We’ve mostly decided that a large mouth bass raised in Maine tastes about as good as small mouth bass when flash fried over an open fire.
Confirming that quality trumps quantity, we proved empirically that a single issue of Grant’s Interest Rate Observer, supplemented with a few pine cones, is a superior fire starting accelerant than a whole section of The Financial Timesor The Wall Street Journal.
One major point of consensus view is that the global investment community needs to stop asking central banks to address issues for which they are neither suited professionally or politically. The spectacle of former New York Fed President William Dudley exhorting his former colleagues on the Federal Open Market Committee to resist President Trump was pathetic and sad, yet another faux pas for the Fed of New York this year.
The Dudley rant illustrates the collective madness that has consumed many observers over the past decade. In truth, the crisis of 2008 still has not been resolved. Dudley wrote:
“There’s even an argument that the election itself falls within the Fed’s purview. After all, Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives.”
Really? Dudley displays the dangerous “I am Superman” complex we wrote about in 2010, a virus that has infected the Federal Reserve System over the past two decades. Mission creep does not begin to describe the pathology of the madness that makes Fed officials think themselves omniscient. We challenge Dudley to point to a section of the Federal Reserve Act than authorizes the political activity he suggests.
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