‘Random refereeing’ of economy is not what’s stagnating it

Jim Saft

Apparently, the U.S. economy is being held back by massive uncertainty over new regulation, future taxation and the deficit and how it will be handled, a state so frightening and confusing that investors won’t invest, businesses won’t hire and nervous consumers have taken to their beds.

That, at least, is the account of Dallas Federal Reserve President Richard Fisher, who, in a speech last week, blamed fear of the arbitrary exercise of power by those in government for slowing the economy and putting those who make, employ and spend in a “defensive crouch.”

“For some time now in internal discussions with my colleagues at the Fed, I have ascribed the economy’s slow growth pathology to what I call ‘random refereeing’ — the current predilection of government to rewrite the rules in the middle of the game of recovery,” Fisher told business leaders in San Antonio.

“Businesses and consumers are being confronted with so many potential changes in the taxes and regulations that govern their behavior that they are uncertain about how to proceed downfield. Awaiting clearer signals from the referees that are the nation’s fiscal authorities and regulators, they have gone into a defensive crouch.”

Saying that businesses and consumers aren’t spending and investing because they are worried about uncertain new regulations and taxes is like saying a man standing on the side of the road next to his wrecked car has stopped driving because his insurance premium is about to go up.

Sure, it’s a factor but it is not the main cause.

Let me offer a simpler explanation: The United States is suffering from a shortage of final demand, the lack of which carries much more weight in economic decisions than concerns about how the new consumer financial protection rules will be carried out.

Banks aren’t refraining from lending because they are worried about coming regulation, they are refraining from lending because more clients are refraining from borrowing. Borrowers, in turn, don’t want to invest because they see less potential for the demand that will make those investments profitable.

Fisher, who in the past has talked a great deal of sense about banking regulation and who is a fearsome and principled hawk and defender of the Fed’s independence, says a regular survey of business contacts he makes before Fed meetings reveals that they are “distressed” about the lack of direction from Washington and are hunkering down, doubtless as a prelude to taking their ball and going home.

Well, I periodically take a poll of fifth graders and they report, emphatically, that homework is interfering with their education and that they want lemonade to come out of the water fountains.

I mean seriously, when did business leaders ever welcome new regulation or heap praise upon Washington?

POLICY, POLICY. WHO HAS THE POLICY?

The distressing thing about this line of thinking, which is not contained by any means to the Dallas Fed, is that it absolves the central bank from responsibility to stimulate a flagging economy. After all, you can buy up all the bonds you like but that won’t make regulations less onerous or politicians less capricious.

Interestingly, James Bullard of the St. Louis Federal Reserve also talked about how regulatory clarity was needed in a recent television interview, and it is true that the Fed, with its expanded role in financial regulation, must act quickly to make clear how they will use their new powers. Bullard also raised the possibility that more quantitative easing will be needed to fight deflation.

Fisher’s view, though, seems to be that the fear of regulation and uncertainty actually trumps the power of monetary policy.

“If this is so, no amount of further monetary policy accommodation can offset the retarding effect of heightened uncertainty over the fiscal and regulatory direction of the country … Indeed, one could posit that further monetary accommodation might make the situation worse if private-sector operators were to conclude that the Federal Reserve has become politically pliable and is prone to substituting such accommodation for fiscal discipline.”

Fisher is off base on regulation, but he has raised a painful truth about politics and monetary policy after the crisis. The Federal Reserve, with cause and in exigency, trampled on the rights of Congress by picking winners and losers through its policy. After all, builders not bakers were helped when the Fed was buying up mortgage bonds. This leaves them open to attacks and doubts if, as I expect, they need to do more quantitative easing.

It would be great, then, if all the United States needed was clarity about policy, but that will not be nearly enough. What will be needed — more quantitative easing — will be highly contentious, risky and a political live hand grenade.