NEW YORK – The president and Congress need to enact fiscal policies to get the country moving again, according to Federal Reserve Bank of Dallas President and CEO Richard W. Fisher, who said the Fed “has done everything it can, and more.”
He assailed “indecision and political mischief” from “both ends of Pennsylvania Avenue,” and said, “If the American dream is to survive, we will need to re-create a fiscal and regulatory environment that¯in conjunction with the Fed conducting prudent monetary policy¯will liberate the forces of entrepreneurial risk taking that have always been America’s hallmark, and that allowed successor generations to live far better lives than their parents ever thought possible.”
Despite cash on a balance sheet, a compliant banker, and cheap money, firms won’t “commit substantial capital” to expand payroll or invest in equipment or plant upgrades “until you know what it will cost you to run your business; until you know how much you will be taxed; until you know how federal spending will impact your customer base; until you know the cost of employee health insurance; until you are reassured that regulations that affect your business will be structured so as to incentivize rather than discourage expansion; until you have concrete assurance that the fiscal fix the nation so desperately needs will be crafted to stimulate the economy rather than depress it and incentivize job creation rather than discourage it; or until you are reassured that the sinkhole of unfunded liabilities like Medicare and Social Security that Republican- and Democrat-led congresses and presidents alike have dug will be repaired so that our successor generations of Americans will prosper rather than drown in dark, deep waters of debt.”
It is time for a leader to “take a position that is neither safe, nor politic, nor popular,” but is the right move, he told the Austin Chamber of Commerce, noting that “honorable members of Congress and presidents past, Republicans and Democrats alike, have conspired over time, however unwittingly, to drive fiscal policy into the ditch. They purchased their elections and reelections with popular programs so poorly funded that they now threaten the economic well-being of our children and our children’s children. Instead of passing the torch on to the successor generation of Americans, they have simply passed them the bill. This is the opposite of honorable.”
He used an analogy he first heard from Fed Governor Sarah Bloom Raskin comparing the economic ills to party remnants in a kitchen sink. “You have two choices. You can reach down and scoop up the gunk, a distinctly unpleasant task. Or you can turn the water on full blast, washing the gunk down the drain, providing immediate relief from both the eyesore and the distasteful job of handling the mess” While using the faucet is easier, it can cause problems elsewhere.
“From my standpoint, resorting to further monetary accommodation to clean out the sink, clogged by the flotsam and jetsam of a jolly, drunken fiscal and financial party that has gone on far too long, is the wrong path to follow,” Fisher said. “It may provide immediate relief but risks destroying the plumbing of the entire house. It is a pyrrhic solution that ultimately comes at a devastating cost. Better that the Congress and the president¯the makers of fiscal policy and regulation¯roll up their sleeves and get on with the yucky task of cleaning out the clogged drain.”
The FOMC have provided fuel for employers to create jobs, and in some cases, he said, more than enough. “I balked at pledging to hold rates low through mid-2013, and felt that ¯Operation Twist would be of doubtful efficacy except in making some quick profits for those market players who bought on the (regrettably too well circulated) rumor and sold on the news of the FOMC announcement,” Fisher said.
Contrary to reports, Fisher said, he opposition to FOMC moves was because he believed “they would do little to encourage job formation,” not for fear of inflation.
“My reluctance to support greater monetary accommodation has been based on efficacy: With businesses’ cash flow—driven by record high profits and bonus depreciation¯at an all-time high, both absolutely and as a percentage of GDP; with every survey, including those of small businesses, indicating that access to capital is widely available and attractively priced; with balance sheets having been amply reconfigured; and with bankers and nondepository financial institutions sitting on copious amounts of excess liquidity, I have argued that further accommodation was unlikely to motivate the private sector to put people back to work,” Fisher said. “It might even prove counterproductive should it give rise to fears the Fed is so hidebound by academic theory as to be blind to the practical consequences of harboring an ever-expanding balance sheet. This inevitably raises concerns we are creating distortions in the fixed income markets that inhibit proper market functioning, or concerns that¯despite our protestations to the contrary¯we are given to monetizing the government’s debt, an impulse that ultimately destroys a central bank’s credibility.”
Nonmonetary factors, he reminded are inhibiting robust job creation. One factor is the uncertainty “about the future of final demand.” While demand has slowly increased in the U.S., events in Europe, and a slowdown in emerging economies suggest business remain cautious. Fisher added, “we are innocent bystanders” when dealing with foreign economies. “There is little we can do but pray that fiscal and monetary authorities abroad get it right. So far, their moves have been less than reassuring.”
The U.S. economy appears to be improving, he said, but they “continue to sour on the other side of the Atlantic.”
But, Fisher noted, there have been great shifts in outlook over the past year, “reflecting the obvious fact that we are in an unfamiliar and rapidly changing economic environment.” In an interview published in 2009, Fisher said, “we forecast the recovery would proceed slowly, gaining momentum over time. This is indeed what has occurred, despite the doubters and skeptics, over the past two years.”
