If there is, as widely perceived, a broad backlash against elected officials in the U.S. for essentially trying to do to much to revive the economy without overwhelming success, something similar may be brewing against an equally important if unelected group of public officials.
Election day, next week, will better prove the level of unease within the populace about the gobs of fiscal stimulus and other programs designed to get things growing. While surely having kept the 2008-09 economy from smashing up completely, these programs leave us still in a slow-growth, high unemployment state of affairs.
The decision makers at the U.S. Federal Reserve won’t have to stand for such a stark verdict on their performance, but recent criticism of coming central bank efforts to spur the economy move along a similar track.
To put the biggest ring around this apparent backlash, we’ll take the outlandish position that it’s about the limits of human ability. Specifically, the question is this: how effectively can human beings manipulate a capitalist economy, part of a larger global collection, as big and complex as that of the U.S.?
If capitalism is built on the notion of an invisible hand guiding millions of self-interested decisions that taken together make the whole increasingly larger, today’s backlash questions the power of the visible hand: that of government action.
In the case of the Fed, its the much-hinted quantitative easing phase II, expected to be announced next week, that’s drawing the latest backlash.
In past posts, I’ve called it fix-it fatigue. It’s a weariness with plans that seem to try to mask some fundamental imbalances that occurred over a long period of time. Those imbalances may need to be sorted out once and for all, no matter how long or painful the process.
The deleveraging of an overleveraged economy. The discovery of a clearing price for housing in an overbuilt market. Those sorts of things.
The Fed’s interest in doing what it can to fulfill its dual mandate of sustainable high employment and steady and controlled inflation is understandable. Quantitative easing simply might not work. It simply could create bigger problems later on.
The backlash says let the Fed try to do less. Here’s Jeremy Grantham, of the Boston-based fund management firm GMO, writing recently: “I would limit its (the Fed’s) activities to making sure the economy had a suitable amount of liquidity to function normally. Further, I would force it to swear off manipulating asset prices through artificially low rates and asymmetric promises of help in tough times …It would be a better, simpler and less dangerous world.”
Noting that some economists believe it can take many, not several, years for economies that are delevering to get back to a steady state, William Gross, managing director of the asset management firm PIMCO, recently wrote: “The Fed, on Wednesday, however, will decide that it is better to keep the patient on life support with an adreneline injection and a following morphine drip than to risk its demise and ultimate rebirth in another form.”
The fix-it fatigue view says too much money, from fiscal budgets and quantitative easing, will pile up generations of debt and create a new round of asset price bubbles. As bad as things are, this argument goes, we’re not collectively clever enough to find short cuts to fix them.
