David Malpass, a research and consulting economist, is a former Treasury Department official under Ronald Reagan and a former State Department official under George H. W. Bush. In a recent hearing before a subcommittee of the House Financial Services Committee, he delivered a devastating and valuable critique of Federal Reserve policy over the past seven years that should have received more attention than it has. Certain passages are worth quoting:
“I think the Fed has been hurting growth and causing income inequality by misallocating capital to bond issuers. By constantly replenishing its giant long-maturity bond portfolio, it biases the credit system in favor of bond issuers (who are responsible for 75% of U. S. credit growth over the past five years) at the expense of smaller borrowers, notably the small new businesses that are critical to U. S. dynamism. The Fed should change direction, including downsizing its balance sheet, reducing its $2.4 trillion in bank debt, reducing the interest rate it pays banks, and shortening the maturity of it $4.2 trillion bond portfolio. These steps would increase growth and income, especially for the middle class which has seen and unprecedented decline in real income during the recovery. These steps would also reduce the fiscal deficit……………”
I want to make clear that I support the Fed as an institution. The problem is that Fed policies aren’t working. Its concept of its mission has grown way too large and is not sufficiently focused on maintaining a strong and stable dollar. It has created a huge balance sheet and regulatory apparatus that hurt growth, and it is allowing itself to house inappropriate executive branch functions such as the Consumer Financial Protection Bureau.”
This is about as profound and concise explanation of a major part of the reason for our economic doldrums and weak recovery over the past seven years that I can imagine, and yet we continue to persist, as though somehow we hope that doing the same thing will soon provide a different result. In fact, Malpass goes further to remind the Committee that since former Fed Chairman Ben Bernanke explained his theory on which these policies are based in a lengthy op/ed in November 2010, the Fed has been projecting that fast growth based on these policies will start working, but that it has had to slash its forecasts in every single year since. Isn’t this close to a working definition of insanity?