Just Vote NO

On Tuesday, July 21, the Senate Banking Committee will vote on whether to support Dr. Judy Shelton’s nomination to join the Board of Governors of the Federal Reserve System. Accordingly, we are re-posting our July 2019 commentary in which we outlined our strong opposition to Dr. Shelton’s candidacy.

In our view, over the past year, the case against Dr. Shelton has strengthened. The Federal Reserve’s speedy and decisive response to the COVID pandemic is a key reason that the U.S. financial system has steadied and the economy quickly began to recover from the worst shock since the 1930s. Had the United States been operating on a gold standard, as Dr. Shelton has long advocated, these Fed actions would not have been feasible.

Indeed, under a gold standard, instead of easing forcefully and committing to sustained accommodation, the central bank would have been obliged to tighten policy in an effort to resist the 19-percent rise of the gold price since the end of 2019. Just as it did in the Great Depression, this policy would have led us down a path of financial crisis and economic disaster (see our earlier posts here and here).

We hope that the Senate Banking Committee will vote down Dr. Shelton’s candidacy and send a determined message that unambiguously backs the Federal Reserve’s commitment to use every means at its disposal―zero interest rates, large-scale asset purchases, and broad lending programs―to restore economic prosperity and maintain price stability. Barring outright rejection, the Committee should at least move to hold an additional hearing on this nomination, as the Committee minority has proposed….

Just say no to exchange rate intervention

Whenever possible, policymakers should explore a broad set of options before responding to challenges they face. However, when the President and his advisers recently discussed foreign currency intervention, we hope everyone quickly concluded that it would be a profoundly bad idea.

Before we get started, it is important to explain what foreign currency intervention is and how it is done….

Protecting the Federal Reserve

Last week, President Trump tweeted his intention to nominate Dr. Judy Shelton to the Board of Governors of the Federal Reserve System. In our view, Dr. Shelton fails to meet the criteria that we previously articulated for membership on the Board. We hope that the Senate will block her nomination.

Our opposition arises from four observations. First, Dr. Shelton’s approach to monetary policy appears to be partisan and opportunistic, posing a threat to Fed independence. Second, for many years, Dr. Shelton argued for replacing the Federal Reserve’s inflation-targeting regime with a gold standard, along with a global fixed-exchange rate regime. In our view, this too would seriously undermine the welfare of nearly all Americans. Third, should Dr. Shelton become a member of the Board, there is a chance that she could become its Chair following Chairman Powell’s term: making her Chair would seriously undermine Fed independence. Finally, Dr. Shelton has proposed eliminating the Fed’s key tool (in a world of abundant reserves) for controlling interest rates—the payment of interest on reserves….

China's Awkward Exchange Rate Regime: an Update

As 2016 draws to a close, it’s natural to look back over the year’s posts. With all the swirling concerns about China-U.S. relations—including the selection of the protectionist co-author of Death by China to head a new White House National Trade Council—we wondered whether our February doubts about China’s exchange rate regime remain intact.

The answer is yes, but for reasons radically inconsistent with President-elect Trump’s promise to declare China a currency manipulator on his first day in office. Like any country with a fixed exchange rate, China’s central bank intervenes actively to maintain its (evolving) currency target. But, for the past two years, the People’s Bank has been intervening to prevent (or at least to slow), rather than promote, the depreciation of its currency versus the dollar. That is, the RMB remains overvalued compared to what it would be in the absence of official intervention.

And, despite secretive instincts of China's authorities, the evidence is there for all to see....

Why a gold standard is a very bad idea

The extraordinary monetary easing engineered by central banks in the aftermath of the 2007-09 financial crisis has fueled criticism of discretionary policy that has taken two forms. The first calls for the Federal Reserve to develop a policy rule and to assess policy relative to a specified reference rule. The second aims for a return to the gold standard (see here and here) to promote price and financial stability. We wrote about policy rules recently. In this post, we explain why a restoration of the gold standard is a profoundly bad idea.

Let’s start with the key conceptual issues. In his 2012 lecture Origins and Mission of the Federal Reserve, then-Federal Reserve Board Chair Ben Bernanke identifies four fundamental problems with the gold standard:...

China's Awkward Exchange Rate Regime

A recent op-ed in a major Chinese English-language newspaper, The People’s Daily, asserts that George Soros “has declared ‘war’ on China, claiming he had sold short Asian currencies.” For those who observed firms like those of Mr. Soros profiting from the collapse of the British pound in 1992, a speculative attack on China’s currency, the RMB, merits close attention.

There are surely parallels to that earlier episode where Soros' firm is reputed to have made $1 billion in a couple of days. Yet, it would be difficult to overlook the enormous differences. Perhaps most important, the United Kingdom was committed to maintaining the free flow of capital across its borders. This is in stark contrast to China, where policymakers have been tightening capital controls in recent months....

Is China's devaluation a game changer?

Since 1978, China has engaged in an unprecedented and wildly successful experiment, moving gradually from a command economy to one based on markets; in small steps transforming a system where administrators controlled the goods that were produced to one where prices allocate resources. There were surely miscalculations along the way. But, even big blunders could largely be concealed. Until now!

What has changed in recent months? The day has come for China to become more closely integrated into the global financial system, and this has a number of implications. The most important is that as prices and quantities of financial assets (rather than goods) are determined in markets, bureaucrats lose a great deal of control. But, as recent events very clearly demonstrate, Chinese authorities are reluctant to let go....

A Swiss Lesson in Time (Consistency)

You can set your watch by the Swiss trains. They are the envy of the world in many ways. Everyone believes that the trains will run on time because they do.

Credibility is at the core of central banking as well. When a credible central banker speaks, households, businesses, and governments listen. And, because they expect the banker to do what she says, their response – measured in terms of how much they work, save, and invest – will reinforce the outcome policymakers seek.

But credibility is tough to earn and – as the Swiss National Bank (SNB) recently learned when it ended a three-year commitment to prevent a rise in the franc versus the euro – easy to lose....

Commentary

Money, Banking, and Financial Markets