Is It Time To Wind Down The US Federal Reserve?

It will be a big omission if I did not mention the blistering Op-Ed that Kevin Warsh, former member of the Federal Open Market Committee, wrote in the Wall Street Journal on August 24. That he served in the Federal Reserve for five years makes his critique all the more special and important.

Perhaps, it is appropriate to conclude this (already long) post with a reference to a recent piece by Nobel Laureate Michael Spence. He points out there are two forms of secular stagnation – one that is beyond policymakers’ control and he calls it SS1. It is caused by “growth-destroying headwinds that are impossible to counter in the near term without endangering future growth and stability.” – I have paraphrased him.

Then, there is SS2 – Secular Stagnation 2 – which is caused by adopting the wrong policy mix. He says the right policy mix would have measures that address income inequality – redistribution through taxation and social security measures, higher interest rates combined with capital controls and active fiscal policy, particularly in Europe.

I like his piece because he makes a beginning by acknowledging that growth cannot be engineered by monetary policy that is aimed at boosting asset prices through liquidity provision. Frankly, when I spell it out like this, it feels so dumb to me. Yet, the persistence of such wrong policies and the extraordinary amount of patronage and support they draw from the so-called intelligentsia is proof that only enduring reality is human irrationality.

Let us then get back to the growth model that is briefly recapitulated above by Warsh and Druckenmiller – growth through savings, investment, productivity and employment.

So, what shall we do with the Federal Reserve? Well, if it cannot wind down its balance sheet, it is time to wind down the Federal Reserve itself.

This piece was first published on The Gold Standard and has been republished here with permission.