When President Bush appointed his aide, Kevin Warsh, to the Board of Governors of the Fed, I was less than impressed. Despite being educated at Stanford and Harvard, he was a lawyer, not an economist. (Who needs more lawyers?) Press coverage at the time suggested his wife's wealthy family were substantial contributors to securing this highly-prestigious appointment for the young 35-year-old Warsh. However, during the global financial crisis, he handled relations between the Fed and Wall Street and, by all accounts, did a good job with that, until his resignation in 2011.
At a recent lecture, he criticized the Fed for "group-think" and having too little intellectual debate inside the Fed. This is not a new criticism and is probably true.
However, he also left an image in my mind that is worth keeping. Imagine Fed-Head Janet Yellen giving her semi-annual Humphrey-Hawkins testimony before the Senate when a pompous Senator says "Madam Chair, while we appreciate your testimony here today, full disclosure requires us to note that the Fed has consistently over-estimated our economic recovery and GDP growth. Frankly, the Fed has had six years to turn this economy around, which I find is time enough. When you return to this chamber in six months, Madam Chair, I expect you will no longer be making excuses and will have "fixed" the American economy, finally."
To which, Janet Yellen would answer "Thank you, Senator, for this opportunity to remind every single member of the Senate and the House that the Fed controls only monetary policy. The Fed has no control over fiscal policy, tax policy, budget deficits, trade policy, nor education policy. While my predecessor and myself have faithfully reminded Congress of their responsibility for fiscal policy, tax policy, budget deficits, trade policy, and education policy, Congress has done nothing, absolutely nothing. When I return to this chamber in six months, Senator, I look forward to hearing what Congress has done to help "fix" the American economy, finally."
It is well-known that economic policy requires both monetary policy and fiscal policy. Unfortunately, American economic policy is a two-fisted boxer with one fist tied behind his back.
At a recent lecture, he criticized the Fed for "group-think" and having too little intellectual debate inside the Fed. This is not a new criticism and is probably true.
However, he also left an image in my mind that is worth keeping. Imagine Fed-Head Janet Yellen giving her semi-annual Humphrey-Hawkins testimony before the Senate when a pompous Senator says "Madam Chair, while we appreciate your testimony here today, full disclosure requires us to note that the Fed has consistently over-estimated our economic recovery and GDP growth. Frankly, the Fed has had six years to turn this economy around, which I find is time enough. When you return to this chamber in six months, Madam Chair, I expect you will no longer be making excuses and will have "fixed" the American economy, finally."
To which, Janet Yellen would answer "Thank you, Senator, for this opportunity to remind every single member of the Senate and the House that the Fed controls only monetary policy. The Fed has no control over fiscal policy, tax policy, budget deficits, trade policy, nor education policy. While my predecessor and myself have faithfully reminded Congress of their responsibility for fiscal policy, tax policy, budget deficits, trade policy, and education policy, Congress has done nothing, absolutely nothing. When I return to this chamber in six months, Senator, I look forward to hearing what Congress has done to help "fix" the American economy, finally."
It is well-known that economic policy requires both monetary policy and fiscal policy. Unfortunately, American economic policy is a two-fisted boxer with one fist tied behind his back.
