An interesting interview with Dallas Fed president Fisher

Dallas Fed president Richard Fisher, who is known as one of the Fed's 'hawks', but is unfortunately also a fan of the fervent supporter of the 'price stability policy' during the 1920's boom, Irving 'permanent plateau' Fisher (alas, no relation), has made some interesting comments in a recent CNBC interview. Now leaving aside the football analogies, we learn here that Fisher is 'trained as a businessman', not a professional bureaucrat.


He says that in a self-deprecating manner, mentioning that he thinks his colleagues 'more knowledgeable'. We would suggest to Mr. Fisher that it is the other way around. We don't think there should be a central bank at all, but since there is one, it would certainly not hurt if there were more businessmen rather than ivory tower academics steeped in Keynesianism running it.

It is noteworthy that Fisher is not in favor of the Fed printing even more money, but he is careful to mention that 'it cannot be ruled out'. And it sure cannot be, with Ben Bernanke at the helm. Furthermore, Fisher himself, as a supporter of the misguided 'price stability policy', regards the bugaboo of 'deflation' as a 'tail risk', which presumably the central bank will have to counter.

He mentions that there is 'enough liquidity' and that businesses are 'hoarding money'. 'There is enough capital', so he says. However, capital is not the same as money. The question is not if there is 'enough' capital out there, but whether the existing capital stock can be usefully employed, and to what extent it needs to be transformed, redirected or liquidated.


The slow pace of recovery

Fisher notes that the economy is not moving forward as well as he would like. Inventory adjustments, and some investment activity have played out, but businesses continue to be stymied. What is most interesting about his comments though is what he has to say about why he believes there is very little hiring and investment going on – especially in the small business sector, which as we know continues to find itself in very bad shape.

See for instance this study by the NFIB (National Federation of Independent Business) 'Small business credit in a deep recession'(pdf) or its most recent monthly survey of business conditions (pdf).

In Fisher's words:


“Congress and the government have inhibited growth by creating uncertainty about business costs, Dallas Fed President Richard Fisher told CNBC Wednesday. “We need clarity," said Fisher. "My background [in business] tells me that you can’t eliminate uncertainty, but you have to reduce it as much as possible.” Questions about healthcare expenses, for instance, have kept businesses from hiring new workers, said Fisher, because executives don't know how much it will cost them.

Businesses also have concerns about other costs, such as whether a VAT [value-added tax] will be imposed. "How do you cost a worker?" Fisher said. "Let’s say you run a delivery-truck system. What’s the price of a new delivery-truck driver? You don’t [know]. So how, as the CFO, do you go to your CEO or the board and say, 'I need to budget a new workforce.' And they say: 'What's it going to cost us?' And you say, 'I can’t tell you the answer.'”


It is worth excerpting some of the comments from the summary section of the NFIB's monthly report, as they clearly confirm what Fisher says, and are somewhat more explicit than he is:


Unfortunately, Washington, D.C. and many state legislatures seem determined to undermine any economic forward momentum for small business owners. And even though small business owners continue to plead their case for policies that will help foster economic growth, many lawmakers are unwilling to listen. Small business owners keep saying that poor sales (“It’s the consumer, stupid!”) is their most pressing problem and the reasons they aren’t interested in expanding are due to current economic conditions and the political climate.

Unfortunately, Congress is fixated on credit and special favors for unionized firms, and that wont sustain or support faster growth. A huge help in moving toward a stronger economy for small business owners would be to “do no harm”. But Congress continues to pass and propose legislation that increases the cost of running a business and create huge uncertainty about future costs. The small business sector of the economy is improving, there is a pulse, but it is weak. Washington is applying leeches and performing blood-letting as a cure. Assuming Washington does not intensify its efforts to “cure” small business, the sector will continue to plod forward as consumer spending picks up and the housing mess continues to correct itself.”



Dallas Fed president Richard Fisher: 'We've printed enough money'. Actually, they printed too much. He rightly bemoans the uncertainty introduced by government's activism.

(Photo credit: Brian Snyder / REUTERS)



Regime Uncertainty strikes

What Fisher and the NFIB are talking about here is known as 'regime uncertainty', an offshoot if you will of Ricardian equivalence, a concept which we have commented on previously. The Obama government was from the beginning hailed in the press as a 'new version of the FDR administration', whose purpose it would be to pursue some sort of 'new New Deal' policy to 'rescue' the economy. This unreflected recommendation in favor of government meddling is unfortunately being taken seriously by the administration, which in terms of its economic policies surely ranks as one of the worst in US history.

In this it is indeed a close cousin to the disastrous FDR administration, which by continuing Hoover's deficit spending policies and even intensifying them helped turn a recession into a depression. If we examine some of the recommendations made by TIME magazine's editors, it is truly cringe-worthy stuff:


We're all supposed to be Keynesians now, so we should understand that government spending creates short-term economic stimulus, which is one reason the Bush-era bubble took so long to burst. But not all government spending is created equal. Obama needs to pump serious cash into the economy in a way that promotes his long-term priorities.”


Aside from the fact that we are definitely not 'all supposed to be Keynesians now', even if TIME insists this should be so, the idea conferred in this paragraph that 'government spending is fine, just as long as you have a better plan than that attending the previous failure of government spending' is simply nonsense. It is definitely the type of nonsense most mainstream economists tend to support, but it remains nonsense.

It does not matter how 'well intentioned' an interventionist government allegedly is – its deficit spending must harm the economy, due to the fact that the economy is not a machine that can be 'planned'. It is more akin to an organism, with individual human actors the 'cells' of this organism, each one with its own sets of skills and knowledge, and these cells are capable of erecting a spontaneous order in the marketplace that is far superior to any attempt to plan the economy.

TIME criticizes spending that has gone towards 'roads to nowhere' (which incidentally is very much akin to a central recommendation of Keynes to battle recessions, who proposed that the government hire workers to do completely senseless jobs), but then immediately asserts that a 'better spending plan will work'. It promptly supplies the plan, of course.


“To jump-start the economy, Obama needs to spread around hundreds of billions of dollars, and he'd be wise to start with the currently underfunded efforts to restore the Everglades, coastal Louisiana and the Great Lakes; to repair crumbling dams, dikes, sewer pipes and bridges; to promote high-speed rail, light rail and other transit systems besieged by skyrocketing demand; even to accelerate research into renewable energy and alternative fuels. But first he should repeal the old water and highway bills — two of the most popular pieces of legislation on pork-obsessed Capitol Hill — and demand a new approach. He can call it a New New Deal or a Green New Deal, but it needs to be a deal, not just a spending spree. How it would work is simple: the feds would supply cash but only to promote federal priorities.

So funding decisions would be made by technocrats rather than congressional ribbon-cutters — like similarly hyperpolitical military-base-closing decisions — and strings would be attached.”


First of all, an economy can not be 'jump-started'. It is not a stalled car engine. A government 'spreading around hundreds of billions of dollars' – which we note is exactly what Obama has done and is set to continue doing – is an enormous burden on the economy, as it crowds out the private sector, misdirects capital and creates the aforementioned regime uncertainty. No matter how 'simple' it all is, according to TIME, in the end, the private sector must pay for all of it, as the government possesses no resources of its own.

The difference is only that instead of the spending and investment being done voluntarily, and thus reflecting the desires and most urgent wants of consumers, the government's spending is directed according to political priorities and pet projects, most of which comprise a hair-raising waste of scarce resources. You can not 'cure' a maladjusted economy by adding fresh malinvestments on top of existing ones, and yet, this is precisely what government spending does.

The government likes to point to the many jobs it has allegedly 'created' with its spending, often displaying a horrifyingly tenuous grasp of simple mathematics (see Obama Hails New Solar Energy Jobs at Taxpayer Price Tag of $1,333,333 Each ), and without reflecting on whether any of these jobs actually make economic sense. Unfortunately, the failure of these investments to create a sustainable recovery is likely to raise a hue and cry for even more spending. In the meantime, everybody knows that higher taxes and more regulations are on their way. In short, the government's policies are inimical to economic growth on more than one level. This is precisely the regime uncertainty spoken of by Fisher.

Businessmen will not invest while there is an interventionist government in charge that makes 'what will Washington do next?' the most important question entrepreneurs and investors must ask themselves. In this context, we want to point to an excellent article at 'Adventures in Capitalism' written by Kuppy, 'The Macro Trumps All Else', which sheds light on the problem the government's interventionism poses for investors. Here is a pertinent snip:


Now, investing seems to revolve around just one factor. 

What will the government do next? Which businesses will they clamp down on? Which will be subsidized? Who will get the next bailout? Will various tax subsidies be increased or eliminated? What new laws are in the mix? How can you anticipate all these changes?

There are no constants any longer. You cannot rely on anything. Everything seems perpetually in flux. The world economy is once again imploding.

Will it be allowed to collapse? Unlikely. When will the next bailout be announced? What shape will it take? Who will the winners be?

That really is the question that everyone demands an answer to. When is the next bailout? Bigger, Badder, More Corrupt — that’s our country’s new mantra.

Which companies will lobby the right congressmen and be included? Which will be destroyed? How do you invest in an environment like this?

Say you look at a company. Do you want a business that’s economically sensitive — or one that has a strong and liquid balance sheet? Are you betting on them printing just a little money — or a full out Weimar style debasement?

What’s the expected tax rate? It’s going up. That’s for sure. Will carbon taxes impact my businesses? What about changes in health care legislation?

There are dozens of issues currently debated in congress. They all impact businesses.


In short, the regime uncertainty that bedeviled the economy under FDR clearly also bedevils the economy under the 'new' New Dealers.



He did what TIME suggested he should do – 'new' New Dealer Obama, spreader of hundreds of billions to 'jump-start the economy'. Prepare for a decade or longer of no economic progress, unless this course of action is swiftly reversed.

(Photo credit: Time Magazine)





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