The WSJ Opinion Section – Going From Just Partly Right to Totally Wrong
We are not sure why Conservatives hate the Federal Reserve System so much. In the current case it may be that they are afraid monetary policy will create sufficient economic growth so that voters will not return Republicans to the White House. In any event, they have now become so desperate that they have employed a former Treasury official in the Reagan Administration to set out a bunch of lies about monetary policy. (Sorry about the ‘lies’ thing, but there is not other way to put it.)
A gentleman by the name of David Malpass writes this in the Wall Street Journal opinion section. After (correctly) documenting the weakness of the recovery Mr. Malpass claims to have found the culprits, expansionary policy.
The disastrous state of affairs was rationalized as a "new normal" following the Great Recession, but the reality is that poor policy choices hurt growth. Tax-and-spend policies sapped investment, and the Fed's low rates and bond purchases damaged markets, hurt savers and channeled credit to the government at the expense of job creators. It's a zero-sum process that should be stopped because of the bad effect on growth and jobs.
Okay, let’s skip over the obvious errors here and go to the big one, that the Fed has somehow taken money that the private sector wanted to use for investment and given it to the government. Here is the argument in more detail.
The Fed's intention is that the low bond rates it provides the government will spill over to big corporations and banks, who in turn will help the little guy. This trickle-down monetary policy has contributed to very fast growth in corporate profits, part of the explanation for the record stock market, but also to weak GDP growth and declining middle-class incomes. The extra credit the Fed channeled to government and big corporations meant less credit elsewhere in the economy, a contractionary influence since most new jobs come from small businesses.
As every student in Econ 101 knows, this is just plain false. The money supply is elastic, and there is absolutely no way that the Fed has restricted supply of funds to the private sector. In fact the system is awash in bank reserves. Banks will simply not lend to private companies because banks are afraid their low capital levels cannot support the added loans on the balance sheet. This is a supply problem in part. Small business and consumers want credit, but the banks simply will not supply it even though they have the funds to do so. This is what happens in a recession that includes a breakdown of the financial system.
As for the level of cash balances, large businesses are awash in cash. The problem here is also a demand problem, because of a poorly defined stimulus program that was too short and too weak, private demand is simply not high enough to generate high growth. But as far as the Fed is concerned, it has done the right thing and it has done as much of it as it can. The limitations of monetary policy, not the policy itself is the problem here.
So what we have in the WSJ opinion section is an essay that if it were handed in to the teachers in a high school economics class would receive an F. As for the WSJ, when the truth does not fit their prejudices, print the myth. And if people like Mr. Malpass ever get back into power and raise interest rates drastically, which sounds like what they want to do, well kiss the weak recovery goodbye. United States, meet