You know it’s bad when you’ve lost Larry Summers…
It appears the so-called ‘progressives’ push to ever more signaling of their virtue and cradle-to-grave dependence on bigger and bigger government (as long as you ‘obey’ the narrative) is just too much for the former Treasury Secretary who warned that monetary policy makers in the U.S. and elsewhere for paying too much attention to social issues and not enough to the biggest risk to inflation since the 1970s.
Speaking to a virtual conference organized by the Institute of International Finance, Summers rebuffed the newly ‘woke’ Fed:
“We have a generation of central bankers who are defining themselves by their wokeness,” Summers, who is now a professor at Harvard University, said on Wednesday.
“They’re defining themselves by how socially concerned they are.”
Read that again and consider the source – Bill Clinton’s Treasury Secretary and head of the National Economic Council in the early years of the Obama administration!!
His fear is simple: Fed talking heads are too focused on social justice that they are taking their eye off the ball that is their mandated job of managing inflation and jobs.
“We’re in more danger than we’ve been during my career of losing control of inflation in the U.S.,” the 66-year-old Summers, a paid contributor to Bloomberg, said.
“We’ve gone even further towards losing it in Britain and I think we’re at some risk in Europe.”
Summers also – quite ironically for someone who has supported fiscal expansion as a means of promoting macroeconomic stability – blamed the Fed and other central banks for not preparing investors for the tough steps policy makers will probably have to take to rein in inflation.
“If those actions come, they’re going to be very shocking and very painful in financial markets,” he said.
This is not the first time Summers has raised a red flag. As James Caton writes at The American Institute for Economic Research, in February, Summers participated in a discussion with Paul Krugman where he outlined his concerns. He notes that:
The stimulus of 2020 was about twice the size of the output gap in the same year. The proposed stimulus for 2021 was, at the time, 4 times the size of the projected output gap.
Unemployment compensation provided to the bottom 30% of earners was more than double their losses from Covid-19.
Elsewhere, Summers explains that the current labor shortage will drive up wages and that we have already seen monthly rents for new tenants increase by 17 percent, on average, above the rents paid by previous tenants.
Summers believes that the “toxic side effects of QE” are not being recognized by policymakers. In an interview, Larry Summers used a rather peculiar metaphor to describe this situation.:
So, I look at that dwindling hole. Then I look at expenditures that aren’t hard to add into the multiple trillions, and I see substantial risk that the amount of water being poured in vastly exceeds the size of the bathtub.
When I heard Summers use this metaphor, my mind was drawn to a passage I first read over a decade ago from Benjamin Anderson in his reflection on the Great Depression. In referring to monetary policy that preceded the initiation of the Great Crash in October 1929, he wrote:
When a bathtub in the upper part of the house has been overflowing for five minutes, it is not difficult to turn off the water and mop up. But when the bathtub has been overflowing for several years, the walls and the spaces between ceilings and floors have become full of water, and a great deal of work is required to get the house dry. Long after the faucet is turned off, water still comes pouring in from the walls and from the ceilings. It was so in 1928 and 1929.
Consistent with both statements is the belief that the monetary policy provided more stimulus than was merited by prevailing economic conditions. And consistent with Summers’ belief that excessive monetary support can be toxic, Anderson bemoans the extensive damage that can occur when the water spigot is left on for too long.
Instead of racial ‘equity’ or climate change, The Fed needs to concentrate on monetary policy. This is a serious job that requires serious focus. Perhaps Summers recognizes that the post-2008 monetary framework has created a fiscal Fed. Or maybe he will.
Summers’ demands for limits to the aims of monetary policy might be politically feasible under the old Volcker-Greenspan regime. Under that monetary regime, inflationary pressure placed strict limits on the expansion of the balance sheet. The political incentives now faced by both politicians and Fed officials promote precisely the sort of oversized fiscal expansions that we have observed in the last two years, the same expansions that Summers decries.
The post-2008 framework has incentivized the destabilization of monetary policy. The sooner we recognize this fact, the sooner we can seriously discuss a solution to the problem.