Thank God for the Fed, particularly incoming Fed chairman Janet Yellen and vice chairman Stanley Fischer. The new Jan and Stan show at the Fed is all that stands between modern civilization and a dysfunctional government, former Fed governor Frederic Mishkin told attendees at IMCA's annual investment conference in New York City yesterday.
Speaking about what the post-Bernanke Fed would look like, Mishkin thinks the American public is blessed with a dynamic duo who are perfect complements to each other and were born to save the world, as central bankers must. The diminutive Yellen is a "bleeding heart liberal," but one who is acutely aware of the ways that inflation can ravage the pocketbooks of the poor and elderly. The Zambian-born Fischer, who taught Mishkin at MIT, is more of a realist who has served on a smorgasbord of global boards of global banking institutions, from the World Bank to the IMF to Israel's central bank, which he ran from 2005 and to 2013.
Mishkin, who served on the Fed's board from 2006 through 2008, contrasted these paragons of responsibility to the sorry characters in Washington. The U.S. Congress "is a scandal," behaving like children in "a sandbox throwing sand in each other's eyes." Whether you agree or disagree with his policies, President Obama is simply "not a good executive."
Then there is the Tea Party, the likes of which this country hasn't seen since the rise and fall of the Know Nothing party in the 1850s, Mishkin said. For the record, the Know Nothing party sprung up in opposition to the influx of German and Irish Catholic immigrants in the middle of the 19th century and got washed away by other events, like slavery. "It is insane to say you will never raise revenues," Mishkin told attendees in reference to the Tea party.
Almost as disturbing to Mishkin is the rise of left-wing populists like recently elected New York City Mayor Bill DeBlasio. Apparently, it eludes central banking titans like Mishkin that the experience of the 2008 financial crisis -- when Wall Street banks and insurers like AIG got federal bailouts and millions of other Americans got the royal shaft as their economic lives took major turns for the worse -- could conceivably spawn populist resentment.
The good news is that the Jan and Stan show will strive to right the ship. "Yellen feels terrible about the unemployed" but wants to "minimize inflation deviations and keep it as close to 2 percent as possible," Mishkin said, adding that she will only tolerate inflation deviations in the short term.
How amazingly brilliant is Fischer? Fischer is "incredibly powerful, always focused on long-term inflation with optimal control. Janet always looked up to Stan. It is unusual to have a No. 2 with more stature than a No.1. Stan puts his ego in his pocket. It is to Janet's credit that she is willing to bring in that strong a No. 2." As for the other Fisher, Dallas Fed chairman Richard Fisher, Mishkin advised attendees to ignore anything he says. [Sorry to editorialize here, Fred, but I always liked listening to Richard.]
Central bankers around the globe are sincerely worried about how the monetary experiment that began in 2008 will end. Predictions that it will end badly with hyperinflation haven't materialized, but that doesn't mean some other disaster or mini-disaster won't occur.
Long-term stability remains the paramount concern, Mishkin said. Fischer worries about the possibility of monetary policy "overshooting" the mark and leading to a credit boom characterized by lax lending standards to consumers and "covenant-lite" loans to businesses. It's reassuring to know at least one central banking Zeus realizes that once in a hundred years he might make a mistake.
Quantitative easing and the quintupling of the Fed's balance means that it could face huge losses if interest rates were to rise sharply. "That's why they want to taper" sooner rather than later, Mishkin said. The Fed has its own arcane accounting system but it clearly does not want to find itself in a position where it has to descend from Olympus and ask spokesmen for the masses like Senators Bernie Saunders and Rand Paul for its own bailout.
However, Mishkin says he and many other central bankers would like to see higher interest rates. At present, inflation is in a downward trend, though that could change if the global economy picks up.
"Inflation expectations can get unhinged," Mishkin told IMCA attendees. If fiscal imbalances blow up and "fiscal authorities become dominant" and totally irresponsible, monetary policy becomes impotent. "Neither party" in America will vote for fiscal sanity and responsibility.
Mishkin also expects Yellen will continue to encourage the collegial environment that Ben Bernanke created. That's a far cry from the Greenspan Fed in which the other governors feared rapier-style putdowns from the brilliant maestro, according to Mishkin. Or the Fed led by the 6'5" Paul Volcker who would use "a baseball bat" if he had to.