Allan Meltzer, author of the huge historical tome on the History of the Fed, is spilling his thoughts on monetary policy and after compliments to Forbes magazine for publishing this very long and incisive interview in 9 parts, we get to find out that Meltzer advocates
- an inflation peg among US, Europeans, Japanese, China at 0-2% and have others peg on to that inflation to achieve, de facto, fixed exchange rates;
- says that Euurozone should amputate the debt-killed and put them in “soft Euro” until they fix themselves;
- Reason why monetary base has been enlarged so much is because “major banks need recapitalization. The Fed is recapitalizing them”.
Of course, by being around the block for some time Meltzer can afford to be blunt so here are some additional nuggets of quoteworthy stuff.
On gold standard:
If we were to take the gold standard and go back on it, we wouldn’t stay on it for very long. Why? Because it does two things which we wouldn’t like. One is, it elevates exchange rate stability above employment stability and the public won’t accept that. So we have to be concerned about unemployment because it’s a democratic country and that’s what people want and expect. And the second thing is, every shock in the world of any importance would force us to respond.
Right now, the CPI is running between 2% or 3%, but 40% of the CPI is housing prices, so when housing prices eventually turn up, it’s not going to look so good. Is the Fed going to react to that? It will be slow. That’s the way it was in the 70’s. Why will it be slow? Because it will get pressure from the market, there’s 8%, 9% unemployment. You’re going to raise interest rates.
They’re [the Fed] paying a quarter of 1% and it is hardly different from zero. They think, they’re very committed to the idea that the way they’re going to keep inflation from rising, when they say they have a plan, what is their plan? Well, their plan is that they’re going to pay interest on reserves at one rate and at a higher rate, they’re going to lend to the banks which will set the market rate, and they’re going to keep the market rate in between those two rates… I mean, I think absolutely insane.
What caused the crisis was a policy to help low income people buy houses. And that was a policy of both administrations. Clinton started it when he appointed a man named Jim Johnson who had been Mondale’s campaign manager to Fannie Mae. Johnson decided Fannie Mae was a sleepy little agency involved in the mortgage market. He was going to make it into a big time operation and help people who didn’t have housing. And so he found people like Angelo Mozilo and they took these mortgages. Now, how dumb do they have to be to say, we’re going to give no down payment mortgages to people who have no credit record and we shouldn’t we expect a large number of defaults. Mozilo was making a fortune. We understand his incentives. He was making a fortune issuing these mortgages and selling them off to Fannie Mae. And the banks said, “Gee, you know, this is a good business.” If you hear that the MBAs from the best universities and schools in the country, Stanford, Harvard, my own school, taking these ratings, never doing due diligence, packaging them and selling them. No heroes there. What if they had said to their boss who was making a bonus on their activity that we don’t want to do this anymore? Go. You’re in the unemployment queue where you later get to say, “I was right. Not much satisfaction for most people.”