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A (Fantasy) Interview With Our Fed Chair

Question:  When will you next raise rates, and how high do you imagine you’ll need to take them in this cycle?

Answer:  Rates are best determined by the free market’s balance of supply and demand for capital.  In fact interest rates are actually the cost of money, and it makes absolutely no sense for the Fed, or any other entity, to dictate what that cost ought to be by overriding the market itself.

Question:  Aren’t you worried that with rates as low as they are today that inflation could be created that could run out of control one day?

Answer:  Again, let me reiterate my complete faith in the market’s ability to react to supply and demand dynamics.  If and when the economy heated up, which there are no signs today, then the demand for borrowing would naturally rise as companies expanded to meet growing demand for products, and lenders would naturally raise rates.  This natural process would staunch demand at the naturally correct place, thus cutting off market excesses and leading to a natural curtailment of inflation and even growth.  This ebb and flow of economic vibrancy is part of the natural cycle, and for the Fed to interfere with it makes no intellectual sense.

Question:  Are you worried that in today’s ultra-low rate environment banks cannot make a suitable profit?

Answer:  Banks are private enterprises, with shareholder ownership and executives who are heavily motivated to generate profits.  This is not the job of the Fed, nor should it be.  Banks, like all businesses, must figure out business models that are profitable, and react intelligently to the realities of the markets within which they operate.  Those that fail to do so will naturally go out of business.  As the protector of the soundness of the American financial system, and the regulator of the banking industry, it is our role at the Fed to insure that depositors as well as taxpayers who are backstopping those deposits through their collective guaranty of deposit insurance are never harmed by the bad business decisions of bankers.

Question:  Are you worried about the effects of today’s ultra low rate environment upon retirees, who are dependent upon their investments generating a suitable return in order to live well in their older years?

Answer:  I am indeed very concerned, as a person who is entering my elder years as well as being a member of the financial management of our country.  However, the seeds of our ultra low rate environment have little to do with the Fed, and ultimately mostly to do with the complete lack of financial responsibility of our elected officials, who have run up annual deficits and national debts that simply could not be serviced at higher rate levels without causing major societal dislocations.  It is true that the Fed has played a part in orchestrating rates lower, yet the pressure to do so emanates from our awful fiscal policies and a general unwillingness on the part of our political leaders to confront the nation in an honest manner.

Question:  What mistakes of the Fed would you like to correct?

Answer:  The Fed has been run by academic economists with little if no input from those with real life market experience.  This has led to a litany of errors, mostly the result of our inclination to look backwards in order to forecast things like growth.  With rates at near lows, having declined about 1,500 basis points in the past 30 years, history is unlikely to repeat itself, so we must stop looking backwards and begin to focus on the realities of today’s financial world.  We must balance our academic approach with a heavy dose of input from those who have lived in the markets and understand it from a practitioner’s sense.

Question:  What is your goal for the Fed in your term as Chair?

Answer:  The Fed ought to be a protector of the financial system, limiting and governing risk taken by banks so as to not ever risk imposing bailout costs upon the taxpayer.  The Fed ought to help educate our society on finance.  Mostly, I would like to end the notion of the Fed as a savior, which it can never really be, and to avoid as best as possible intervening in markets.  There are ups and downs in life as well as in markets, and important lessons to learn from the downs.  It would be wrong on most every level for the Fed to intervene and try to unnaturally stem the effects of a downturn, as such efforts would at best only delay those effects and may very well amplify them.

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