Tuesday, March 22, 2011

No Shortcuts to Greatness - By Vitaliy Katsenelson

Nothing defined Alan Greenspan’s tenure as chairman of the Federal Reserve Bank more than his wholehearted embrace of capitalism. With early roots in his 30-year association with the novelist and philosopher Ayn Rand, that faith grew into an unconstrained confidence in the free market and deregulation to steer the economy and ward off crises.

According to a current Fed governor, however, both Greenspan’s Fed and the Fed today have not been the stalwarts of capitalism that the Maestro believed them to be.

On March 7th, I had the great pleasure of listening to Thomas Hoenig speak at the Colorado CFA Society forecast dinner. Hoenig, the only member of the Federal Reserve Board of Governors who I respect, is the board’s lone rational dissenting voice.

After his speech, a lengthy Q&A, and a short conversation with him, I left the event even more impressed with him.

Hoeing was equally critical of both the Fed’s zero-interest rate policy and of QE2. He said these policies encourage speculation and don’t allow for price discovery, and consequently they lead to imbalances, unintended consequences, and misallocation of resources.

He said it is important to judge QE2’s success over the right time frame, one long enough to encompass not just its stimulative benefits but also its consequences. (In other words, there is a good reason why we don’t judge steroids solely based on what they do for an athlete’s performance during the race, ignoring the strokes and other health problems they often cause after the race).

Throughout his speech, Hoenig warned that there are no shortcuts to greatness in monetary policy. The Fed’s intervention in the economy will have unintended consequences, and it is impossible to know where they’ll show up.