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Richard Fisher on QE3 [ClearOnMoney]
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Richard Fisher on QE3

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Commentary

Richard Fisher on QE3

21 Sep 2012 by Jim Fickett.

On Wednesday, Richard Fisher, head of the Dallas Fed, made some cogent remarks on the latest Fed policy. Although he has a degree in economics, he explicitly states that he is commenting as a market realist and not an economist. Fisher says (1) there is no transmission mechanism by which QE3 will stimulate demand, (2) no one knows how or whether we can reverse course, (3) the bigger problem is the debt being run up by Congress. He says all this rather well; the speech is worth reading.

My perspective is thus framed from the viewpoint of an engineer, an MBA and a former market operator—not as a PhD economist. For most economic theoreticians, hundreds of billions, or even trillions, of dollars are inputs into a dynamic stochastic general equilibrium model and other econometric equations. To a banker, businessperson or market operator, these are real dollars that have to be thought of within the framework of a transmission mechanism that needs to get the money from its origin at the Fed into the real economy with maximum efficacy. My focus tends toward the practicable—how to harness theory to devise a workable solution to the problems that confront a central banker. There are many superb PhD theorists among the 19 members of the FOMC and support staff. There are only a handful of us—four, to be exact—who have worked as bankers or in the financial markets. …

We are blessed at the Fed with sophisticated econometric models and superb analysts. We can easily conjure up plausible theories as to what we will do when it comes to our next tack or eventually reversing course. The truth, however, is that nobody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. And nobody—in fact, no central bank anywhere on the planet—has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank—not, at least, the Federal Reserve—has ever been on this cruise before.

This much we do know: Our engine room is already flush with $1.6 trillion in excess private bank reserves owned by the banking sector and held by the 12 Federal Reserve Banks. Trillions more are sitting on the sidelines in corporate coffers. On top of all that, a significant amount of underemployed cash—or fuel for investment—is burning a hole in the pockets of money market funds and other nondepository financial operators. This begs the question: Why would the Fed provision to shovel billions in additional liquidity into the economy’s boiler when so much is presently lying fallow? …

In the current tumultuous economic sea, facing strong headwinds common in the aftermath of financial crises and balance-sheet recessions, our desired port is increased employment. …

Surveys of small and medium-size businesses, the wellsprings of job creation, are telling us that nine out of 10 of those businesses are either not interested in borrowing or have no problem accessing cheap financing if they want it. The National Federation of Independent Business (NFIB), for example, makes clear that monetary policy is not on its members’ radar screen of concerns, except that it raises fear among some of future inflationary consequences …

With regard to business fixed investment and job-creating capital expenditures (capex), the math is pretty straightforward: Big businesses dominate that theater. Most all of these businesses have abundant cash reserves or access to money, many at negative real interest rates. I have repeatedly reported to the committee that the CEOs I personally survey will simply not be motivated by further interest rate cuts to invest domestically—beyond their maintenance needs—in job-creating capex. In preparing for this last FOMC meeting, I specifically asked my corporate interlocutors the following question: “If your costs of borrowing were to decrease by 25 or more basis points, would this induce you to spend more on job-creating expansion?” The answer from nine out of 10 was “No.” …

When I raised this point inside the Fed and in public speeches, some suggested that perhaps my corporate contacts were “not sophisticated” in the workings of monetary policy and could not see the whole picture from their vantage point. True. But final demand does not spring from thin air. “Sophisticated” or not, these business operators are the target of our policy initiatives …

If you want to save our nation from financial disaster, may I suggest that rather than blame the Fed for being hyperactive, you devote your energy to getting our nation’s fiscal authorities to do their job. …

Just recently, in a hearing before the Senate, your senator and my Harvard classmate, Chuck Schumer, told Chairman Bernanke, “You are the only game in town.” I thought the chairman showed admirable restraint in his response. I would have immediately answered, “No, senator, you and your colleagues are the only game in town. For you and your colleagues, Democrat and Republican alike, have encumbered our nation with debt, sold our children down the river and sorely failed our nation. Sober up. Get your act together.