Fisher sees folly in Fed’s “full frontal”

September 28, 2011

Dallas Federal Reserve President Richard Fisher is not one to pull his punches. He was one of three dissenters on the Fed’s most recent move to ease policy, and has argued the move will not only be ineffective but also potentially harmful to jobs. Speaking with reporters after his refreshingly frank defense of his dissent this week, Fisher – an architect of the Fed’s new communications policy aimed at more transparency – suggested there are times when he would prefer to be a bit more demure.

Asked if the Federal Open Market Committee’s gloomy economic outlook in its post-meeting statement last week matched his own, he said: “I think the FOMC does its job to honestly state how it views things. We are in an age of enhanced transparency.”

But that’s not always a good thing, he suggested, especially when the market is not used to getting an unvarnished view. Warning that he was about to make a “bad joke” – and then proceeding with it – Fisher said:

We are an almost 100 year old institution … I don’t think that anything that’s 100 years old should give a full frontal view. We do reveal most fully what we discuss, and the markets are going to have to get used to that. It may not be a pretty view, but its a full frontal view.

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I agree completely with Mr Fisher.
More jobs would definitely increase borrowing. Easing causing inflation, would hurt jobs. Easing isn’t the only, or even the best solution, obviously. However, with unemp at 9%, the other 91% potentially can borrow.
I humbly submit my proposal:

-The Feds 2011 Economic Solution-
The aim of Bernanke’s efforts seems to be to induce growth in borrowing even if only by a little, which is better than slowing it down altogether, hypotheta-theoretically. A brief examination of the Fed’s actions just before and during the Housing collapse, which caused the global crisis in the first place, affords us a window into the light at the end of the tunnel. The solution is simple and bi-fold. Firstly, a realization that both printing money thus inducing inflation and/or further flattening the near-zero interest yield curve by buying longer maturing Treasury notes only prolongs and exacerbates the problem. The problem being that there isn’t enough Consumer Borrowing . Lowering banks and lenders interest rates doesn’t do anything significantly to make banks actually lend and borrowers actually borrow any more than they already do when rates are already low enough. (The issue of the ethics of usury in general is an entirely other subject.) Our aim should be, together with the Fed, to induce and somehow make borrowers come out in droves, to take the risks associated with borrowing and actually to make the leap of faith and borrow.
Herein lays the second part of the solution: Realization that it’s the banks, and not the Fed, that actually control the attractiveness of their products, especially when the yield curve has flat-lined and there is little to no interest to charge. The banks are the ones doing the advertising and actually reaching the borrowers. The problem is, the banks don’t make substantial revenue from the interest when the rates are so low to offer any real incentives. Hence, the solution is to raise the rates. I know, you’re thinking, he’s nuts. How can we possibly get more borrowers to borrow by offering loans at higher rates? With a higher rate alone, we can’t. However, with banks charging a higher rate per note, lenders stand to make more from each note and, subsequently, with those extra funds, offer less traditional, more progressive incentives for higher rates in the form of products and services not available to a low-interest note. Some of the product and service incentives could be, but aren’t limited, to something like borrower’s insurance; offsets to costs of moving; private low and middle income down-payment assistance programs; property upgrades and upgrade allowances, especially for distressed properties; vehicles; vehicle, home and/or property service warranties; buyer’s point-of-sale independent negotiation liaison/concierge to streamline the purchase and advocate for the borrower; cash; gift-cards; steep discounts on furniture; short term 90, 120 and 180 day move-in bill pay programs; offsets in energy; landscaping and education expense incentives. The possibilities are endless.
As long as a market for mortgage-backed securities is fueling a blood-lust to keep interest rates low so banks can warehouse, bundle and repackage loans as investments, we will remain addicted to the cycle that started it all in the first place. We must break the cycle of, and addiction to, mortgage-backed securities. We must take the baby steps and suffer the teething pains required to get ourselves back to a healthy economy. Back to an economy where banks actually lend at reasonable rates (8-12%), and can afford to hold and invest money for consumers. Where banks can also afford to offer new, neat and wonderful incentives products and services that are actually attractive to prospective borrowers and an occasional low rate in due season. We need, with the Feds help and leadership, to ween ourselves off of the lure of permanent low rates and the business model of our banks being loan-sharks with bait-and-switch ARMs, offering no other incentive to reluctant borrowers than just another low rate which borrowers can get anywhere, and making no real interest in seeing the notes they lend grow to any real maturity, pass the off as an investment with dozens of others, and sell it all off down the river.
It all starts with the Fed. Raise the rates, respectfully I submit, Mr. Bernanke, as you said you would do in October 2010 and then didn’t. Sure, it’ll be a little rough at first. What good, real recovery isn’t? Then we’ll be on the right track, and back to what the rates were before Mr. Greenspan felt he had to start lowering them. We will finally be getting back to when things were good and banks were primarily banks, not primarily investment brokers.

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