A dust up in Gotham reveals Fed’s frustrations with Congress
There was a tense and unscripted moment at the opulent Harvard Club of New York City this week when Richard Fisher, the otherwise elegantly spoken head of the Federal Reserve Bank of Dallas, seemed poised to insult one of the club’s good members. Fisher was the special guest speaker Wednesday evening and, no surprise, he packed the house for a vintage speech that compared Fed Chairman Ben Bernanke to Odysseus and likened Congressional lawmakers to drunken sailors. When it was over, nearly a dozen people stood to ask questions and one particular exchange – dutifully transcribed below – revealed just how frustrated are central bank policymakers with U.S. politicians whose partisan gridlock risks sending the fragile economy over the so-called fiscal cliff at year end.
Fisher, a former hedge fund manager known for his hawkish views on monetary policy and inflation, was finishing up arguing that “inflation is the most injurous tax that one can levy on people, rich or poor,” noting the Fed has a “duty to make sure it doesn’t take root.”
Fisher: “But any country that has ended up having the central bank substitute for tough decision making by fiscal authorities … you end up as Argentina, or nationalist China, or Weimar or, in the worst case, Zimbabwe. We will not let that happen – period.”
Michael Jaliman, a senior advisor at True North Advisers and a Harvard Business School MBA: “How will you prevent that from happening?”
Fisher: “I think you will prevent this from happening. I think the markets will prevent it from happening.”
Jaliman: “To be quite honest I don’t think we will prevent it from happening, and I don’t think the markets will prevent it from happening. The markets are focused on creating profits for investors – they’re not focused on the stability of the system… You’re quite aware how close things were to a complete collapse of the financial system in this country in 2008… The political parties function the same way that corporations function, which is self interest, not some larger interest, which is my observation. And if it’s not in their self interest not to come to an accommodation, and we have a falloff in GDP which is mandated through tax (rises) and spending cuts without addressing entitlement programs… There’s no real dialogue on these issues, and the country has become used to a level of prosperity that even right now is less than what we’re expecting. We have high unemployment, and there are fundamental economic problems which everyone would admit are not being addressed right now. And that could put us into a situation after the election in which we have a similar event that we faced in 2008. My question is, is the Federal Reserve prepared to be able to prevent that from happening, and to be able to step in on their own to prevent a collapse of the financial system if there is a loss of confidence?”
Fisher: “That was quite a speech. You sound like you’ve already made up your mind. If everybody depends on the central bank in this country to solve the country’s problems, we’re in deep doo-doo, to use a Bushism. I hate to be rude, but if you’re worried about this country and you’re unhappy with it, I’ll tell you who you should look at – look in the mirror in the morning. Well, you don’t shave, but whatever. And I’m not trying to be personally rude, but all I’m going to tell you is that you are responsible. Everybody in this room. You elect these people, you pay for their campaigns, you put them in office. If they cannot straighten out the fiscal problems in this country, get some new ones. Do not turn to the central bank. Because if you turn to the central bank to solve our problems we’re going to be in serious trouble, and we will have, in the end, hyper-inflation and all the disastrous outcomes that you’ve just outlined. You have the capacity to change things. I have limited powers, the Federal Reserve has limited powers.”