Fiscal and Monetary Policy Crossroads

Fiscal and Monetary Policy Crossroads

This is a confusing time:

  • Lousy fiscal policy — way too much borrowing by the government
  • Lousy monetary policy — way too much expansion of the monetary base, and for little good reason, and funding the deficits of the government as a result…
  • Negative real interest rates on Treasuries 15 years out; that is financial repression, and that can’t happen without the Treasury and Fed conspiring to do so.
  • Low equity market valuations, but only because profit margins are abnormally high.  There are reasons to think that profit margins will not mean-revert this time, because the increase in the global capitalist labor pool is depressing wages.  Wages may remain low for a longer time than many expect.  Sorry to the laborers, but there are more of you than the globe can accommodate.  Thus I remain agnostic on high profit margins; let’s revisit the issue when wage rates rise.

Personally, I think that the fiscal multiplier is negative.  Spend money on government projects, many of which do not build value for the economy, and the economy grows slower or shrinks.

We would do better with austerity.  The economy would grow faster with a balanced budget, and a sense that government was not out of control.  Shrinking the bureaucracy and its rules, would allow the economy to grow faster.  Delegate more responsibilities to the states, particularly regulation of financial companies.  Relatively few insurers fail, which are state-regulated.  Many banks fail, which are federally regulated.  It is far easier to co-opt a single federal regulator than many state regulators.  Best yet, split all of the too big to fail banks into 51 entities, divided into the states and DC.  No more interstate branching — that’s the real problem, not Glass-Steagall.

Limiting banking to states keeps it small, Glass-Steagall tinkers at the edges, but if banks are kept small by limiting their size by states, like insurers, they won’t become systemic problems.  Simple, huh?

Much like the AT&T breakup, I think a breakup of intrastate banking would be good for the US economy.  It would unleash competition in financial services, and would eliminate systemic risk in the financial economy.  And once banking regulation is returned to the states, like insurance, we can eliminate the Fed, which has been a poor regulator of banks, and a bad manager of monetary policy.  Go back to a gold standard, or at worst a currency board.  Get money out of the hands of the government, who diverts much of the economics back to themselves.

By David Merkel, CFA of Aleph Blog