From New America Panel: What Does a Liberal Member of the Federal Reserve Look Like?

The second day of the Future of the Federal Reserve event co-hosted by the New America Foundation and Roosevelt Institute is viewable online at New America and C-Span.  You can see all three panels – the first is on full employment, the second consumer financial protection, and the third the future of the Federal Reserve – at those links.

Since I think it is important that Fed vacancies are filled, I’ve been trying to understand what a strong, liberal member of the Federal Reserve would look like. We know what a liberal on the Supreme Court should look like — what about here?

Josh Bivens of EPI gave a five-point outline during the final panel at the event.  I’m going to summarize it as follows with my own observations; you should watch the video for the full thing.

1. Commitment to full employment

As Joerg Bibow reminded us in his talk, once you lose a full employment mandate it is that much harder to get the Federal Reserve to move on anything other than monetary austerity. Look at Europe.

Why full employment? Beyond wage growth, we want to see a stronger and more empowered workforce. This ensures that a fairer share of the surplus goes to workers and makes them freer from domination in the labor market. These important goals are more likely to be achieved when unemployment is closer to 5% than it is at 10%. Why the full employment mandate? Because it is necessary to balance out the conservative nature of having regional bankers represented on the FOMC.

We should ask potential candidates what their estimate of NAIRU is and how they go about understanding where NAIRU and the natural rate of unemployment is.

2. Higher inflation target

We need a higher inflation target to deal with the swings in the business cycle. We’ve had thirty years of increasingly lower inflation rates, and right now the Federal Reserve has little it is able to do to stimulate the economy.

Brad Delong makes the case for a higher inflation target at the Economist and Ryan Avent moderates his points.

Alternatives involve setting a different type of target, including nominal GDP. (See herehere, and here for David Becksworth on this topic, Scott Sumner here.) Either way, we need a target that gives the Fed flexibility to deal with severe macroeconomic shocks. The costs of 2% higher inflation are meek compared to the lost output we currently have from this Great Recession.

3. Preemptively pop bubbles

There was a consensus that more needs to be done to tame bubbles that show up because of the financial sector. The hands-off approach was predicated on the ability to clean up afterward. Now we’ve learned that the Fed doesn’t necessarily have that power and it also has political constraints on how aggressively it can try to boost employment.

4. Additional tools other than the short-term interest rate

One way to preemptively pop bubbles is through macroprudential financial regulation.  If you have two targets, you need more than one instrument. We need to bring tools like countercyclical capital requirements and financial regulations into play. Perry Mehlring and others have discussed needing the equivalent of the short-term target for the capital markets, as the interest rate reflects a financial system that no longer exists. And Joe Gagnon discussed how the regulatory side and the macroeconomic side of the Federal Reserve not only had bad communication, but also lacked a general language and worldview to work together. This is one area that needs a lot of work.

5.  Get out of the debates over the composition of fiscal policy

This was Biven’s pet peeve, and I think it is worth bringing up. The size of the federal budget and the size of the federal budget deficit are an appropriate thing for Federal Reserve members, particularly the president, to discuss. But Greenspan was too aggressive in commenting on tax cuts and assaults on the social safety net, things that are not appropriate for an independent Fed to take part in discussing.

If the Federal Reserve believes that the deficit is too large and it is affecting monetary policy, fine. But if it is suggesting closing that deficit by doing X, Y and Z, it has crossed the line into Congressional policy, using power and influence delegated for a specific responsibility to push political views. Under this requirement, the new conservative requirement that a Federal Reserve nominee can’t support tax increases for Social Security is an invalid complaint as long as the nominee understands it is not their job to support one fiscal policy over another.

What do you think? What’s missing, or needs to be taken out?

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14 Responses to From New America Panel: What Does a Liberal Member of the Federal Reserve Look Like?

  1. Mike, here’s the big question, and your chance to be the first one anywhere to answer it (a good amount of searching has found no good solid answer):

    What does happen, and who decides, when the money runs out and there’s no authority to borrow? If we only have 60% of what we need to pay for our already authorized spending (a CNN Money figure), who decides how that 60% is distributed, who gets paid and who doesn’t?

    Who decides??

    A bill is passed? What if Republicans block any bill, none passes, then how’s that 60% distributed? Who doesn’t get paid? Debt holders? Seniors don’t get their Social Security checks? Who? Who decides? The courts? The Treasury Department?

    Barkely Rosser just left this reply to me at Mark Thoma’s blog:

    Another reason the thing should be abolished. This has never been determined, although presumably the US Treasury can choose to pay some bills and not others. But there is no law about this at all.


  2. Magpie says:


    Those are your 5 proposals

    1. Commitment to full employment
    2. Higher inflation target
    3. Preemptively pop bubbles
    4. Additional tools other than the short-term interest rate
    5. Get out of the debates over the composition of fiscal policy

    And you ask: “What do you think? What’s missing, or needs to be taken out?”.

    I think in general it’s great. In particular, I like 1 and 4.

    I suggest you have a look at this post:

    Modern monetary theory and inflation – Part 1

    If those guys are right (and you are capable of judging that on you own, so I will not say anything) maybe you don’t have to accept 2.


  3. DougT says:

    This sounds great except:

    1. What do you mean by “full?” 5%? 4%? 3%? It used to be that NAIRU was defined as 6%. Really. Who decides this?

    2. What do you mean by “higher”? 4? 5%? See #1.l

    3. What do you mean by “bubble”? Gold? Social Networking stocks? Oil stocks? Agricultural land? These things all have Congressional sponsors. See #1.

    4. What other tools? Like, buying Treasury debt? Hey, maybe that’s a way out of the debt-ceiling problem.

    5. I didn’t know the Fed was in that debate. Do you want the Fed to act on monetary policy independent of fiscal policy? Sounds like a recipe for double-barreled austerity. Are you suggesting that we muzzle the Fed Chair per legislation? Greenspan, I recall, was exceptionally turgid when it came to saying *anything*? But maybe my memory is clouded. At any rate, Bernanke knows how to keep his mouth shut. Even when asked his opinion.

    These proposals all sound great. I just don’t know what they mean.

  4. Ted K says:

    Question: “what would a strong, liberal member of the Federal Reserve would look like????

    Answer: You should ask Alan Blinder’s wife what the backside of Alan’s trousers look like as he walks out the door every morning (think about it for awhile, and you might get that joke).

    Seriously, there are good examples. Janet Yellen, Alice Rivlin, Blinder. A strong argument could be made that Bernanke is not exactly Republicans “best friend” right now. Volcker is more Democrat in the sense he believes there should be more restrictions on trading desks and the separation of Investment banks from commercial banks. Your boy Peter Diamond I think will be a good one, if he can get past Shelby, Corker, and the American Bankers Association. Good luck on that last one.

    Mike, I think your arguments would be better served addressing each individual’s merits case by case (example: Diamond’s Nobel prize) than the usual liberal whiny tones that you don’t know what a left FOMC member looks like, or even creating a “checklist”. When you make a checklist it’s like you’re working at making it a political vote. You argue case by case, individual by individual. Not by crying to Mommy the game is tilted. I say that as a Democrat.

  5. PeakVT says:

    I think that’s a good list, though it comes across as overly reactive to recent events. Would the list be the same if you were writing it in 1978? Also, I would add 6) strip the FRB of a lot of its non-macroprudential responsibilities, such as clearinghouse services, though that’s not terribly important nor doable until we get a very different Congress.

  6. SPECTRE of Deflation says:

    What part of “we are broke” don’t you understand? Exponential math says it’s impossible to ever pay off the debt that we have accumulated without turning our currency into toilet paper which, unbelievably, is happening while I type this. When you include unfunded liabilities, we are done. All those non-marketable sucurities being held by the SS Administration will have to be put back to the Treasury with new issuance of Treasury paper in order to pay benefits. We are paying twice, and yet nobody says a word. This is the brave new world we live in where nobody tells the truth because it’s too painful, so we just bullshit one another until it goes boom. Liberal or Conservative won’t matter at that point, so you enjoy this academic and time wasting conversation while you can, as what comes next will have your mind on other things.

    • amileoj says:

      If you are going to complain about BS in someone else’s post, you should avoid packing so much of it into your own comment.

      Are we broke? Really? What prevents the federal government from making whatever payments it is obliged to make? What will it run short of, exactly, that will prevent this? A stash of bills somewhere? A horde of metal? Electrons?

      It’s obvious why Greece, Ireland, Spain etc. can go broke–obvious what they can run out of (Euros). It’s equally obvious why the same could happen to any state or local government the Feds are unwilling to bail out.

      But how, exactly, could that happen to the U.S. government? Do we need Euros to spend? How for that matter to Japan, Australia, Canada, the UK? How are they going to run short of something that they alone produce, and produce at virtually no cost?

      But this means printing money (i.e., increasing the monetary base) and that means hyperinflation, you say? Really? Because Japan has so much hyperinflation? Because we do? Directly in proportion to the huge increases in our respective monetary bases, right? No? So why not?

      It’s almost as if, in this brave new world we live in, nobody tells the truth because the truth is too unacceptable to the Conventional Wisdom…

      • Magpie says:


        Glad to see that not every American has fallen for that fear mongering BS.

        So, let me spell this out for those who have: the US Dollar is a fiat currency, people.

        Hyperinflation!? My back side (and yeah, anyone can ask the missus)

  7. Chris of Stumptown says:

    Re: point 1, the Federal Reserve has a doctrine on wage inflation. It will not permit the price of labor to increase faster than the general price level. To me this appears to be one of the two defining drives of the central bank, the other aversion to debt-deflation. This desire is rooted in the deeply painful inflations of the 1970s. The problems of 1976 are not the problems of 2011.

    The price of labor has been suppressed for over 30 years. It should be no surprise, then, that it is so difficult for Americans to maintain their living standards. I would like to see the Governors acknowledge this. Volcker, Greenspan, and Bernanke have all done well in vanquishing inflation. But that is not today’s burning issue. I think what I would like to see is a clear statement that this era is over, and the Fed would at the very least tolerate a period of high wage growth.

    The other thing I would like to see from a Fed governor would be bringing the public interest into the executive portion of the Federal Reserve banks. Each bank has 9 directors, 3 of which are appointed by the Governors, 3 of which are appointed by shareholding banks to represent the banking industry, and 3 of which are appointed by shareholding banks to represent the public interest. I find the latter deeply, deeply problematic. The public deserves representation and is not receiving it.

  8. SPECTRE of Deflation says:

    I explained how we are broke rather bluntly, so let me give you details dear reader. However, I explained how we were broke in the post. Including unfunded liabilities we fall somewhere between $100 and $200 trillion Dollars, and which when you use normalized rates, as ZIRP can’t run to infinity it will be impossible to service our debt. Even with our current ZIRP in place we are still paying out better than $350 Billion in Interest payments in this fiscal year. Exponential math states that there is a maximum potential in all things be they biological or man made. Once reached, a decline and demise ensue in the future. In no particular order, we are broke because:

    1. Our total debt, both public and private, now stands at better than 360% of GDP
    2. Our current total deficit is 100% of GDP
    3. Our current yearly deficit is 12% of GDP
    4. The FDIC insures $5 Trillion Dollars in Deposits with a negative balance in the fund.
    5. The non-marketable securities held by the SS Admin. are worthless

    There are plenty more that I will be happy to provide, and I didn’t even touch the mortgage fraud in the post or derivatives for that matter..

  9. Chris of Stumptown says:

    @SPECTRE of Deflation

    You use a lot of generalities and pronouns like “we are paying”, “we fall somewhere between” and so on. Who is we? Federal govt? Public sector? Net US position? What?

    I guess your broad point is that Fed govt liabilities and promised benefits exceed expected tax revenues. OK, but what does it have to do with Fed appointments?

  10. Pingback: Around The Dial – 5/18/11

  11. SPECTRE of Deflation says:

    Chris, I wasn’t general at all. In the numbered examples I was explicit regarding who owes what. Example:
    Our total debt, BOTH PUBLIC AND PRIVATE exceeds 360% of GDP.

    What part of this is not self explanatory, as my point was that this level of debt is unsustainable? During the Depression, this ratio never exceeded 270% for historical context. I’m talking about total debt.

    As for individuals, here’s an eye opener for you. In 1995, an individual’s debt to income ratio stood at 65% while in 2008 it stood at 135%. It has since fallen, but not in a significant way.

    Derivatives? Including both Private and OTC it stands at over 1 Quadrillion Dollars. Well over in fact.

    Many years ahead of schedule, SS now pays out more than it takes in. The surpluses to fill in the gaps of the budget are gone, and the worst part is the pure crap they hold will have to be put back to the Treasury which will have to issue paper on something we already paid for.

    We took in $2.2 Trillion in Receipts, and paid out $2.3 Trillion in benefits. We no longer cover the nut.

    47 % of individuals pay no Federal Income Tax at all.

    I could continue, but I hope you get the picture regarding where things stand. We are all moving around the deck chairs of the Titanic because our new paradigm is too painful to contemplate.

    “It’s hard to get a man to understand something when his job depends on him not understanding it.”

    “When a man loses everything, and he has nothing left to lose, he loses it.”

  12. wetcasements says:

    Repeal all of the Bush tax cuts and cut military spending by 30%.

    Done and done.

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