The late economist Milton Friedman compared money creation’s devil-angel nature to alcoholism, with the hangover arriving well after the initial buzz. Likewise, the pain of sobering up comes before the benefits of sobriety.
Powell should help America detox from the easy-money binge, but his incentive is to give her the hair of the dog in the form of low interest rates and freshly created money.
Some may think this scandalous and novel, but we often forget that bureaucrats are people, susceptible to incentives like everyone else. And America has been here before. Today’s Fed is likely repeating the catastrophic mistakes of the 1970s.
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When it had nearly vanquished inflation, the Fed returned to creating money. That brought even worse inflation, and necessitated Fed Chair Paul Volker’s shock treatment, which made the back-to-back recessions of 1980 and 1981-82 ones for the record books.
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It was as if Volker was trying to atone for his mortal sin of persuading President Richard Nixon to end the gold standard almost eight years to the day before he took the helm at the Fed. For the eight years thereafter, while the Stars and Stripes hung over the Eccles building, Volker might as well have flown the Jolly Roger – he took no prisoners.
That was likely why even President Ronald Reagan couldn’t stomach Volker and replaced him with Alan Greenspan in 1987, a man whose easy-money policies eventually created the first too-big-to-fail bailout by the Fed (Long Term Capital Management) and housing bubble with the subsequent financial crisis.
People like Powell are the rule; even Volker was only the exception later in his career. Perhaps that’s the best argument why institutions like the Fed should have as little power as possible.
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E.J. Antoni is a public finance economist at The Heritage Foundation and a senior fellow at the Committee to Unleash Prosperity.
