Sunday, August 10, 2008

Jason Furman Doesn't Get It

As we have pointed out before, Barack Obama's economic advisor, Jason Furman, does not seem to have a clue about business cycles or the unique power and importance of the Federal Reserve.

David Wessel at WSJ moderates an ongoing debate on economics between Furman and, McCain economic advisor, Douglas Holtz-Eakin.

Wessel put the following question to both:

QUESTION #6: Would it be a good idea for the Federal Reserve to set a public, numerical target for inflation, as some officials there have advocated? Would it be consistent with the dual mandate Congress has given the Fed — to aim for maximum sustainable employment and stable prices

This would have been an ideal opportunity to stress the importance of the Fed, instead Furman mouthed off some platitudes about the need for Fed independence and then switched the subject away from the Fed:

Barack Obama respects the independence of the Federal Reserve and does not comment on the Federal Reserve’s policy actions. He believes that the Federal Reserve plays a critical role in price stability and in maintaining full employment.

But it’s important to understand that the Fed doesn’t act in isolation. There are many things we could be doing that we’re not that would help with both inflation and the overall economy. For example: aggressive actions to limit the fallout in the housing market, repair our financial markets, and jumpstart economic growth would ease the pressure on the Fed to be the sole tool in fighting the recession, and in the process potentially Barack Obama respects the independence of the Federal Reserve and does not comment on the Federal Reserve’s policy actions. He believes that the Federal Reserve plays a critical role in price stability and in maintaining full employment.

With over four million unsold houses in the country, Furman has to be clueless to think there is any action other than Fed money printing that will result in houses clearing at present price levels. Just what aggressive action is he talking about?

Further, the fact that he mentions, "aggressive actions... would ease the pressure on the Fed to be the sole tool in fighting the recession, and in the process potentially limit some of potential side effects from the Federal Reserve’s policy in terms of inflation and the value of the dollar," suggests he does not realize that, to date, the Fed has been sterilizing its bailout activities by either liquidating Treasuries from its portfolio or exchanging them for junk on the books of various banks. This means that to date there is ZERO inflation impact from the Fed's activities, and zero impact on the value of the dollar.

McCain's man, Eakin, also throws out a bunch of platitudes, but at least he doesn't fool himself into thinking there is some sort of non-Fed aggressive action that can be taken to turn the housing market around:

The cumulative success of the Federal Reserve over the 20th century in establishing its credibility, independence, and regulatory support of financial markets under its current dual mandate is quite impressive. Accordingly, this argues for caution in changing the statutory foundations of the Federal Reserve system, especially dictating a numerical inflation target. From the perspective of the Fed, there has been a steady evolution of the Fed in the frequency, character, and volume of its communications with market participants; steps take by the Fed under the dual mandate toward better economic performance for America’s workers and their families. The Fed itself will be best-positioned to determine if it can better meet its obligations by communicating to markets and the economy as a whole in the form of a numerical target

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