Following on November 19's Fed Newbie Stephen Miran: "Banks should hold more Treasuries, less reserves".
From Compact Magazine, November 13:
When the recently appointed Federal Reserve Governor Stephen Miran spoke at the Economic Club in New York this September, he broke one of the Fed’s unspoken rules. Dissent is officially noted in the central bank’s meeting minutes, but the identity of the dissenters is hidden in anonymous “dot plots.” But Miran revealed himself to be the solitary deviating forecast, the lone “Miran dot” signaling opposition to where the Fed was heading.
He used the moment to challenge the foundations of United States monetary policy. “I think it’s important to take these models seriously, not literally,” he said. He warned that models do not take into account the scale and speed of policy changes in light of the Trump administration’s re-election. The problem with the Fed isn’t wrong technique or bad data, he suggested, but rather that the very structure of its models is embedded in the economic and political assumptions of a bygone era. The world the forecasts are trying to measure no longer exists.
If the neoliberal economic model that has prevailed since Paul Volcker’s tenure as chair of the Fed is breaking down in the Trump era, Miran is trying to sketch a post-neoliberal framework to preserve American dominance. If he is right, he may be the first major figure inside the Fed to begin thinking beyond neoliberalism.
To call Miran “post-neoliberal” means more than the Trump era GOP rejecting market fundamentalism and free trade and embracing state planning. It means he accepts that the institutional world built under Reagan and Thatcher has exhausted itself, and is asking what new tools might be required to achieve growth, stability, and transformation.
Major crises in global capitalism have given rise to new economic theories that explain the causes of the breakdown and provide new operating models. John Maynard Keynes wrote his General Theory in the midst of the Great Depression; Milton Friedman rose to prominence during the stagflation of the 1970s. Neither produced their theories out of whole cloth. Instead, they tried to explain outcomes that existing models couldn’t account for and used those failures to expose the limits of the prior orthodoxy. Keynes relaxed some of the rigid assumptions of classical economics to explain the persistent downturn of the 1930s, while Friedman augmented the popular “Phillips curve” to make sense of the era’s mix of high inflation and high unemployment.
Like these famous predecessors, Miran is trying to follow through on tendencies that have emerged in the neoliberal era in order to be ahead of the curve of changes in capitalism. His aim is not to liquidate US-led global capitalism, but to adapt it to new realities.
iran emerged in the public spotlight in the early months of Trump’s second term. Prior to that, he received his doctorate in Economics from Harvard and worked in the asset management industry until March 2020. He briefly served as an advisor in the Treasury during the final year of the first Trump administration, resigned when Joe Biden took office, and returned to the private sector to work as an analyst and strategist. From there, he began writing publicly about monetary policy.
Miran set his sights on the Fed’s abandonment of price stability after watching an uptick in inflation during the first two years of Biden’s presidency. Under Ben Bernanke in 2012, the central bank had introduced an explicit 2 percent inflation target as a way of reassuring markets that the Fed would prevent runaway inflation as well as deflation. While this may have been temporarily justified, it soon became a means to assert an alternative economic reality. For Miran, the near infinite ways of measuring inflation meant that any explicit inflation target would be subordinate to subjective “methodological quirks.” Political pressure on the Federal Reserve soon became a way of gaslighting the public that the economy was doing well when consumers felt the sting of rising prices. When the White House insisted in 2021 that rising prices were “transitory,” Miran called it “an exercise in data mining,” with officials actively massaging data to suit their policy objectives.
Behind this complaint is a deeper critique of technocracy. The neoliberal ideal of a politically neutral central bank, free of democratic pressures, had degraded into rule by models and backward-looking formulas that served to validate policies that no longer work. By committing to the 2 percent rule, one that was regularly challenged as increasingly irrational, the global economy fell into what Miran called an “overreliance on the Fed as an engine of growth.” The supposed guardians of stability had become a major source of distortion.
The overreliance on the Fed, Miran argues, meant that technocracy and politics became increasingly entangled. The Federal Reserve has been nominally independent since 1951. But following the 2008-2009 financial crisis, writes Miran, the bank’s mandate “expanded to include inherently political activities such as credit allocation, the selection of economic winners and losers, and bank supervision.” The 2023 banking turmoil, for example, was not an isolated failure but the unintended result of reforms meant to fix the last one.
Even well-intentioned reforms deepened this politicization. The 2010 Dodd-Frank Act, which essentially replaced the earlier Transaction Account Guarantee Program, codified what Miran and Dan Katz called “perverse incentives” in the federal guarantee of bank deposits. As they explain, by promising to cover losses, the legislation encourages major investors (e.g., big banks) to let distressed banks crash and be propped up by governments before buying the failed-but-now subsidized banks. In other words, a policy meant to prevent panic instead rewarded vulture-like behavior.
The 2008 rescue programs already blurred the line between monetary and fiscal power. Because the Fed’s emergency lending facilities required Treasury authorization, every crisis intervention drew the executive branch deeper into monetary management. What was supposed to be a wall between independent central banking and government spending effectively crumbled.
In a white paper co-written with economist Nouriel Roubini, Miran argued that the Treasury had come to act like a shadow central bank. Despite the Fed hiking interest rates at the end of 2021, the Treasury continued to loosen financial conditions by changing the interest-rate risk faced by holders of government debt. Simply put, even a bond with a fixed yield carries risk because market conditions such as inflation expectations or prevailing interest rates can change before the bond matures. The longer the maturity, the longer the horizon of uncertainty....
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