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Monetary versus Fiscal Policy, and a few observations about the Federal Reserve System Victory Bank

Monetary versus Fiscal Policy, and a few observations about the Federal Reserve System

Posted on Monday, April 02, 2012

 I attended a field meeting hosted by the Philadelphia Federal Reserve Bank last week, an annual affair with speeches by Fed economists and a featured speech by Charles I. Plosser, the President and Chief Executive Officer. He holds a lengthy and impressive list of degrees and credentials in academia, and as a Fed President sits on the FOMC that makes national decisions regarding interest rates and monetary policy. [1] The economic forecasts we heard were fairly upbeat, although there remains a lot of “overhang” in the economy because of the poor housing market and with millions of defaulted loans and foreclosures still underway. This will remain a big drag on future growth for some time.

The gist of Mr. Plosser’s speech was a reminder that there are big differences between monetary policy, geared towards fostering economic growth, stability in employment and interest rates (as mandated by Congress when it created the Federal Reserve System), as compared with fiscal policy, meaning how does society (government) generate revenue (taxes and fees) and then how and where does it choose to spend it, e.g., “guns v. butter,” infrastructure, “entitlements,” health care, education, etc. I found his comments very illuminating.

Mr. Plosser reminded us that a lot of what we see and read about the Fed unfortunately mixes these issues together, e.g., a topic like inflation that is certainly part of monetary policy can also have significant fiscal considerations, since high inflation rates may appear to reduce the government deficit, but also function like a tax that transfers wealth from one segment of the society to another. Lots of people in high places are constantly pushing the Fed in one direction or another, maybe more to promote their personal fiscal and political agendas instead of stable monetary and employment policies that benefit all of society in the long run.

The Fed also does a lot more than this, serving as a key cog in the national payment system, and as supervisor and regulator of bank holding companies under the law. Our bank holding company, The Victory Bancorp, is regulated by the Fed. I would guess that many people don’t know that the Federal Reserve System is self-funding and not supported by taxpayers.

I did feel a sense of gratitude for the opportunity to enjoy these presentations; a cautious but fairly optimistic economic update along with lots of “food for thought.”

[1] Charles I. Plosser became the Federal Reserve Bank of Philadelphia's 10th president and chief executive officer on August 1, 2006. Before coming to Philadelphia, he was the John M. Olin Distinguished Professor of Economics and Public Policy and director of the Bradley Policy Research Center at the William E. Simon Graduate School of Business Administration , where he also served as dean from 1993 to 2003. He was also a professor of economics in the Department of Economics at the University of Rochester, a senior research associate at the Rochester Center for Economic Research in the university's College of Arts and Science, and a research associate at the National Bureau of Economic Research in Cambridge, Massachusetts. He has also been a visiting scholar at the Bank of England and the Federal Reserve Bank of Minneapolis.

Plosser has lectured to academic and business audiences worldwide on topics ranging from management education to economic and public policy issues. The author of numerous academic articles and a participant in scores of professional seminars and conferences, Plosser has also served as co-editor or associate editor of three prestigious journals of economics and referee for over a dozen others. His research and teaching interests include topics on monetary and fiscal policy, long-term economic growth, and banking and financial markets, and his articles have appeared in numerous leading economic journals.
Plosser earned Ph.D. and M.B.A. degrees from the University of Chicago, and he received a bachelor of engineering degree (cum laude with honors) from Vanderbilt University.

I think he's the best Fed Reserve Chariman and proud he's in Philly.  Most troubling is that he's one of the few in the Fed who gets it.  He's often a lone wolf in terms of policy of the FOMC. It needs to shrink the balance sheet of the Fed; need to stop buying long term treasuries and mortgage backed securites and go back to short term treasuries and printing so much money where you need inflation to keep the country's debt managed.  Everyone thinks the price of gas today is a result of refining, shipping and production.....I think it's pricing based on what true multinationals think of the value of the dollar in the global arena.  It's a harbinger of hyperinflation as a result of bad Fed policy and it is sneaking up on us fast. If the price of gas and troubles in Europe isn't a good clue, what is? Politics has somewhat corrupted the Federal Reserve in pressuring them to buy our Treasuries (when no one else will) going long to keep the federal debt service as low as possible, and finance and bailout unproven and often "green" business ventures for political expediency.  Unless they get more independent, it will come crashing Milton Freedman. 
Posted by Alan Apt ( on Monday, April 02, 2012, 9:54 PM

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