By Paul Petillo
Whoopi Goldberg has concerns over how the candidates are approaching the topic of China. Her insistence at why the Chinese influence on America is so little discussed among those running for the highest office in the land concerns me as well. In part two of our look at the adverse feedback loop, we wonder, is Ms. Goldberg concerned about whether the Chinese have the ability to translate Fed-speak and if so, are they worried?
When Federal Reserve Bank of St. Louis President William Poole explained monetary policy in a speech at Marquette University recently, he said, "I have a much simpler way of describing monetary policy. If you print money in your basement, it's called counterfeiting. If we print money it's called monetary policy. And that's literally true, we have the power to print money - that's what we do."
When former professor of economics at Columbia University and newest Federal Reserve governor Frederic S. Mishkin suggested that falling housing prices have an effect on consumer spending and that results in an economic slowdown, he was also suggesting a way to address financial instability. It must be acted upon with "timely, decisive and flexible" monetary policy.
Mishkin also points to what he calls a disruption of financial information. He asserts that money flows cannot go where they are needed because "the financial system prevents it from channeling funds efficiently to productive uses". So what does a country that helped finance a $256 billion trade deficit, up 9% from the prior year, think of this?
As to timeliness: did the Fed wait too long to begin to exercise monetary policy? A macroeconomy is influenced by liquidity and credit spreads and to a lesser degree, the information that Mr. Mishkin mentioned. The Fed has very little left in its arsenal to soften the financial shock a faltering economy can experience aside from the use of rate cuts.
The two in January helped but did, at least in hindsight seemed o have been directed not at the economy in general but at investors on Wall Street. Even market watchers are scratching their collective heads at the prolonged resilience of equities. Many claim that much of the bad news is already priced in and, most reluctantly admit that more bad news is to be expected.
On Main Street, bankers have not only turned their backs on qualified borrowers, in many instances, the mortgage rate actually rose as the Fed cut its short-term overnight rates. The stimulus package is not going to create savers or spenders. It will go towards getting-by.
The decisiveness in Mr. Mishkin¹s world is another term for good risk management. The best form of this type of management comes from a good assessment of the problem. Reacting is not what you assume would be in the economy¹s best interest. Used correctly, decisiveness acts like insurance.
Mishkin's final economic triage comes with the ability of the Fed to be flexible with policy decisions. This seems doubly difficult if the flow of information is disrupted. By this point in time, you would have expected Fed policy to begin to solidify around a central policy. The one question continues to pop up: can the Fed be all things to an economy that is not only stretched to the breaking point here at home but losing ground and economic credibility on the global stage as well and do it all at once?
Focusing on price stability and controlling inflation are all admirable policy initiatives. As Mr. Mishkin has said, a "systematic approach to risk management requires policymakers to be preemptive in responding to the macroeconomic implications of incoming financial market information, and decisive actions may be required to reduce the likelihood of an adverse feedback loop."
Next time you hear the candidates speak, listen for their thoughts on risk management. Listen for their skills at correcting what has been a long slide into a smaller role on the world stage. Listen for leadership skills that understand that stumping locally is about governing internationally. Mr. Bush acquiesced, cut taxes, encouraged consumerism and promoted spending and this allowed China to gain more economic ground both here and around the world.
Perhaps, if the candidates did offer any answer about what to do concerning China, they would risk revealing their own adverse feedback loop. James Fallows of the Atlantic Monthly magazine called it "The $1.4 Trillion Question." Whoopi just wants to know, "what about China?"
