It’s no secret Richard Fisher, president of the Federal Reserve Bank of Dallas, is opposed to another round of quantitative easing.
Fisher, however, took his oppositional beliefs a step further, promoting a white paper by William White of the Organisation for Economic Co-operation and Development this week. The paper questions the effectiveness of ongoing Fed intervention and comes as Ben Bernanke reiterates his openness to more monetary easing.
But Fisher is simply not buying it.
“By purchasing government paper on a large scale, central banks open themselves to criticism that they are cooperating in the process of fiscal dominance,” William White wrote in the paper championed by Fisher.
The study, “Ultra Easy Monetary Policy and the Law of Unintended Consequences,” is being promoted by Fisher as a counterpunch to the current accomodative policy stance.
“Lower interest rates cannot generate wealth, if an increase in wealth is appropriately defined as the capacity to have a higher future standard of living,” White wrote. “From this perspective, higher equity prices constitute wealth only if based on higher expected productivity and higher future earnings. This could be a byproduct of lower interest rates stimulating spending, but this is simply to assume the hypothesis meant to be under test.”
The paper also questions whether wealth created by lower interest rates leads to spending and rebuts common presumptions about higher home prices equating to rising future living standards.
“The argument ignores the higher future cost of living in a house,” White argued. “Rather, what higher house prices do is produce more collateral against which loans can be taken out to sustain spending.”
One of White’s concerns in the paper is the role of central banks in the wake of the four-year period of accommodative policy.
“The actions of central banks have palpably been motivated by concerns about financial stability,” White wrote. “Going forward, it will no longer be possible to suggest that monetary policy can be uniquely focused on near term price stability.”
Click here to read the full paper.
