Obfuscation is an art form in which the Federal Reserve Board excels. It follows a few simple rules:
- Never use a word or phrase that is simple and widely understood when a word is available that is less well known (e.g., “obfuscation” instead of “confusion”).
- Act as though you know what you’re talking about.
- Act as though everyone else knows what you’re talking about.
- Ignore failure and act as though you’ve succeeded. No one will know the difference.
The Fed’s expertise in obfuscation is clear in its choice of strategies that are allegedly designed to create economic growth, but are really designed to prop up the bloated stock market.
First, we had “quantitative easing.” The Fed couldn’t just call it bond buying. What does “quantitative easing” mean? Is it the opposite of qualitative easing? Or quantitative hardening? How does one go about easing quantitatively? What exactly is being eased?
The Fed couldn’t just reduce its bond buying – it had to “taper” its bond purchases.
The Fed also flirted with “forward guidance,” which, as we’ve previously explained, is simply talking about what you’re going to do without doing it. Mario Draghi, chair of the European Central Bank has perfected this technique. Too bad The Fed hasn’t, because it could have avoided buying trillions of dollars in bonds it will soon have to sell.
Now, though, the Fed has trumped even Mr. Draghi, with its new strategy of “macroprudential supervision.” The beauty of this strategy is that no one, apparently even the Fed, knows what it means.
Even The Wall Street Journal, one of the most respected financial publications in the world, admits to not knowing what it means. As George Melloan, former columnist and deputy editor, wrote this week, “A new buzzword at the Fed, frequently employed by the academic-minded (Fed Chair Janet) Yellen to describe policies available in her toolkit, is ‘macroprudential’ measures. What this expansive word means is not entirely clear, but a simple translation might be ‘muscling the banks’ to bend to Fed diktats.”
In other words, it’s another power grab. Melloan wrote that, “The 2010 Dodd-Frank law, which was enacted on the premise that banks should be punished for the sins committed by politicians, enlarged the muscle power of the Fed and other federal agencies that regulate the financial industry. None of them have been timid about using that power.”
A “Smarter Alternative?”
The Economist, which typically gets high visibility on the coffee tables of those who seek to impress, pretends it knows what macroprudential supervision is – and even attempts to explain it.
Calling macroprudential supervision a smarter alternative to the “sledgehammer approach” of using higher interest rates “to prick asset bubbles,” The Economist explains that its purpose is “to reduce instability across the financial system.”
“What do these rules look like in practice?” The Economist asks, then answers, “The modern financial system involves many different types of assets and markets, and the rules designed to safeguard it are just as diverse.”
In other words, The Economist doesn’t know what macroprudential supervision is, either. The writer identifies examples of its use in New Zealand and Spain, of all places, but concludes that, “Expecting regulators to identify bubbles in advance—and then design rules to deflate them—may be optimistic.”
Not too reassuring, but if this macroprudential thing can keep interest rates low and stock prices high, who cares, right?
In a separate attempt to take on macroprudential supervision, The Wall Street Journal brought in the best and brightest to explain it – Martin Feldstein, chairman of the Council of Economic Advisers under President Reagan, and former U.S. Treasury Secretary Robert Rubin.
But, as they note, “Neither the Fed nor any other regulatory body has laid out a comprehensive description of the potential macroprudential tools.”
Whatever the Fed means by “macroprudential,” Feldstein and Rubin believe three issues must be addressed: “First, since a wide range of assets and asset holders are involved, current tools are not nearly as broad and comprehensive as the existing range of systemic risks. Second, the situations are complex, making the design of an appropriate regime complicated and time consuming. Third, it might take considerable time for the FSOC and the relevant agencies to reach a decision to act.”
The FSOC is the Financial Stability Oversight Council, created by Dodd-Frank, which gives the Fed authority over certain non-banks. The FSOC can also recommend policy changes to regulators.
So are we any closer to defining “macroprudential supervision?” Not really. But it may help to consider what the term “macroprudential” really means. “Macro,” as in macroeconomics, means “large scale” or “overall.” The dictionary defines “prudential” as “involving or showing care and forethought,” so “macro prudential” means “showing great care and forethought” systemwide.
Isn’t that what the Fed should be doing all the time, anytime?