Brad provides his usual thoughtful analysis in responding to my post of a few days ago, wherein I waxed enthusiastic about Michael Kouparitsas' Chicago Fed Letter article on the sustainable level of the U.S. current account deficit. As is often the case, the basic disagreement comes down to assumptions about future GDP growth rates, interest rates, and so on. On these, reasonable people can disagree, and for the most part I find no fault with Brad's position.
Nonetheless, I still don't quite agree with Brad's characterization of the majority Fed position. He writes:
It sort of feels like the markets have been listening to the Fed. After all, the Fed, with some notable exceptions, has taken something of the lead in arguing that US current account deficits of the current magnitude do not pose a serious policy concern – or at least not the kind of concern that requires any action on the part of the Fed. And for some in the Fed, they don't really demand much action from the White House: If Bernanke's savings glut thesis is taken to the extreme, recent large budget deficits arguably have served the usual purpose of preventing the global savings glut from driving real US rates even lower and thus have helped to ward off an even bigger housing boom (or bubble).
I flatly reject the claim that Fed officials have taken "a lead in arguing that US current account deficits of the current magnitude do not pose a serious policy concern." Substitute "Brad" for "Mr. Roach" in this passage from one of my previous posts...
Really? Perhaps Mr. Roach missed the speeches and comments documented here, here, here, here, here, and here.
... and you have my argument. To be sure, most comments by Fed officials do not endorse the Roubini-Setser hard landing scenario, but that is simply not the same thing as "arguing that US current account deficits of the current magnitude do not pose a serious policy concern." Other than using the bully pulpit -- which many have done -- I'm not sure what else Federal Reserve officials can "demand" of the White House.
Furthermore, I don't find it particularly useful to extend Ben Bernanke's comments beyond where he clearly wanted them taken. Here is what he said:
Although I do not believe that plausible near-term changes in the federal budget would eliminate the current account deficit, I should stress that reducing the federal budget deficit is still a good idea. Although the effects on the current account of reining in the budget deficit would likely be relatively modest, at least the direction is right. Moreover, there are other good reasons to bring down the federal budget deficit, including the reduction of the debt obligations that will have to be serviced by taxpayers in the future. Similar observations apply to policy recommendations to increase household saving in the United States, for example by creating tax-favored saving vehicles. Although the effect of saving-friendly policies on the U.S. current account deficit might not be dramatic, again the direction would be right. Moreover, increasing U.S. national saving from its current low level would support productivity and wealth creation and help our society make better provision for the future.
And his perspective on the "global savings glut":
In the longer term, however, the current pattern of international capital flows--should it persist--could prove counterproductive. Most important, for the developing world to be lending large sums on net to the mature industrial economies is quite undesirable as a long-run proposition...
A second issue concerns the uses of international credit in the United States and other industrial countries with external deficits. Because investment by businesses in equipment and structures has been relatively low in recent years (for cyclical and other reasons) and because the tax and financial systems in the United States and many other countries are designed to promote homeownership, much of the recent capital inflow into the developed world has shown up in higher rates of home construction and in higher home prices... in the long run, productivity gains are more likely to be driven by nonresidential investment, such as business purchases of new machines. The greater the extent to which capital inflows act to augment residential construction and especially current consumption spending, the greater the future economic burden of repaying the foreign debt is likely to be.
This does not add up to the blithe dismissal of fiscal and current account deficits that Bernanke's critics habitually suggest.
As for expressing "the kind of concern that requires any action on the part of the Fed," what exactly would that action look like? The speech by Ted Truman to which Brad links contains this advice:
Some may argue that a more rapid tightening of the considerable monetary accommodation that is still a prominent feature of the US economy would slow the growth of output. That may occur, but the slowdown will be greater if the adjustment is compressed into a shorter period because of the sharp decline of the dollar, perhaps precipitated by China finally adjusting the value of its currency. The Fed should take out insurance by changing what it says and does.
Under one interpretation of this advice, it is exactly the position taken by, for example, Federal Reserve Bank of Cleveland President Sandra Pianalto (documented here):
How, then, should monetary policy deal with current account imbalances today? I do not think that the FOMC should take preemptive measures to address these imbalances. However, I do think that the Committee should continue to bring the federal funds rate target to a level that is consistent with maintaining price stability in the long run. If we achieve that, then we will be in a position of strength to address whatever challenges arise.
An alternative interpretation, of course, is that Truman does literally mean a preemptive strike, "over-tightening" monetary policy in a deliberate attempt to slow the economy. Thus, the central bank should engineer (with the extraordinarily blunt tools it has to accomplish such things) a restraint of GDP growth that, as it stands, is not beyond its potential pace, in an environment where employment growth has proceeded in fits and starts, to address a problem not of its making, that may or may not evolve into the worst-case scenario? I'm willing to stick my neck out and suggest that this is terrible advice.
More to follow.