Allan Meltzer has had a long and distinguished career as an economist and scholar, making many notable contributions to monetary economics at both the theoretical and empirical levels, also writing valuable and highly regarded contributions to the history of economics and economic history, especially his 1989 book on Keynes and his recent monumental two-volume history of the Federal Reserve System. Meltzer has the added virtue of being a UCLA-trained economist, where as a student he began his long collaboration with his teacher Karl Brunner. So I take no pleasure in writing this post about what can only be described as an embarrassment, namely, the abysmal op-ed article (“What’s Wrong with the Federal Reserve?”) Meltzer wrote in today’s Wall Street Journal about the Fed and current monetary policy.
Meltzer immediately gets off to a bad start, from which he never recovers, with the following opening sentence.
By allowing its monetary policy to be influenced by elected politicians and market speculators, the Federal Reserve is putting its independence at risk.
Now you might have thought that a serious charge about the Fed’s conduct would require some supporting evidence that the Fed’s policy was being influenced by either politicians or speculators. Well, this is what seems to count as evidence for Professor Meltzer.
Consider the response to last week’s employment report for June—a meager 80,000 net new jobs created, and an unemployment rate stuck at 8.2%. Day traders and speculators immediately clamored for additional monetary easing. Even the president of the Federal Reserve Bank of Chicago joined in.
So the people that Professor Meltzer thinks are now controlling Fed policy are a bunch of day traders. This goes way past what even Ron Paul would say about who is controlling the Fed, i.e., international bankers (aka the Rothschilds). No, it’s a conspiracy of the day traders, apparently having co-opted the president of the Chicago Federal Reserve Bank. Talk about lowering the bar. But it gets worse. Let’s read on.
To his credit, Mr. Bernanke did not immediately agree. But he failed utterly to state the obvious: The country’s sluggish growth and stubbornly high unemployment rate was [sic] not caused by, nor could it [sic] be cured by, monetary policy.
OK, Professor Meltzer has discovered that the Fed is being controlled by a conspiracy of day traders working through the president of the Chicago Fed. Except that Bernanke and the FOMC (except for that guy from Chicago) did not go along with the conspirators! What then is the evidence that Fed policy is controlled by the day traders? Apparently, the failure of Bernanke to make an abject admission of the Fed’s impotence.
Now what is Professor Meltzer’s evidence for the Fed’s impotence? Let him speak for himself:
Market interest rates on all maturities of government bonds are the lowest since the founding of the republic.
This is astonishing. Allan Meltzer is widely regarded as a founding fathers (along with Milton Friedman and Karl Brunner) of modern Moneterism, one of whose basic tenets is that nominal interest rates are primarily determined by inflation expectations. Thus, low interest rates, as Milton Friedman always pointed out, are symptomatic of tight monetary policy that keeps inflation, and inflation expectations, low, as they are now. But somehow Professor Meltzer has now concluded, like the Keynesians that Monetarists once disputed, that low interest rates are symptomatic of easy money. Meltzer later invokes Friedman’s authority to support the proposition that monetary policy is an unreliable instrument for stabilizing short-term fluctuations in the economy, causing one to wonder whether his memory lapses are random or selective.
Professor Meltzer’s memory of recent economic history is also dubious. Discussing the Fed’s adoption of QE2 in the fall of 2010, he writes:
Consider also how, in the summer of 2010, the Fed allowed itself to be spooked by cries about a double-dip recession and deflation. It added $600 billion to banks’ reserves by buying up federal Treasurys and mortgage-backed securities. Today, $500 billion of those reserves remain on bank balance sheets, and most of the rest of the dollars are held by foreign central banks. Not much help to the U.S. economy. By early autumn 2010, it had become clear that fears of a double-dip recession and deflation were just short-term hysteria.
Actually, Chairman Bernanke only signaled in late August and early September 2010 that the Fed would engage in renewed quantitative easing, thereby producing an immediate market response. The renewed purchases did not begin until the autumn. What became clear in the autumn was not that recession and deflation fears were just short-term hysteria, but that quantitative easing prevented the slide into recession that had been anticipated by a sharp dive in the stock market in August 2010.
Meltzer asserts that the cause of the weak recovery is uncertainty about future tax rates, health-care costs, and the regulatory burden. One would expect that, as an accomplished empirical economist, Professor Meltzer would attempt to back up his assertion with evidence. But he apparently regards it as too self-evident a proposition to require any empirical support.
Professor Meltzer again displays a shockingly cavalier attitude toward empirical evidence with the following assertion:
Evidence is growing that many think higher inflation is in our future. One sign is the premium that investors pay to hold index-linked Treasury bonds that protect against inflation.
These claims about inflation expectations are not backed up by data of any kind, even though they are readily available. The only problem is that the data don’t support Meltzer’s claims. Breakeven TIPS spreads have edged up slightly in the last couple of weeks as fears of an imminent financial crisis in Europe have eased, but even at the 10-year time horizon the breakeven rate is barely above 2%, which is less than inflation expectations have been for most of the nearly four years since the onset of the financial crisis in 2008. And according to the estimates of inflation expectations by the Cleveland Fed, 10-year inflation expectations in June were at an all-time low, about 1.2%.
Although there is much more to criticize about this piece, it would be churlish to continue further. But I cannot help wonder why Professor Meltzer is so heedless of his reputation that he would allow his name to be attached to a piece of work so far below not just his own formerly high standards, but even below a standard of minimal competence. My only conjecture is that Rupert Murdoch is somehow responsible. Perhaps Murdoch has cast a demonic spell on Professor Meltzer. That seems as good an explanation as any.
Uneasy Money 
My interpretation is that even Free Market economists dislike free markets when the market forecasts disagree with the economist’s preconceptions.
Seriously, Meltzer has been warning of incipient hyperinflation and the need for an exit strategy since at least early 2009. He’s a complete joke.
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This crisis has made many economists “drunkards”!
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Yeah I was struck in reading his piece this morning as well-is this really one of the founding fathers of monetarism?!
Another guy who’s been an embarassment lately is John Taylor. He’s also been featured a lot in the WSJ op-ed page.
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I have more general thesis.
(1) Modern macroeconomics was kicked off in the reaction to the 1930s Depression.
(2) The 1930s Depression was a seriously abnormal event.
(3) Being framed by a seriously abnormal event, and by two charismatic economists (Hayek and Keynes) who were both significantly wrong about said event, set macroeconomics off on a deeply flawed course.
(4) How flawed is shown by economists failing around when confronted with another deeply abnormal event 80 years later.
The WSJ Op.Ed. pages are a particularly egregious example of (4). A sort bad monetary economics thinking grease trap.
This could be called “the Glasner thesis” since I came to it by reading this blog and writings by its author.
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Or, perhaps, the Glasner-Sumner thesis, since the notion that the profession had derailed came from Scott Sumner.
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More fundamentally, why do newspapers always demand tight money?
Surely newspaper owners are the first to suffer if there is inadequate demand for their papers?
Expansionry monetary policy would increase advertisement rates and circulations.
Therefore, why oh why, do our press corps, (in the UK and the US), consistently demand tight money and spend so much time decrying “money printing”?
Do they realise their inaccurate reporting of monetary policy may be damaging their businesses?
Further evidence that the world will be a better place once the last newspaper is printed.
Also you may have seen:
http://www.voxeu.org/article/britains-hacking-scandal-readers-and-shareholders-unite
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David–On Meltzer, it gets worse. Indeed, he advocated that Japan go heavy into monetary expansionism, and eschew tax cuts. See here:
So Meltzer joins John Taylor, Milton Friedman, Ben Bernanke, Fredric Mishkin and who knows who else who wholeheartedly advocated Japan go to QE—but now seem intent on undermining US monetary policy (excluding Friedman, of course).
One can only conclude Meltzer is carrying water for the GOP, and wants Obama out.
That’s fine—but one would hope that patriotism would outrank partisanship. I guess not.
I want the best monetary policy for the USA. Whoever is President.
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SHOWDOWN ON MONETARY POLICY SEEN
Another showdown on the nation’s monetary policy was foreseen in official circles today.
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One of the nation’s foremost economists told the United Press the…purchases apparently were the Administration’s final monetary plans before recourse to currency expansion. He described the purchases as “a course over an uncharted sea, the outcome of which cannot be gauged in advance.”
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“If this does not work in raising domestic prices, the only alternative is the printing of money. Even this might not work in raising prices, unless the dollar was suddenly forced down to only a fraction of its present value and people lost confidence in the currency.”
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CODES, TAXES DELAY RECOVERY, FEDERAL RESERVE CHARGES
A spirited defense was made today by Administration spokesmen against a charge by the Federal Reserve Board that the application of codes and processing taxes had retarded industrial activity.
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Secretary of Agriculture Wallace countered the Board’s charge by blaming the recession on the industries themselves.
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Officials of the Reserve Board stood firm. They pointed out their statement was based on research and statistics.
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FYI, these are excerpts from the Berkeley Daily Gazette, October 1933. Hope I tricked some people.
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“Evidence is growing that many think higher inflation is in our future.”
Actually, this is a correct statement. He says that there is growing evidence that there are many stupid people who ignore the facts about low expected inflation in our future (such as low rates he mentioned earlier). The evidence for this statement (i.e. that many think this BS) is in the WSJ, and other right-wing publications.
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Dear Dr Glasner,
Are you not harsh to Prof. Meltzer ? I am not in a good position to judge, of course, and haven’t access to that gated paper. Anyway, I thank you for providing quotes from Pr. Meltzer’s piece, for I respect him much.
As I read the quotes, he didn’t write that “the Fed is being controlled by a conspiracy of day traders working through the president of the Chicago Fed “, he just noted that he days traders were clamouring for more easing. Well, I don’t know if that is true, it could be and would be in their interest. He didn’t say that they operated through the Chicago Fed president, but that he joined the chorus.
For the independence of the Fed, that would surely be difficult to prove, and I don’t know? In Europe we had quite a lot of meeting between head of states and Jean-Claude Trichet participated. And a lot of members of governments were publicly arguing for action by the ECB, asking the bank to buy without limits government bonds. The french finance minister François Baroin was an example. The campaign’s aim was certainly to give pressure to ECB officials who could hardly have failed to hear. During Nixon’s time, according to reviews of Burns’s diary, the administration doesn’t lack means of pressure. Sure, I don’t know with the Fed and chairman Bernanke. I guess that Allan Meltzer is far-far best informed that I could be, like you are, but is it not conceivable that the Fed keep an ear to the government ? Or that it’s members are influenced by the general (except the Wall Street Journal for sure) clamor from, say, wall street ? That kind of things would for sure difficult to prove, but it could be something that you (I mean Pr. Meltzer) just know (or perhaps were told). And we are not in a courtroom.
Of course he might be wrong and you could be justified of criticising his peace for not been scholarly enough. But remember, it is only a op-ed. But to say say, nay, to suggest, that he, and other you disagree with, John Taylor (as some one said in a comment) are paid by Murdoch, or the GOP, is a big step. He was he said is bad enough to damage his reputation, why damage it further ?
That said, you post in interesting, as usual.
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David, this is a terrific critique of Meltzer’s article – I hope you and other Market Monetarists will continue to push the Fed to do the right thing. I find it very concerning that Republicans are loud (and wrong) about monetary policy, while the Democrats are painfully silent.
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Its all about incentives, is it not?
Writing for the Murdoch controlled press must pay well or get you invited to nice events – so people are willing to trade credibility for money/connections.
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Steve, He has been warning of inflation. I don’t know about hyperinflation. That’s more of an Austrian thing.
Marcus, Well, it’s done something to them.
Mike, Meltzer and Taylor are both at the Hoover Institution now.
Lorenzo, I don’t know how much influence Hayek had on the development of macroeconomics. Some of his work, done at a very high level of abstraction, without direct policy implications is very important. The pop revival of ABCT has occurred with zero input from modern macroeconomics. So I sympathize with your thesis (and am flattered to be given credit for it), but I’m not sure that it fits all the facts.
asdasdasd, Sorry but I have no clue why newspapers tend to support tight money. Actually the Financial Times and the Economist (if we count it as a newspaper) have been mildly supportive of monetary expansion.
Benjamin, Others have also pointed out the disconnect between his policy advice to Japan and his current advice.
Steve, Thanks for providing those news stories. Very illuminating.
Christiaan, That is one possible interpretation.
Olivier, Thanks for your comment. I don’t dismiss your points, and I felt some misgivings in critizing Meltzer as harshly as I did. However, he started by saying explicitly that the Fed is allowing policy to be determined by politicians and speculators, a serious charge. If he makes such a charge he should back it up, but all does is to refer to “day traders and speculators” and suggests that their position is being supported by the president of the Chicago Fed. I think that such loose language and wooly thinking is unacceptable coming from someone like Meltzer. You are right that Meltzer didn’t say that the president of the Chicago Fed is representing the day traders, but he said that the Fed is being influenced by speculators and politicians. The only indication of influence that he provides is that the president of the Chicago of Fed is supporting them. So what, I ask, was Meltzer talking about? I also agree that Fed independence is important and it has not always been respected. If Meltzer believes that Obama is influencing the Fed improperly why did he not say so? I am not aware of any such evidence. On the contrary, Obama seems to have no interest in Fed policy. The pressure on the Fed seems to be coming entirely from opponents of monetary easing who are making all kinds of veiled and not so veiled threats about what will happen if the Fed loosens monetary policy. I implicated Murdoch because it is his newspaper that is publishing this sort of drivel, and because he and his newspaper are obviously taking a very prominent role in this election. If Prof. Meltzer’s reputation suffers because of what he has written, that is his responsibility not mine.
Ravi, Thanks.
Gepap, It’s still a mystery to me why if he is writing something, Meltzer would not at least write something that made sense.
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I think you’re being a bit harsh on Ron Paul. The standard Rothbardian line I recall blames domestic rather than international financial/political forces for the Fed.
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Dr. Glasner, please give more respect to Olivier Braun. Regardless of whether Meltzer did or didn’t give specifics about who is influencing the Fed, he certainly did not say day traders were the influence. Your inference that he must have meant day traders is illogical. It’s as likely that he meant people he did not choose to mention, as that he meant people he did mention and declined to blame for influencing the Fed.
I think this is important because the sloppy reasoning casts doubt on the rest of your piece. Slop in part of an essay has its cost.
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Wonks Anonymous, I didn’t think it was possible to be too harsh on Ron Paul. When it suits them, he and Rothbard were quite prepared to calibrate their message to suit their targeted audience.
Thomas, I try to be respectful of all my commenters, and that certainly includes Olivier. In replying to his comment, I was merely explaining why I felt it was legitimate to attribute to Meltzer a conspiracy theory of day traders. His assertions about the Fed’s being influenced by speculators and politicians not only bore no relationship to any objective evidence, but no relationship to his own questionable assertions about what had transpired. I admit that what I attributed to him went outside what he himself asserted, but I was using irony to highlight the absurdity of what he was asserting. And he did explicitly include day traders along with speculators in his list of people who were clamoring for monetary easing, and presumably influencing the Fed, so it does not seem to me to be that great of stretch from what he said to what I attributed to him. You may be right, however, that I should have been more careful in my criticism, but I am not convinced that that is the case. Scott Sumner has also just pointed out that my use of the word “corrupt” in the title of the post may also lend itself to misinterpretation, and I responded to that point on his blog. Again, he may be right, but I thought that it was clear from the last paragraph of my post, the only place in which Murdoch’s name appears, that my reference to Murdoch was being made with my tongue in cheek. But perhaps I ought to have been more circumspect in using a word that might imply wrong doing.
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What a coincidence I was just talking about the Rothschilds yesterday. Why not write a piece about them? I think it would be well worth.
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Tas, Sorry, I don’t really know enough about them to say anything interesting about them.
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