Thursday, April 28, 2005

Macroblog to Roach: J'Défends!

by Calculated Risk on 4/28/2005 01:29:00 AM

In a four post series (1, 2, 3, 4) , Dr. Altig defends the Federal Reserve against Stephen Roach's most recent Fed bashing piece: "Original Sin".

Stripping aside Roach's hyperbole, I believe Roach makes three arguments:
1) that recent growth in the US economy has resulted from borrowing against inflated assets leading to "imbalances and distortions";
2) the FED should consider asset prices when setting interest rates and
3) that FED officials have made some irresponsible comments in recent years.

On the first point, I mostly agree with Roach. In my mind there is no question that the US has been buying growth with debt, both public (general fund deficit) and private (mortgage equity withdrawal).

On the second point, I believe the FED should not consider asset prices when setting interest rates, so I disagree with Roach. Much of Roach's scathing commentary is based on his belief that the FED should target asset prices.

And on the third point, I generally agree with macroblog that FED officials have, with the exception of Mr. Greenspan, been responsible in their comments, especially in recent months. I believe Chairman Greenspan has made several irresponsible and inaccurate comments when speaking for himself.

Perhaps the FED could have spoken out sooner on certain issues, like the general fund deficit and the housing bubble. As Dr. Thoma wrote in the macroblog comments concerning the 'behavior of congress over the deficit/trust fund':

"... watching out for the public interest is an important role of the Fed, but that's not something the Fed had direct control over and other than publicly denouncing such policy, they have little choice but to do their best in spite of poor policy elsewhere in government."
In my view Roach's anger is misdirected. Although I agree with Roach's general economic assessment, I believe the problems are primarily due to poor fiscal and public policy.