Stiglitz’s article is the latest sign that Brainard’s promotion to the chairmanship of the Federal Reserve has increased. Although Powell’s defense may be well-deserved, I am not sure whether Brainard will be better.
Stiglitz believes that the Fed has made clearer commitments to address climate change. He believes that this is their statutory duty to maintain financial stability. It is hard to deny that the Fed has tremendous power (I think it and the military are the most powerful institutions in the United States); and it is easy to think that this power should be used to tame climate change. But a slogan that sounds good is not always good in practice. After COP26, we should begin to understand that ESG investment and other “market”-oriented measures are more of a problem that keeps us in trouble: measures aimed at providing guarantees for the global externalities behind excessive consumption in the West. On the contrary, the Fed should delegate the power it usurped to a representative government. If it wants to deal with climate change, it should place this responsibility in its proper place, not on its balance sheet, but on legislation.
Stiglitz is right because the Fed’s decision has a huge distributional impact, and Powell’s tenure must have seen some of the worst effects. But as inflation begins to eat dinner at the American table, it is difficult to see how the dovish Brainard will improve the situation. She can certainly change her position, but the current sentiment among market participants is that she will postpone the interest rate hike in the second half of 2022. In addition, she agrees with the government and is seen as more adaptable to asset price growth, especially before the medium term. Let them eat the stock!
Around these parts, Brainard may have some sympathy, because she has shown some understanding and sympathy for MMT. Unfortunately, the moment of inflation is the constraint that MMT recognizes that the sovereign currency issuer has reached its limit. Unfortunately, what is needed now is the most unpalatable medicine of modern financial capitalism, the destruction of some “wealth”.
When asked about inflation, Covid-related supply chain barriers are the favorite culprit of those in power. The Fed will certainly accept this when it describes these price increases as temporary and delayed interest rate hikes. For the lack of robustness and redundancy of our physical supply chain, we obviously need to make very accurate criticisms. Some good analyses have been provided on this website. But I think these two explanations are missing something more basic and difficult to remedy.
Fifty years ago, we found ourselves in the trap of actual negative growth, and we were fighting a global conflict with a proliferating competitive system. Our response to this is deregulation and financialization. This allows us to use debt and leverage to drive future consumption. We reversed the relative decline between us and our opponents, so much so that their systems seemed to be extinct. We enjoyed sports shoes, cheap electronics, and cheap energy, all of which were repaid with debt.At every point of friction, we redoubled our efforts, actually so radical that we submitted all the power and responsibility On these issues, demands were made to the central bankers who dream of it. But the bill has expired.
Covid may be the catalyst, but I don’t believe we will see an improvement in our supply chain or inflation, even if the virus is defeated. I think what Americans and Westerners capitalize is that they will have to be familiar with lower consumption levels.
The remedy will not be to fight inflation by raising interest rates. These may temporarily support the purchasing power of currencies, but they will undermine asset prices and again cause us to reduce consumption. If it is even possible to dream of it in our current system, the remedy will not be pleasant. We need to transform from a consumer financial economy to a production financial economy. We need to destroy most of the nominal non-productive wealth and transfer the distribution of wealth in this little cake to the labor that actually produces it. We need to defend the central banking institution, not just the chairman.
If Stiglitz really believes that Brainard will oppose Powell’s current path, he should hope to see her serve as finance minister and strive to regain the power and responsibility of representing the government from the central bank.
