WEBVTT NOTE The Ethics of the U.S. Monetary Policy in Response to the Financial Crisis 1 00:00:00.000 --> 00:00:07.000 As the title of my paper suggests, my paper is a moral analysis of the Federal Reserve's 2 00:00:07.000 --> 00:00:15.900 policy since the crisis began in August 2007, although a more acute phase started in September 3 00:00:15.900 --> 00:00:22.700 2008. Needless to say, there's been a lot of analysis of the Fed's actions over the 4 00:00:22.700 --> 00:00:29.520 last year and a half, but much of it has revolved around the question whether or not the Fed 5 00:00:29.520 --> 00:00:37.360 will actually succeed whether or not its policies will work in reviving the economy. 6 00:00:37.360 --> 00:00:44.600 Very little, except perhaps implicitly, but very little has been said about the ethics, 7 00:00:44.600 --> 00:00:49.280 the moral dimensions of monetary policy. 8 00:00:49.280 --> 00:00:55.200 And indeed, this is nothing new, as Guido Huelsman, I hope I'm pronouncing that correctly, 9 00:00:55.200 --> 00:01:03.520 Hulsman, as he mentioned in his recent work on the ethics of money production at the beginning, 10 00:01:03.520 --> 00:01:08.880 he surveys the moral discussion of monetary policy and finds that there's very little 11 00:01:08.880 --> 00:01:11.600 unless you go way back to the late scholastics. 12 00:01:11.600 --> 00:01:15.280 So this is nothing new. 13 00:01:15.280 --> 00:01:22.040 Monetary policy for various reasons has become a part, something that a technical clique 14 00:01:22.040 --> 00:01:35.160 This elite is viewed as having some special knowledge because of their knowledge of mathematics 15 00:01:35.160 --> 00:01:44.300 and models and their jobs to manipulate various aggregates, M1, M2, GDP, CPI and no one else 16 00:01:44.300 --> 00:01:51.920 really can talk about the ethics of what they're doing because they know what's going on. 17 00:01:51.920 --> 00:01:58.720 So my paper is designed to fill this gap, this absence of a moral dimension to the discussion 18 00:01:58.720 --> 00:02:00.760 of monetary policy. 19 00:02:00.760 --> 00:02:06.080 Now anytime you start talking about morality, you start running into the question, who's 20 00:02:06.080 --> 00:02:08.800 to say what is moral? 21 00:02:08.800 --> 00:02:15.880 That is a question I always hear from undergraduate students every time I teach a class in ethics. 22 00:02:15.880 --> 00:02:24.080 And beneath that question, of course, is this skepticism, relativism even, that says that 23 00:02:24.080 --> 00:02:33.840 unlike questions of natural science or mathematics where objective truth seems to be generated, 24 00:02:33.840 --> 00:02:39.920 ethics is a place where it's just a matter of opinion and that's it. 25 00:02:39.920 --> 00:02:44.480 And there's really not much more we can do about it except to clarify our respective 26 00:02:44.480 --> 00:02:51.400 of Opinions and perhaps tolerate each other. 27 00:02:51.400 --> 00:02:55.880 Behind this skepticism or relativism, whatever you want to call it, ultimately it's rooted 28 00:02:55.880 --> 00:03:02.760 in the idea that there is no agreement among moral philosophers. 29 00:03:02.760 --> 00:03:07.800 In the natural sciences, in math, they seem to produce agreement, therefore we feel confident 30 00:03:07.800 --> 00:03:13.080 in referring to their conclusions as objective truths, but in moral philosophy, because you 31 00:03:13.080 --> 00:03:17.760 You've got people who are utilitarian, some are Kantians, some are Sotelians, and all 32 00:03:17.760 --> 00:03:20.480 the rest, all the other perspectives. 33 00:03:20.480 --> 00:03:24.160 People conclude that there's no objectivity there. 34 00:03:24.160 --> 00:03:35.000 So to deal with this problem here in evaluating monetary policy, I propose that we select 35 00:03:35.000 --> 00:03:42.320 four major moral theories that are diversified in the sense that they have varying perspectives 36 00:03:42.320 --> 00:03:48.120 on what counts as a moral action and see if they can produce agreement. 37 00:03:48.120 --> 00:03:54.800 If they can produce agreement, then while we may not have the objectivity of Einstein's 38 00:03:54.800 --> 00:04:00.840 theories or Newton's theories, we can at least reach a point on the continuum where we're 39 00:04:00.840 --> 00:04:07.960 making statements where there's arguably at least compelling to a neutral observer. 40 00:04:07.960 --> 00:04:10.360 So that's my approach in the paper. 41 00:04:10.360 --> 00:04:19.840 I pick four moral theories, apply them to US monetary policy. If there is unanimity or 42 00:04:19.840 --> 00:04:26.560 a strong majority in favor of a particular view, I conclude then that with some reasonable 43 00:04:26.560 --> 00:04:30.920 assurance that our conclusions are binding on neutral observers. 44 00:04:30.920 --> 00:04:37.720 Now the four moral philosophies that I choose are Aristotle's Virtue Theory, Locke's Natural 45 00:04:37.720 --> 00:04:45.760 Cultural Rights Philosophy, Kant's deontological vision of morality, and utilitarianism. 46 00:04:45.760 --> 00:04:50.840 And on utilitarianism, because there's many varieties of utilitarianism, I decided to 47 00:04:50.840 --> 00:04:57.640 just go with Jeremy Bentham's view A, because his view on the subjectivity of happiness, 48 00:04:57.640 --> 00:05:03.640 because he argues that happiness is really just a positive balance of pleasure over pain, 49 00:05:03.640 --> 00:05:07.480 and pleasure is whatever the person thinks it is, and same with pain, and there's no 50 00:05:07.480 --> 00:05:12.120 There's no objective way to evaluate pleasure and pain, which John Stuart Mill, another 51 00:05:12.120 --> 00:05:14.640 utilitarian actually argued for. 52 00:05:14.640 --> 00:05:20.760 So I decided to go with Bentham, also because Bentham's views actually are ensconced within 53 00:05:20.760 --> 00:05:27.120 the economics profession, or at least the orthodox understandings of economics. 54 00:05:27.120 --> 00:05:30.000 So those are the four theories. 55 00:05:30.000 --> 00:05:35.360 They're very different in the sense that some emphasize duty, some emphasize rights, some 56 00:05:35.360 --> 00:05:42.400 Some emphasize happiness, guiding one's actions by the good, others emphasize the notion of 57 00:05:42.400 --> 00:05:46.640 guiding one's actions by moral principle, by the right. 58 00:05:46.640 --> 00:05:49.600 Some focus on the individual, some focus on society. 59 00:05:49.600 --> 00:05:57.520 So my thinking is that if we can get unanimity out of this sample of four theories, each 60 00:05:57.520 --> 00:06:03.000 with very different fundamental starting points, different assumptions about human nature and 61 00:06:03.000 --> 00:06:09.560 and the Nature of Morality, then maybe we've got a sound basis upon which to evaluate the 62 00:06:09.560 --> 00:06:10.960 Bernanke Fed's actions. 63 00:06:10.960 --> 00:06:15.800 Now, in my paper, I summarize Bernanke's monetary policy. 64 00:06:15.800 --> 00:06:21.040 I do so on the basis of various speeches he's given over the last year. 65 00:06:21.040 --> 00:06:24.200 He's done a number of them and usually he repeats the same analysis. 66 00:06:24.200 --> 00:06:34.240 He usually organizes the Fed's actions into three different prongs, if you will. 67 00:06:34.240 --> 00:06:39.320 One is that they lowered rates, we all know about that, if I remember it started at 5.25% 68 00:06:39.320 --> 00:06:46.080 before the whole thing started and progressively came down and now we're down practically at 69 00:06:46.080 --> 00:06:47.080 zero. 70 00:06:47.080 --> 00:06:53.440 It's really the most dramatic lowering of rates in the history of the Fed. 71 00:06:53.440 --> 00:06:59.800 The second prong of the Fed's monetary policy response to the crisis has been the provision 72 00:06:59.800 --> 00:07:01.000 of liquidity. 73 00:07:01.000 --> 00:07:06.840 Here the Fed has been following the playbook set out by Walter Badgett in Lombard Street, 74 00:07:06.840 --> 00:07:10.520 a 19th century book. 75 00:07:10.520 --> 00:07:14.320 And in that book, Badgett argued that if you have a crisis, you're just supposed to throw 76 00:07:14.320 --> 00:07:19.840 liquidity into the system so that people have an assurance that if they need it, they can 77 00:07:19.840 --> 00:07:20.840 get money. 78 00:07:20.840 --> 00:07:27.800 Assurance, then they'll be less likely to seek liquidity. And there have been 79 00:07:27.800 --> 00:07:32.040 various measures here. They've extended the discount window in terms of the 80 00:07:32.040 --> 00:07:37.160 amount of time that they provide loans to institutions. They've accepted a wide 81 00:07:37.160 --> 00:07:42.760 variety of securities. They've taken action to support the commercial 82 00:07:42.760 --> 00:07:49.000 paper market, the money market funds. So that's the second prong. And then the 83 00:07:49.000 --> 00:07:54.240 The third prong, harder to categorize, the best way of putting it is that here the Fed 84 00:07:54.240 --> 00:07:59.400 is trying to deal with the systemic issues, the overall structure of the financial system 85 00:07:59.400 --> 00:08:05.800 and in this part of the policy response, the Fed, for example, guaranteed $29 billion of 86 00:08:05.800 --> 00:08:13.600 securities that Bear Stearns had on its balance sheet to facilitate the takeover of its takeover, 87 00:08:13.600 --> 00:08:22.600 by Barry Stern's Takeover by J.P. Morgan. You got the AIG money here, which now I think 88 00:08:22.600 --> 00:08:30.060 goes up to 150 billion last week. They got another injection. And they've also sought 89 00:08:30.060 --> 00:08:36.040 to support the mortgage security market, trying to get mortgage rates down, buying Fannie Mae 90 00:08:36.040 --> 00:08:41.080 and Freddie Mac mortgages. And there's talk, but my understanding that it hasn't become 91 00:08:41.080 --> 00:08:48.080 The Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit 92 00:09:11.080 --> 00:09:17.080 The Federal Reserve, fiat money, fractional reserve banking, Human Action, Man Economy and State, The Theory of Money and Credit 93 00:09:41.080 --> 00:09:46.480 PowerPoint, but I wanted to show you an image of, it's not even a hockey stick, the way 94 00:09:46.480 --> 00:09:51.520 Al Gore shows the famous hockey stick, it's essentially vertical, the monetary based move 95 00:09:51.520 --> 00:09:56.320 and most of that since the fall of 2008. 96 00:09:56.320 --> 00:10:03.400 Now so far it really hasn't percolated into the system, M2 is starting to percolate a 97 00:10:03.400 --> 00:10:10.400 bit, M2 is a broader definition of money supply, includes checking deposits and savings deposits, 98 00:10:10.400 --> 00:10:18.560 And the reason why it hasn't flowed into the financial system as of yet is because commercial 99 00:10:18.560 --> 00:10:23.760 banks are very nervous about their capital asset ratios, so they're very wary of lending. 100 00:10:23.760 --> 00:10:26.200 Also, there isn't a lot of loan demand out there. 101 00:10:26.200 --> 00:10:30.820 It's not like many people are actually going in and asking for money. 102 00:10:30.820 --> 00:10:33.720 People are generally retrenching. 103 00:10:33.720 --> 00:10:42.080 So but if once the economy does revive and one hope it does and banks start using some 104 00:10:42.080 --> 00:10:48.280 of this money on reserve and we go from 110 or 120% reserve system, whatever we have now 105 00:10:48.280 --> 00:10:55.780 to the more normal situation, then this whole thing is the money will, the money supply 106 00:10:55.780 --> 00:10:58.200 will could literally explode. 107 00:10:58.200 --> 00:11:04.720 I mean, given the move in the monetary base, the implications for the broader aggregates 108 00:11:04.720 --> 00:11:07.240 of money are actually quite scary. 109 00:11:07.240 --> 00:11:14.120 Now, the Fed assures us, i.e. Ben Bernanke assures us that they'll mop up this liquidity 110 00:11:14.120 --> 00:11:19.200 as soon as the signs emerge that the economy is doing better. 111 00:11:19.200 --> 00:11:22.760 But I would argue that it's unlikely that they'll do so. 112 00:11:22.760 --> 00:11:27.080 Politically, it'll be very difficult for them to do so because once the economy starts 113 00:11:27.080 --> 00:11:31.440 Reviving and they take money out of the system, they're going to get complaints from Congress 114 00:11:31.440 --> 00:11:34.360 and Wall Street that they're nipping or recovering the bud. 115 00:11:34.360 --> 00:11:36.040 Their record of doing so isn't good. 116 00:11:36.040 --> 00:11:41.440 In 2001, 2002, they were making the same sort of argument that we're going to take money 117 00:11:41.440 --> 00:11:44.780 out of the system, but they didn't, at least not quickly enough, and that led to the real 118 00:11:44.780 --> 00:11:46.380 estate boom. 119 00:11:46.380 --> 00:11:50.720 And then there's also the point, too, that Peter Bernholz makes in his book on inflation 120 00:11:50.720 --> 00:11:55.400 on monetary regimes, which he points out that all inflation is ultimately rooted in huge 121 00:11:55.400 --> 00:12:00.440 huge budget deficits which political officials feel compelled to monetize and of course we're 122 00:12:00.440 --> 00:12:06.080 looking at, given the budget projections of the current Obama administration, we're looking 123 00:12:06.080 --> 00:12:12.320 at huge deficits, percentage of GDP, something we haven't seen since World War II. 124 00:12:12.320 --> 00:12:18.540 So given that we're looking at inflation, that's the assumption I work with in applying 125 00:12:18.540 --> 00:12:19.540 the Four Moral Theories. 126 00:12:19.540 --> 00:12:22.920 Let me quickly go through the application of the Four Theories. 127 00:12:22.920 --> 00:12:29.880 Aristotle argued that morality is best evaluated by looking at the virtues. Morality is about 128 00:12:29.880 --> 00:12:35.760 cultivating a good character, developing certain virtues. There are many virtues that Aristotle 129 00:12:35.760 --> 00:12:44.600 talks about in the Nicomachean Ethics, but two are especially germane. One is liberality, 130 00:12:44.600 --> 00:12:49.240 which has to do with the giving and receiving of money. Basically, Aristotle had sort of 131 00:12:49.240 --> 00:13:14.240 Aristotle has two definitions of justice, commutative and distributive. Commutative 132 00:13:14.240 --> 00:13:17.200 has to do with reciprocity in transactions. 133 00:13:17.200 --> 00:13:23.080 If you add money to the system, what will happen is that it doesn't all come in at once. 134 00:13:23.080 --> 00:13:27.140 The people who get the money first have an advantage in transactions because they'll 135 00:13:27.140 --> 00:13:32.720 be able to use the money at prices that don't fully reflect the inflation and they'll get 136 00:13:32.720 --> 00:13:35.600 the better in transactions. 137 00:13:35.600 --> 00:13:40.400 So the inflation will create a lack of reciprocity in transactions. 138 00:13:40.400 --> 00:13:45.600 Not to mention that inflation will cause redistribution of income and wealth. 139 00:13:45.600 --> 00:13:50.200 People who are on fixed incomes who have most of their assets in paper will lose out to 140 00:13:50.200 --> 00:13:54.880 those who have money and hard assets or who have ways of indexing their income. 141 00:13:54.880 --> 00:14:00.400 So this redistribution takes place without any reference to merit, which violates Aristotle's 142 00:14:00.400 --> 00:14:01.400 theory. 143 00:14:01.400 --> 00:14:05.440 Locke, this one's a fairly simple one to apply. 144 00:14:05.440 --> 00:14:07.400 Locke was a proponent of property rights. 145 00:14:07.400 --> 00:14:11.240 I won't go into the full story of how he backs that up, although it actually has a lot to 146 00:14:11.240 --> 00:14:18.560 do with the invention of money, and clearly inflation undermines our property rights insofar 147 00:14:18.560 --> 00:14:24.680 as the government is taking part of our wealth away. 148 00:14:24.680 --> 00:14:31.860 With Kant, Immanuel Kant, his theory of morality is based on the categorical imperative. 149 00:14:31.860 --> 00:14:33.380 This has two parts. 150 00:14:33.380 --> 00:14:44.060 One part is, before you do anything, conceive whether it could be universalized, i.e. made 151 00:14:44.060 --> 00:14:52.100 into a universal rule, and could it still be logical in making it universal. 152 00:14:52.100 --> 00:14:54.620 And I would argue no with inflation. 153 00:14:54.620 --> 00:14:58.740 If you were to universalize the rule, which the Fed is applying here, whenever there's 154 00:14:58.740 --> 00:15:02.860 a crisis, whenever there's economic difficulties, we're going to pump up the money supply dramatically. 155 00:15:02.860 --> 00:15:09.620 I would argue that that's logically contradictory because in doing so, you're effectively undermining 156 00:15:09.620 --> 00:15:10.980 the meaning of money. 157 00:15:10.980 --> 00:15:16.540 Money has a significance because the government artificially restricts its scarcity, but once 158 00:15:16.540 --> 00:15:23.060 you universalize this rule that the government, whenever it feels that there's a crisis, then 159 00:15:23.060 --> 00:15:27.700 you're undermining money no longer is something with a command over goods and services, but 160 00:15:27.700 --> 00:15:31.620 now becomes something that just a piece of paper. 161 00:15:31.620 --> 00:15:35.620 Finally, utilitarianism, this I would argue is really what the Fed is operating under 162 00:15:35.620 --> 00:15:37.980 though they're not fully conscious of it. 163 00:15:37.980 --> 00:15:43.300 They're worried about deflation and I won't go into the full story about how they see 164 00:15:43.300 --> 00:15:45.260 why they're so concerned about deflation. 165 00:15:45.260 --> 00:15:48.460 They would argue ultimately that deflation will lead into this sort of vicious spiral 166 00:15:48.460 --> 00:15:52.300 where prices go down, layoffs occur, prices go down further. 167 00:15:52.300 --> 00:16:00.520 I point out that by adding money to the system, you are avoiding the economy from doing the 168 00:16:00.520 --> 00:16:02.000 and Necessary Restructuring. 169 00:16:02.000 --> 00:16:06.840 I would also argue that you're probably going to make the economy much more cyclical, much 170 00:16:06.840 --> 00:16:15.200 more volatile, because at some point the Fed is going to have to come in. 171 00:16:15.200 --> 00:16:20.480 And finally, deflation, historically speaking, is not as bad as people think, so that's basically 172 00:16:20.480 --> 00:16:20.920 my paper.