So why do people do this kind of behavior? For one thing, maybe we are clueless. Some of us don’t see a problem or opportunity coming until it runs right into us. Garsh honey, after being married for 28 years I didn’t know you had blue eyes. Anyway, a second reason for coming with too little too late is that you are just basically conservative. You NEVER strike first or fast. You prefer to see how things play out.
Finally there are those people who assess each problem independently. Sometimes you address the issue quickly – like when your daughter brought home that guy with the really loud motorcycle. Other times you believe a more patient approach is best.
So too little too late can occur for many different reasons. I am thinking about this after Ben Bernanke was quoted last week as saying that while he noticed that his low interest rate policy is creating financial bubbles, he doesn’t see any reason to change his policy.
His speeches make one pretty sure that important people like Federal Reserve Chairmen are studying problems judiciously and coming to very good decisions. But it is worth wondering out loud whether he is either clueless or inflicted by a habit that ALWAYS waits too long to make the right decision.
A recent report quoted in the press was very critical about Fed Policy in 2007 – faced with a slowdown in the economy, the Fed seemed to be the last one to know that a recession was taking place and needed a boost. Of course just before that the Fed was faced with about-to-explode bubbles in real estate and financial markets and closed it eyes to anything they might do about all this. Inasmuch the Fed went from a policy to stimulate the economy quickly to one that slowed it and then back to a policy to stimulate the economy. Wow – now that is frying pan to the fire kind of stuff. The Fed seemed to be the last one to know that a change in policy was needed.
Of course none of this is new. As inflation built during the 1960s and then early 1970s it seemed to take forever for the Fed to react. By the early 1970s the Fed had to jerk the economy around – so much that they finally had to give up for fear of creating an economic crisis. They admitted failure to control inflation when after being the backbone of the Gold Exchange Standard for almost 30 years, the USA unilaterally backed out of that system. Then Nixon, realizing the Fed could not solve the economic problem talked privately to his own portrait several times and decided to implement Wage and Price Controls. Of course that didn’t work. The main effect of W&P Controls was that a 50 cent candy bar was soon a lot smaller and still cost 50 cents. Apparently the W&P Controls didn’t differentiate between price and price per ounce. Lovers of Baby Ruth bars went into the streets and rioted.
We weren’t finished with inflation – it kept escalating throughout the 1970s – until the Fed finally got serious – after doing too little too late they followed that with too much too late in 1980. Remember the stories of 20% interest rates? Those are not fun stories. It pretty much wrecked us for a while.
This history shows why the Fed ought to be on top of their policies. If Bernanke is seeing bubbles forming then he would do us all a huge favor by taking out a really big and sharp needle and popping those suckers. Do it right now. Why doesn’t he do that? I don’t think he is clueless. I don’t think he needs to study this problem. I think he has a wait and see syndrome. But how much more evidence does he need? Hey mom – I see bear droppings on the front porch. I am scared. Don’t worry honey – there are no bears around here. The Ranger told me so.
Bernanke does not want to upset the applecart. The right policy now is to admit that it is time to end the low interest rate policy. But Bernanke isn't when the bubbles will burst. He doesn't want to do anything to anger investors or bankers right now. We can deal with the aftermath of the bubbles if they ever pop on their own. The Democratic Party is saying the same thing about debt relief. Paul Krugman said we can take care of exploding debt in 2030. The government can be counted on to do too little about bubbles because of politics.
That is understandable. But the Fed is legally independent of the President and Congress. The Fed does NOT have to support expansionary policy. The Fed is supposedly run by apolitical technocrats. Or did the last financial crisis change that? Has the Fed become a lackey to politicians bent on endless stimulus? I hope not. Too little too late will bring another round of too much too late. And of course another recession.