January's relay is the complete interview of Dallas Fed President Richard Fisher by former SEC chair Arthur Levitt on Levitt's Bloomberg show "A Closer Look." We present this at Demand Side because it is thoughtful and complete, but more because it confirms our characterization of monetary policy. Because it is also mistaken on some elemental points. To be clear, this is different from other relays here at Demand Side because we do not agree with the speakers.
Fisher IS on point in his comments here with regard to the coddling of the big banks and the penalty smaller banks pay. His idea to dump Dodd-Frank and all its lobbyist-inspired complexity and replace it with a simple guarantee on deposits only, no more, is an excellent one. Market discipline would be a lot more strict than the regulation of captured regulators.
The mistakes which we have alleged at the Fed, Fisher confirms.
The quantity theory of money. The Fed to a man does not understand that the quantity of base money has little to do with the rise or fall of the broad money supply. This in spite of the clear evidence. Base money has exploded, broad money has fallen.
Mistake two: The fear of inflation from Fed easy money. And mistake two A, the belief that some sort of exit strategy will defuse the inflation once it rears its head. Both again derive from the misunderstanding of how broad money is created, which is through the lending system, and from the idea that base money can control the broad money.
Inflation may occur -- demand pull inflation -- only when there is renewed investment. At that point the Fed might crush the green shoots, but if the demand is there the investors will find a way. That inflation derives not only from the creation of new money, but from the employment of people in investment goods production, people who bid for the product of the consumer goods sector.
Not to go too long in our introduction, but Fisher is right to question the ability to sell off the trillions of dodgy paper on the Fed's balance sheet in any sort of organized manner. Now, in its entirety: Richard Fisher of the Dallas Fed with Arthur Levitt.