Doug Noland’s Credit Bubble Bulletin – Paying for the Past: Lindsey, Fisher, Greenspan Insights

wallstreetexaminer.com / by Doug Noland • May 24, 2015

This is a syndicated repost courtesy of Credit Bubble Bulletin. To view original, click here.

The Peterson Institute for International Economics this week held its sixth annual “Fiscal Summit,” a wide-ranging and critical discussion of issues facing our nation. I have highlighted comments from a panel discussion, “Paying for the Past: How Will Rising Interest Costs Affect Economic Growth?,” with former Fed governor Lawrence B. Lindsey, former Dallas Fed president Richard W. Fisher and former Fed chairman Alan Greenspan (moderated by Bloomberg’s Betty Liu).

Lawrence Lindsey: “We’re delaying a normalization of rates way, way beyond what is prudent. We have a monetary policy that’s now in place that was adopted for the crisis conditions of 2008 and 2009. This summer we’re going to be getting the seventh year of this recovery. It’s been a lousy recovery, but it’s still the seventh year of a recovery. That is totally inappropriate. The unemployment rate is essentially at what economists call “NAIRU” [Non-Accelerating Inflation Rate of Unemployment]… When I went to school, you’d be laughed out of the classroom if you said the right interest rate when unemployment rate was five four [5.4%] was zero – it was just the most preposterous thing you could imagine. Or that the Fed should have quintupled its balance sheet in five years. We’re at the point of absurdity. Maybe it made sense when you had a crisis. It does not make sense now. At some point what is going to happen – and this gets to my eight or nine cataclysmic number [on a scale of 1 to 10] – is that we’re going to get a series of bad numbers – a little higher inflation, higher average hourly earnings or whatever – and the market is suddenly going to say, “Oh my God, they are so far behind the curve that they will never catch up.” And the market is going to force an adjustment on the Fed that will be wrenching. That’s the cataclysmic outcome. If the Fed were to get a little bit ahead of the curve – or even maybe move a little bit closer to the curve – that’s the best we can hope for – we would mitigate that.  We would phase into it gradually. And that’s why so much is at stake in the monetary policy that we adopt now…

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