By Billie G Blair, PhD,
President and CEO, Change Strategists
There seems to be a growing expectation that Federal Reserve Chairman Ben Bernanke should be the one to pinpoint magical fixes for the economy and to implement and sustain these changes single-handedly. For example, there was high anticipation recently on the part of many in Wall Street that the Fed would offer up an additional round of asset purchases, or, in the vernacular of the street, QE3.
In response to heightened pressure for QE3 and an expectation that the FOMC (Federal Open Market Committee) meeting in August would deliver it, Bernanke signaled that he and the Federal Reserve should not be expected to take actions that were rightfully in the purview of lawmakers. That’s absolutely true. The excessive amount of pressure currently being placed on Bernanke by exerting expectations that he and the Fed should fix the ailing economy is wrong-headed. These unwarranted beliefs hold that Big Brother has the easy fixes and that they lie within Bernanke’s purview. Fortunately, Bernanke is clear about the Fed’s mandate, and he is absolutely right in disabusing those who persist in seeing him as the locus for change.
To gain some perspective on why there is the expectation for change placed on Bernanke in the first place, let’s review what has been the recent history of the Fed and of the markets. During the week of August 22nd, the market experienced the roller-coaster ride of stocks rising quickly, then tanking, then rising again—the result of what economists refer to as “moral hazard,” where investors try to bet on whether the Federal Reserve will intervene again to support financial markets. The creation of moral hazard is the result of risky investing activity carried out in the hopes that government will bail people out of the trouble they get into. This was the idea behind the government’s 2008 bailout of several banks after the collapse of Lehman Brothers. Federal reaction to a financial crisis in the markets at that time created the idea that these banks were too big to fail, and, enactment of government bailout actions, cemented the notion that bondholders were to be protected from their mistakes.
Consequently, the expectation—as well as the circumstance—of moral hazard continues apace today. As an example, the markets rose in the first three days of last week, anticipating that Bernanke would announce another monetary stimulus by the end of the week. By Thursday, there was growing fear that he would not be making this announcement, which caused the market to drop. On Friday, as Bernanke declined to make the quantitative easing declaration but instead announced the Fed’s extended meeting schedule in September (of one additional day), the markets again rose on the renewed expectation that the longer meeting signaled a willingness to move toward QE3.
These reactions and their resulting market manipulations show that it can be difficult to disentangle the markets from their growing reliance on government support. Some Federal Reserve officials remain deeply concerned about the consequences of moral hazard. These concerns have prompted individual members to point out that the Fed’s move to keep interest rates near zero for two more years is akin to propping up stocks, citing reluctance to have the Federal Reserve enact policies to protect traders and investors.
So, what is the realistic view of what the Fed can do and what is the more accurate expectation for Bernanke’s role? As a first attempt to answer this question, let’s review the technical description of the Fed’s mandate. Its duties have changed over time, but today these can be summarized as a responsibility to: 1) conduct the nation’s monetary policy; 2) supervise and regulate banking institutions; 3) maintain the stability of the financial system; and 4) provide financial services to depository institutions, the U.S. Government, and foreign official institutions.
With this information in mind, let’s next look at the rather limited possibilities of Fed actions that are evident at the present time. Three primary areas have been cited as offering possibilities for some stimulation of the economy, as well as assisting in providing more coherence to Fed policies.
These three possibilities are:
1. Inform the Marketplace of Intentions. The Fed’s guidance to the marketplace can come from having a firm plan for purchasing/selling securities, for reinvestment activities, and for setting of short-term interest rates. The long-term plan has now been determined. A first step was to end the Fed’s purchases of $600 billion of longer-term Treasury securities (completed in August). A second step is to allow its securities portfolio to gradually wind down by letting securities expire without reinvesting the proceeds. A third step will be to move toward hiking short-term interest rates. And, a final step will entail the gradual selling of its securities. Information and guidance comes by identifying the indexing of future actions to the new plan. The Fed can give public guidance on the timing of the plan’s components, particularly that of initiating shrinkage of the portfolio. An assurance that it won’t start enacting the final steps of the plan for a long time is seen as providing clarity and assisting in holding down long-term interest rates.
2. Inform the Public of Adjusted Projections. There appear to be “persistent headwinds to growth” that continue unabated. As these increase, the Fed has moved to adjust its earlier projections and to reassure the public that short-term rates will stay low for an especially long period of time (determined to be at least two years at the August meeting). This action is expected to help to hold down long-term interest rates as well as to support growth.
3. Establish a Floor. In October of 2008, the Fed attempted to gain more control over other market rates by establishing the practice of paying interest rates to banks that kept their money with the Fed on reserve, thus intending to establish a floor on market interest rates. That interest rate paid to banks to park their funds with them is now greater than the standard Fed fund’s rate, offering rate advantage and creating a large amount of cash that is not in play in the economy. The Fed could lower this rate to induce banks to seek other, economy-interactive short-term placements for their money. (At the FOMC’s August meeting, it was determined that this approach would not be pursued at this time.)
While these actions might seem modest, they are within the purview of the Federal Reserve and could be realistic options to undertake. Certainly, more dramatic moves toward change are not the responsibility of the Fed. Alan Greenspan, in reflecting upon his years as Fed Chairman, has pointed out that unintended consequences always resulted from attempts to set new Fed policies. He suggests that, if those consequences could have been anticipated, the policies enacted at the time would certainly have been altered to avoid them.
Given all the background information that we have now reviewed, it stands to reason that when Ben Bernanke is eschewing the radical change actions that are proposed to him as “preferred approaches” of the marketplace, he should be applauded rather than criticized. He is right to insist upon acting within the purview of his position. It would indeed be refreshing if we could benefit from the history of our past actions and the lessons that this history provides.
And, even better: It would be useful if we, as corporate leaders, could learn from Bernanke’s experience. There is a broader lesson that can be gained from the modeling that he has provided. For all those who head important organizations and who speak for them—executives, CEOs, corporate and governmental representatives—the message is clear: When thrust into the spotlight, be confident about your organization’s mission and its mandate. This clarity of purpose will allow all leaders to resist being manipulated into taking insupportable positions, making hasty statements, and promising actions that are in opposition to the organization’s scope.
Dr. Billie Blair is an organizational psychologist and President/CEO of the international management consulting firm, Change Strategists, Inc. She has acquired extensive leadership/management experience through positions held in corporate, government and university settings and is proud of the fact that she was mentored during doctoral work by Professor Peter Drucker. Dr. Blair is the author of two recent books on organizational change management: “All the Moving Parts: Organizational Change Management” and “Value Plus: Employees as Valuers.” She can be reached at: www.changestrategists.com.