National Lockdown Aspirations: A Bridge Too Far Even for the Fed

I   am happy to engage in constructive dialogue over what “aggressive” or “experimental” monetary policies are and are not appropriate from the Federal Reserve in these unprecedented times. I am generally supportive of the arguments that inflation expectations are justifiably low as far as the eye can see, and that emergency conditions warrant accommodative policies around interest rates. I am certainly supportive of the idea that the central bank should be the “lender of last resort,” which history has informed me is actually why we have a central bank to begin with. Dried-up liquidity in March warranted some (not all) of the emergency measures taken by the Fed, and I see that as an appropriate part of the Fed’s stated mission. I could go down the list of all the Fed has done (and is doing), and there would be plenty to commend, plenty to condemn, and even more to fear that it will be maintained “too much, for too long.” In other words, interventions from a body such as the central bank are almost assuredly distortive in the absence of a rules-based exit plan. And I promise you: There is absolutely no rules-based exit plan –- for anything.

But even if I am willing to understand their need for emergency liquidity measures, hundreds of billions of dollars of swap lines, trillions of dollars of bond-buying via quantitative easing, and all the other components of Fed interventions that have become commonplace in the new post-2008 experimental vision for central banking, there is at least one line I would like to draw:

Fed governors telling the American economy when it can and cannot be open around a viral pandemic.

Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, has hit the morning talk-show circuit to argue for a six-week nationally mandated lockdown of the most draconian variety. He has called for a “stringent and uniform lockdown in every state” and for the economy to stay on pause until this happens. He has stated that this “short-term pain” is necessary before we can reopen and called for a lockdown much more severe than the one imposed in March/April/May across the country.

Kashkari is known for having worked in the Treasury Department during the financial crisis and served as Hank Paulson’s right-hand man in devising the TARP system. He is sharp, exceedingly self-confident, and ambitious. He ran for governor of California in 2014 when no other Republican wanted to do so (losing badly, as Jerry Brown was reelected for a second term) and has kept a highly visible presence in the media ever since becoming a Fed governor in Minnesota five years ago. He is young (only 47) and does little to hide his aspirations for a greater presence on the national stage, either politically or in the central bank’s leadership.

A common criticism of central bankers is the god-like complex that being in charge of the world’s money supply can create. The arrogance required to believe one can make judgment calls on the price of money that supersede other natural market indicators comes, perhaps, with the territory, but I would suggest that this territory should not extend to issues such as national health and pandemic mitigation. Kashkari may have co-written a major article in the New York Times describing the “stringent” measures he would like to see taken with an epidemiologist, the director of the Center for Infectious Disease Research and Policy at the University of Minnesota, but from Dr. Fauci to Dr. Birx to Dr. Gottlieb to the present leadership of the CDC and NIH, no public-health professional managing this crisis is calling for anything remotely close to what he and his co-author have advocated.

The argument that a lockdown will be painful now but “could almost stop the viral fire” leaves a lot of questions unanswered. What exactly would the plan be for reopening in the six weeks that followed? And what, if anything, does this do to address the danger of a “second wave,” other than mere postponement? And worst of all, the unfathomable personal damage done to the real lives and relationships of people suffering under a national “incarceration” is given relatively little consideration. I’m also not convinced by the argument that without measures of this kind, “the economic recovery will be much slower, with far more business failures and high unemployment for the next year or two.” That is unknowable and appears to take little account of the long-term devastation to an already weakened economy that would be caused by renewing lockdowns on this scale.

To come up with such a reckless policy prescription is perhaps indicative of the thinking of many central bankers — unbridled confidence in their own views and outlooks, no matter how outside their lane such views may be. Hayek might have referred to it as a fatal conceit. Regional Fed presidents are supposed to be analysts of regional data, and allow such (economic) data to descriptively inform the FOMC’s adjudication of the national economy. What Kashkari has done here ought to embarrass the entire Fed, as it can easily be interpreted as a demonstration of the Fed as its most reckless and arrogant — even if Kashkari is merely one banker speaking for just himself. He has no business giving health advice or recommendations on health policy, ever, but this error transcends even that. The American people have a hard time believing that 0 percent interest rates are necessary for healthy economic life. But when they see someone from the Fed chiming in with utterly disastrous lockdown recommendations, it undermines the credibility the central bank will need to defend the already controversial way it is operating in areas that are within its mandate.

Kashkari’s problem is not unique to Kashkari. But might we see in him here a mere symptom of the problem with central banking itself, when it is divorced from rules and criteria that serve as both a healthy guide and useful constraint?