Bill White, the former chief economist at the Bank for International Settlements and my favorite central banker

 It would be an understatement to say he’s concerned.

Bill’s top fear is the Federal Reserve may get so far behind the curve it can’t ever catch up. This could happen if inflation rises faster than the Fed hikes. In that case, real interest rates would actually be moving lower.

Bill’s most interesting point is one I have made many times: central banks are overconfident in their own ability to control the economy. He says it more eloquently, so I’m going to quote him at length.

“Mark Twain said, ‘It ain’t the things that you don’t know what gets you, it’s the things what you know for sure, what ain’t so.’ And Oliver Cromwell wrote a letter to the Scottish parliament, I think it was…  And what he said was, ‘Brothers, I beg you in the bowels of Christ, think it possible that you might be wrong.’ And this problem of people holding on to false beliefs seems to me to have been around for a very long period of time. The first question, I guess, is, do we think that the Central Bankers actually have got it wrong?

“And in consequence, the economy is not understandable, and it is not controllable. Maybe controllable within certain limits, but it will not take the maximization that has been going on without having some unintended consequences that, over some longer run, will come back and bite you in the bum. And that’s precisely what’s been going on.

Most of this was during the Alan Greenspan era. The initial mistakes seemed innocent. The Fed became more accommodating to markets in the Mexican peso crisis, then later with Asian and Russian debt crises. These were indeed bad situations. The Fed had to respond, which it did, preventing the markets from imploding. 

Wall Street hailed Greenspan as a genius. But then bankers and investors came to think the Fed could manage its way out of any crisis. This was the genesis of the overconfidence Bill White talked about, and other central banks had it, too.

This went from bad to worse in 2007 as Ben Bernanke became Fed chair. A small group—not the entire FOMC—came up with the “Bernanke Doctrine” of zero rates and large-scale asset purchases. This was well before the Bear Stearns and Lehman Brothers failures.

Hoenig thinks there is a very real chance the Fed will soon make that same mistake again.

“Will the Fed stay the course? Will the Fed even keep rates where they are? Let’s say they’re 2% by summer and they’re taking out the $95 billion a month, and the market begins to have a real anxiety attack. Will the Fed stay the course?

This is my fear as well. We saw a similar situation in 2018. I was critical at the time of the Fed doing what I called a “two-variable experiment.” The Fed was tightening, markets didn’t like it, and Powell gave in.

John Mauldin 27 May 2022

https://www.mauldineconomics.com/frontlinethoughts/rock-and-a-hard-place

Bill White world’s central banks were making a mistake with their single-minded focus on monetary policy

https://englundmacro.blogspot.com/2016/07/bill-white-worlds-central-banks-were.html

An unsustainable level of private sector debt is the main factor explaining the present severe downturn, as well as many previous downturns in history. 

William White FT 2 March 2010

https://www.internetional.se/stabiliseringspolitik.htm#whiteplanb