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In this article, we’ll review the recent brief conversation we had on Twitter with Minneapolis Fed President Neel Kashkari. Neel is known as one of the most dovish members of the Fed. Being dovish means he’s usually in favor of having rates lowered and more quantitative easing. As you can see from the chart below, the Minneapolis Fed President got a -2 ranking which is the most dovish you can get. Neel was the only member to vote against the last rate hike. Neel makes the case that not all of those in the employment market have seen wage hikes, so the Fed should be more cautious. The problem with the Fed setting rates in the first place is the labor market is dynamic as people are always getting pay increases and pay cuts in various industries. Managing the wages of a doctor and a plumber are impossible from the top-down approach the Fed uses. The free market can adjust for every change instantly which is why the Fed shouldn’t control rates.
The best thing Neel Kashkari does is he is the only active Fed President on Twitter. He even set up a hashtag called #askneel where people could ask him about economics. Unfortunately, he ignored Fed critic Rudy Havenstein which means he’s not open to facing disagreements. Anyone who believes the Fed should have its role diminished isn’t thought of as a serious person intellectually. It’s about self-preservation for Fed members to oppose the end the Fed movement. This is the same reason why Janet Yellen is forcefully opposed to the audit the Fed legislation which is sponsored by Rand Paul.
The Twitter conversation we had started with Neel, revolved around a story from the Wall Street Journal, as you can see below.
It’s a great article about how migration among Americans is down which is hurting the free movement of labor. This gets to the point which was mentioned earlier. The labor market is different in each region, making the Fed’s top down approach ineffective. In some small towns, jobs are tough to come by because of the weakness in manufacturing. It’s also worth noting that not all jobs have been shipped overseas; some have become outdated as robots replace humans in the manufacturing workplace. There’s a few reasons why people aren’t moving from small towns to the city. They are housing costs, cultural differences, the fact that small communities support each other financially, and because many workers such as bartenders are getting licenses to do their job in their state. This shows how ridiculous licenses are. They are meant to standardize practices across the industry, but they prevent workers from moving out of state to get a better job.
The article had a pro-free market tilt which is usually the case in the Wall Street Journal. Neel Kashkari shared it probably because it had great in-depth analysis using real people’s quotes as well as statistics to back up the claims. As you can see from the image below, we responded asking about the Fed’s role in affecting housing prices. The Fed has kept the Fed Funds rate the lowest ever and it has had an easy money policy for the longest period ever. Low interest rates make debt more affordable, increasing demand, consumption and asset prices higher. The problem with this approach is that nothing lasts forever. Manipulating the business cycle to the upside, also prolongs the cycle to the downside. In a free market, rates would be determined by the savings of capital of the population. The higher the savings per capita (more well off people are), the lower the interest rate would be. If the savings rate of the population was low, as it is today, in a free market interest rates would be much higher to reflect the risk of loaning capital to a person who does not have a lot saved. The Fed has a terrible track record with this as policy makers encouraged people to get teaser variable rate mortgages in the 2000s and then Alan Greenspan increased rates, causing a massive flood of foreclosures.
Neel ignores the Fed’s role in affecting housing prices and focuses on other issues. Of course, there are many aspects that affect housing prices, but it is ridiculous for him to ignore the Fed’s role in this. It would be like a baseball player making a comment about how poorly his team is doing this season, while leading the team in strikeouts as a hitter.
Neel responded to our comment by saying that new housing supply doesn’t respond when housing prices go up because of zoning regulations. This is a great point which was made in the article. Zoning rules and other regulations make it tough/impossible to build a new homes in some cities like San Francisco. If these laws didn’t exist, supply would meet demand and prices would fall.
We responded that this was a good point. We were happy to see him be against these regulations because regulations in general limit the free market from working efficiently. We also mentioned that he was pushing the blame off Fed policy and onto other factors. He makes a half-true statement because zoning regulations do increase housing prices, but so do low interest rates. Neel should probably be more concerned with the issue he can directly affect instead of focusing on one he can’t. When the Fed has a good track record, it can criticize other policies honestly. Until then, it’s time to focus on improvement.
As you can see below, he jokingly seems to have called himself a broken clock for being correct on wanting to get rid of housing related regulations. Then we asked him what his thoughts on the ECB tightening were he didn’t respond. The ECB policy of buying 60 billion euros in bonds per month affects the Fed policy because the ECB’s guidance has currency implications and affects what the Fed’s unwind will do to the market.
We’re happy the President of the Minneapolis Fed was willing to respond to our comments. We’re also pleased that he’s against zoning regulations which increases the cost of housing. Unfortunately, Neel isn’t a true believer in free markets because he’s a member of the Federal Reserve which manipulates markets based on its models. This manipulation creates unintended consequences such as bubbles in asset prices. Because Neel is so dovish, he is supporting the policies which have created bubbles. He doesn’t learn from past failures and continues on in a futile attempt to manage the economy.