Back in the day, I was responsible for the MBA (Master of Business Administration) degree program offered by Mercer University in Savannah. It was a 14-month cohort program that met every other weekend. Students in the program largely came from Gulfstream engineers and Memorial Hospital nurses. It was a lot of fun teaching classes where some of the students mainly used the left side of their brains to solve problems while others mainly used the right side. Mixed student teams were either very creative or totally dysfunctional. In either case, it was fun.
A feature of the program was that a week in June was given to a trip to New York City to study financial markets. Morning and afternoon lectures were given by hedge fund managers, stock exchange traders, Broadway show producers, bureaucrats from the Securities and Exchange Commission, and on and on. We exploited all that New York City had to offer. It too, was a lot of fun — plus there were Starbucks on every corner.
One of the coolest parts of the week was a tour of the gold vault at the New York Federal Reserve Bank. While gold no longer drives Federal Reserve monetary policy, the vault is used to store the gold holdings of foreign countries and other agencies with holdings. To access the vault, one rides an elevator down to the bedrock of Manhattan, about eight stories below street level. There, an 8-foot diameter solid brass cylinder vault door was set into the bedrock in 1921. Located in the financial district of lower Manhattan, yet being that far below the earth’s surface, vault workers claimed that they did not feel the World Trade Center buildings fall on 9/11. Just for the experience, they will close you behind the vault door if only for a moment — a true test of the machismo of an economist’s claustrophobia.
After returning to the main floor at street level, we would get a lecture about the history of the Federal Reserve and monetary policy from someone in the public relations department. I heard this same presentation from the same person for 5 of the 6 years we ran the program. It was singularly terrible. She was not a gifted speaker, had no real knowledge of the workings or importance of the New York District Bank or of the Fed in general, and just seemed bored with her role. I imagine that she was trying, however.
On one visit we had the assistant open market account manager give a presentation during the financial meltdown. This person worked in the area of the New York Fed that conducts open market operations for the System through buying and selling of Treasury securities. Of all the tools at the Fed’s disposal, open market operations is the one most often used, discussed, and studied. Her presentation was wonderful. At the end, I had to ask a question, “Are all the forms of quantitative easing doing any good?” My question was about the instances when the Fed added massive liquidity to the economy. Her reply — no doubt in a moment of weakness was — “We don’t know. We really don’t understand what is going on.” At one moment I was stunned yet refreshed to hear an honest opinion. Even someone at the Fed had no clue to the crazy that was going on during the financial crisis.
I tell this story because I have heard that some folks in the world today believe that the Fed needs to add global warming to its policy objectives. Even some presidential candidates have taken on this mantel. When I first heard it, I did not know what to think or say. In my mind this ranks right up there with folks who think the earth is flat and/or those who are excited that ET has returned to earth to visit Elliot again.
I know that the Federal Reserve is all powerful; creates rules and policies that determine the behavior of financial institutions; when Jay Powell, Chairman of the Fed, speaks everyone listens; and on and on. When all is said and done, the Fed really has only one thing that it truly controls — the monetary base. By buying or selling anything (largely Treasury securities but could include mortgages, ham sandwiches, etc.) or by lending or not lending money to banks at the discount window (which was popular prior to World War II) the Fed changes the reserves of the banking system. The summation of bank reserves and cash in circulation gives you the monetary base. The Fed does not control the money supply and it does not control interest rates. In practice, the Fed only influences those things by controlling the monetary base. See, by increasing the monetary base the Fed can either increase interest rates or decrease interest rates. Both are possible, conditioned on the state of inflation in the economy. Variables that matter for the economy — the money supply and interest rates — are determined by the behavior of private individuals pursuing their own interests or by financial institutions pursuing profits by lending and creating deposits once the Fed has set the monetary base.
People will say that I have just oversimplified what are really complex issues and processes. My reply is that it is really very simple. Unfortunately, we have made it complex.
Then, how can the Fed influence global warming? I suspect that, in real reality and not in crazy reality, any connection between the monetary base and global warming is virtually nonexistent. Thus, the answer becomes that the Fed needs a new tool that allows it to determine who can borrow money. Under this new tool, any individual or enterprise that contributes to global warming will not be allowed to borrow money. They might promote the lady from the public relations department to take the lead on this new activity.
Extreme, yes, but I don’t know any other way to do it. The already powerful Fed will need to become even more powerful and intrusive in our lives. One day, you may need to decide if this is ok. In the meantime, being behind the closed vault, eight stories below the surface of the earth, seem pretty attractive to this claustrophobic economist.
Dr. Skip Mounts is the Dean of the School of Business and Economics at the College of Coastal Georgia. He is also a professor of economics and a research affiliate with the Reg Murphy Center for Economic and Policy Studies.