Per se: adv. By or in itself, themselves, or (now rarely) himself or herself; without reference to anything (or anyone) else; intrinsically.
Oxford English Dictionary
The gathering of the members of the American Economic Association (AEA) at the academically most interesting time in their profession, even though saying so could be both heartless and ironical because it would be similar to watching the earth blow up from a distant planet in a solar super nova to analyze its physics, appears to have motivated the profession to reflect more openly for the first time in recent memory on the validity of the application of their dismal ideas. On the one hand, they seem to be lamenting the asteroids they are hurling at the economy to resolve its problems, and on the other hand, they are anxious about saving the dinosaurs from extinction. The opportunity cost could be extinction: the murder of Abel the homo sapien by Cain, the homo economicus.
The trouble the AEA is in is one every engineer is taught as a matter of basic training, especially those who have studied thermodynamics: boundary conditions. What may be valid within a pre-defined set of system constraints may not perform as expected once the boundary conditions change. What may be valid per se, may not be valid in its larger context. This is also the problem with monetary policy or any policy for that matter.
The star attraction of the red carpet club in Atlanta, Georgia was their executor-in-chief, Ben Bernanke, who, as any economist-turned Fed Chairman or Secretary of the Treasury is, also the object of subliminal envy: in a crisis, economists would both want and not want his job, at the same time, similar to quantum quirkiness. It is the landscape of monetary policy as Alan Greenspan, his predecessor had pointed out also to a gathering of economists at another esteemed conference: at Jackson Hole, Wyoming, the annual ritual conclave of conservative central bankers.
This landscape, however, is not one of uncertainty, which has a specific meaning in economics. It is not always random walk. It is often the very measurable and quantifiable risk whose oversight or supervision by government (the Fed and its legislative overseers and the White House) and self-regulation by the risk takers ― the markets ― matters, as Bernanke had concluded in his paper to the AEA. It defines the impact of the monopoly interest rate setting capacity of the Fed both per se and in the larger context of the economy and the financial markets. Bernanke (as was Alan Greenspan) is both wrong and (would have been) right, at the same time, that interest rates don’t matter per se, and do matter (which he had not said) for bubbles, housing or otherwise. Bernanke’s troubles though lay in the fact that they do.
The Federal Open Market Committee (FOMC) sets interest rates based on mostly real variables, taking into consideration the impact of the financial markets on the real variables within the Fed’s forecast horizon of 3 years. The macroeconomic trade-off is indeed, as Bernanke had pointed out, between output and inflation as encapsulated by the Taylor Rule.
Per se the federal funds rate and money supply, are indeed weak and blunt instruments to determine the paths that money would take once its leaves the doors of the central bank without monetary policy also engaging in industrial policy as the Fed Chairman himself had pointed out once before in the context of his stated reluctance to doing so. In the larger context, however, especially in a crisis of both the economy and employment, saving the financial industry in downtown Manhattan is also a form of industrial policy. The same extraordinary circumstances that made him bend the Federal Reserve Act (FRA) to save the financiers on Wall Street also permit him under the same law to save the other industries in the economy to which the financiers are supposed to provide that money for the purpose of economic recovery. In fact, this was the intent of the amendments to the FRA after 1929.
The trouble with the AEA since the new Keynesian government-markets synthesis, Bernanke being no different from his ilk (confession: the author of this article, me, also being a dues paying member of the AEA) is that the repair of the financial markets is seen as being sufficient from the perch of Keynesian macroeconomic fundamentalism that has pervaded the profession since the publication of Keynes’ General Theory. Anything else is seen as firm-level microeconomic interference, even if it means following the money down to the balance sheets of the individual banks receiving it from the Fed, even though doing so is the Fed’s legal responsibility and even if the Fed is to be forgiven for that part of the financial markets over which both the Fed and the rest of the government have no purview at the present time.
This is exactly where the Fed stands today: to clean up the financial markets bank by bank, as is in fact permissible current law, or to let the money it is providing percolate on its own time for the financial markets to allocate it as they see fit, no matter how inefficient or time consuming that process may be, focused once again on the macroeconomics of the Taylor Rule. Moreover, what stands in the way of making more rational decisions is the intellectual investment of the economists themselves: the very tomes they have written that have propelled them to prominence in their profession may have to be overwritten by their own actions when applying economic science in practice. Akin to asking politicians to reform campaign finance laws. Incurring such an opportunity cost could mean continued survival.
Supervision and oversight do not necessarily also have to mean telling banks what to do with the money they receive. Sometimes, the government paying close attention is sufficient to induce responsible behaviors when complemented by other macroeconomic policies such as fiscal policy and trade policy.
It is high time both politicians and economists said that they are wrong to do the right thing, because the general welfare of the United States trumps personal achievements. And that is a very explicitly Keynesian idea and an implicitly classical idea. Doing so could in fact be a bigger personal achievement for policymakers. Fixing the markets will indeed fix the economy, provided the financial markets are fixed instead of expecting them to fix themselves by throwing money (or more technically, money supply and interest rates) at the problem.
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