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An Open Letter to the US Senate – Vote No on Stephen Moore

To The Senators of the United States of America:

This letter will be a swift and thorough explanation for why voting NO on Stephen Moore should be one of the easiest decisions you have ever made.

Mr. Moore is a well known TV pundit and political commentator. We should be clear – despite often being referred to as an “economist” Mr. Moore is not, in fact, a PhD holding economist. And his basic misunderstanding of economics has been on consistent display over the last 30+ years. His predictions about the economy are, to be kind, a revolving door of wrongness in a way that makes you wonder how this revolving door is still in operation. Here are some of his greatest hits:

This barely scratches the surface. There are plenty of other bad predictions from Mr. Moore as seen herehere, here, here and here. There are also his endless predictions about the scary size of the government debt which was problematic until his own party was the one running up the national debt. Interesting how that works.

But I specifically highlight the above two predictions because they extend from a deep misunderstanding of the very entity he has been nominated to join. It is perfectly fine to be wrong about things. But Mr. Moore’s inaccurate predictions extend specifically from his misunderstandings about how the Federal Reserve works. We know this, empirically. And the Federal Reserve itself has helped to correct many of these misconceptions over the years, however, Mr. Moore has chosen to toe the political pundit line instead of learning from his mistakes and trying to provide a more objective and empirically sound perspective.

In 2014, Mr. Moore helped publish a piece for the Heritage Foundation that put these misunderstandings on clear display. For instance, when explaining how Quantitative Easing (also known as the Fed’s Large Scale Asset purchases) works Mr. Moore said:

“These purchases, in other words, were supposed to boost economic activity because they add reserves to the commercial banking system, thus allowing banks to lend more money.”

In fact, this was not the transmission mechanism for QE at all. As the Federal Reserve explained in 2010, this isn’t just an incorrect transmission mechanism, it is a non-existent one because banks CANNOT lend reserves to non-banks. That is, quite simply, not how lending works. Federal Reserve banks can lend reserves to one another, but the Fed system is a closed system and banks cannot lend their reserves outside of this system.

He continues:

“Instead of creating new money through additional lending, the Fedโ€™s QE policies have greatly expanded the amount of excess reserves in the banking system. (See Chart 2.) In other words, banks have mostly decided to hold onto the cash that the Fed gave them when it executed all those securities purchases. Consequently, it is rather difficult to argue that these Fed policies have done much to expand the economy.”

This, again, is wrong in the most basic sense. Banks do not determine the quantity of excess reserves that they hold. The quantity is determined by the Federal Reserve. This fact was eloquently explained in a 2009 Federal Reserve paper.

Mr. Moore continues by trying to explain Interest On Reserves:

“The fact that the Fed started paying interest on reserves in October 2008, something it had not previously done, could also explain the buildup in (idle) excess reserves. This new policy lowered banksโ€™ incentive to create more money with new reserve balances because it reduced the cost of holding excess reserves. On the surface, it makes little sense for the Fed to flood the market with trillions in reserves and simultaneously induce banks to forgo using them to make new loans.”

This, also, is wrong in a very basic way. As the Fed explained back in 2014 (and many times before then) interest on reserves does not stop banks from lending to non-banks. We have already established that banks don’t determine the quantity of reserves they hold as well as the fact that banks don’t lend reserves to non-banks. But this had nothing to do with why the Fed began paying interest on reserves. The reason the Fed started paying interest on reserves is that excess reserves put downward pressure on rates specifically because banks CANNOT lend reserves to non-banks and thus, in trying to lend them to one another within a closed system, they cause the overnight rate to fall to 0%. By paying IOR the Fed is able to incentivize banks not to lend to one another thereby creating a floor to raise rates if they need to. Strangely, Mr. Moore has argued, when it is politically convenient, that low rate policies can be dangerous and so having a tool in place to raise rates should be something Mr. Moore is in favor of. But he clearly doesn’t understand the operational aspects of the policies he is so quick to criticize.

These comments are telling, not just because they are wrong, but because they show a deep and basic misunderstanding of the very entity Mr. Moore is being nominated to join. Further, they expose Mr. Moore as someone who is blinded by politics and unable to maintain an independent and objective perspective. 

The Federal Reserve is intended to be an independent entity and the Federal Reserve Board is intended to be managed by economics and banking experts. Mr. Moore is neither an economics or banking expert nor is he capable of maintaining objective and independent positions.

This is not a question of politics. This is a question of basic qualifications. In addition to not being an actual economist Mr. Moore has consistently shown that he does not understand how Federal Reserve policy works. Voting NO on this confirmation should be the easiest confirmation vote you’ve ever made.


Cullen Roche

Founder, Orcam Financial Group