Last week I came across this comment on the December 2019 Federal Reserve meeting: “The bar for lower interest rates and monetary inflation via repo and assets purchases is exceedingly low while bar for future rate increases and monetary restraint very high”. This is an interesting statement.
First, it shows that expansion is easy. It’s the same for organizational expansion. Same principle, the bar to organizational expansion is far lower than the one to reverse it.
Once a policy or organization accommodates expansion, the way to reverse it is getting harder and harder. Why is that so hard?
For instance, the weight loss problem is not only about to lose weight, it’s also about maintaining a healthy weight. The latter is more important than the first one. The first one is focussed on eliminating symptoms and is easy as there are plenty of fast-fix solutions as diets. The hard, aka higher bar is focussed on fighting the causes and is about maintaining a healthy weight as it requires ongoing attention what you eat, that you sleep enough, don’t drink much sodas and alcohol and doing regular work outs to stay fit and in shape. Early January as part of new years resolution, you’ll notice plenty of people busy losing weight and going to the gym. How long will they keep on going to the gym?
Management consultancy firms often focus on how to structure an organization by slicing it into several parts like it’s a mechanical problem they’re dealing with. It’s the same with monetary policies. When you listen to Central Bankers it’s like they going to work with a toolbox like they’re a mechanic or plumber. They make the appearance that they can ‘fine tune” inflation using their toolbox.
Is monetary policy a pure technical matter? I don’t think so, just as organizational problems are not pure structural matters. Easy, fast-fix approaches do mostly focus on reducing ‘lower bar’ symptoms, not on taking away ‘higher bar’ causes. By having a blind eye for causes, monetary policies and organization reforms are set up to fail.
I point at a few directions to spot ‘high bar’ causes for failure of monetary as organizational reforms. These aren’t the usual subjects as discussing if management theories are effective, or that an inefficient organizations needs to replace leadership. As for monetary policies, I’m not pointing to an introducing of a gold standard or auditing central banks. That are all good measures. But we need to bring analysis to another dimension, as causes are often deeper than symptoms.
What makes that the vicious circle keeps going on choosing for easy, fast-fix solutions, while ignoring the deeper causes? Lets first change the scope of analysis, from technical to a focus on power. Instead of focusing on fixing things from a technical perspective, we focus on the social context who benefits in current situation and why. By doing so, we get a different picture and understanding why it’s hard to escape the vicious circle of failing organizational and monetary reforms.
Lets look again at Lets look again at the lifecycle of bureaucracy described by Charles Hugh Smith. What happens to bloated organizations that become vulnerable for ‘gaming the system’? This is the stage that matters, as things can still be reversed as budgetary cuts are needed to prevent the implosion stage.
The former blog ended concluding that adding more departments and layers to an organization makes it ineffective and burdensome. So the focus should be on reducing unnecessary, and thus expensive management departments and bureaucratic layers. These are the cause that an organization doesn’t function well and drives its costs higher. Reducing management and departments are typical higher bar measures. Management and other departments become bastions of power, ego and privileges for its staff, and they don’t give up that status easy. They have an interest to ‘game the system’.
Who would break down and reduce the privileges of their own bastion? This is the main cause why organizational reforms fail.The choice is usually made for easy, fast-fix measurers as reorganizing and reducing people on the work-floor. And thus mainly on the wrong things that don’t solve causes that made an organization infective and bloated. This decay process goes on until an organization implodes, when the table legs are breaking down finally. Reorganization of the work-floor shapes uncertainty for people who actually doing the real work, they decide to leave looking for a better place. Skills and ‘know how’ leave the organization. This is the last stage of implosion in Hugh Smith’s Lifecycle of Bureaucracy
We go to monetary policy. What is the cause that makes it hard to escape the vicious circle of failing reforms? To answer that we need understanding of the establishment of the Federal Reserve (Fed). The goal of its establishment in 1913 was described as the need to regulate banks to prevent that they became too powerful. That was the original version that was told to American voters. But it turned out to be the complete opposite: banks became even more powerful as result of the establishment of the Fed. How could this happen?
Instead of accountability towards political leadership and government, the bankers became partners of politicians and the government. Instead to be accountable towards governmental regulation power, they used that power in their own interest (gaming the system). The establishment of the Fed made it possible to use regulations to stop a healthy competition between banks, build a monopoly on the creation of money out of nothing for the purpose of lending, get control on all bank reserves and last but least, make the taxpayers pay for inevitable losses. They flood the economy with loans (credit) causing the appearance of rising asset prices, but in reality it is nothing more than lowering of the value of Dollars and Euro’s. Banks enjoy the fruits as they earn interest on all these loans created out of nothing and can do that pretty risk-less.
In essence it is the same issue as with organizational leadership: the banking cartel won’t give up this risk free privilege of creating money out nothing easy. This is the cause for failing reforms of monetary policies. Central Banks make it appear as a pure technical matter of adding or withdrawing liquidity like a mechanic. But these are the symptoms of its unprecedented privilege.
I hope this post illustrates that problems aren’t pure, neutral and technical matters. In the end it all comes down who has the power and resources to frame the issue at hand and set the direction. Problem framing is politics to make preferred solutions look credible. As individual organizations can come into the final stage of imploding, the question remains open what will happen to the credibility of the banking cartel to make it lose its unprecedented power? The next bust?