Why Do Bankers Hate Inflation?

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David Leonhardt on why the Fed is so hawkish on inflation even though the economy is sluggish and inflationary pressures seem remote:

Why does the Fed skew more hawkish than the economics profession as a whole? Part of the answer lies in the way the 12 voting members of the policy-setting committee are chosen. They are a mix of presidential nominees subject to Senate approval, with 14-year terms, and regional Fed presidents, who are chosen by outside boards that are made up partly of private-sector finance executives.

David Levey, a former managing director at Moody’s and another critic of Fed inaction, points out that banks often have more to lose from inflation than from unemployment. Inflation reduces the future value of the money that their debtors — homeowners, car buyers, small businesses and the like — will repay them.

“The Fed regional banks represent, in essence, the banking community, which tends to be very conservative and hawkish,” Mr. Levey says. “Creditors don’t like inflation — it’s good for debtors.” Indeed, the three recent dissents all came from regional bank presidents: Richard W. Fisher of Dallas, Narayana R. Kocherlakota of Minneapolis and Charles I. Plosser of Philadelphia.

This is obviously the traditional view, and certainly it was true at one time. But is it still true? Or maybe my real question is: should it still be true? Isn’t most long-term debt either indexed to inflation in some way (usually via links to LIBOR or treasury spreads or something similar) or else hedged for inflation risks? Shouldn’t banks these days actually be fairly indifferent to inflation as long as it stays within a moderate range? There’s probably a hole here in my understanding of how finance works, but I don’t really get why this creditor/debtor divide on inflation still exists.

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Reclaiming power from those who abuse it often starts with telling the truth. And in "This Is How Authoritarians Get Defeated," MoJo's Monika Bauerlein unpacks six truths to remember during the homestretch of an election where democracy, truth, and decency are on the line.

Truth #1: The chaos is the point.

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Please take a moment to see how all these truths add up, because what happens in the weeks and months ahead will reverberate for at least a generation and we better be prepared.

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