By Captain John Konrad (gCaptain) CNBC editor Lori Ann LaRocco is a superstar in the world of logistics and seaborne trade. LaRocco’s tireless and timely reporting on port congestion and the effects of COVID on the supply chain have been excellect, so I was shocked to find myself disagreeing with her latest FreightWaves editorial titled “Viewpoint: 1 piece of the inflationary puzzle the Fed can’t control“.
In the article LaRocco says the Federal Reserve has many tools to address inflation, but there is nothing it can do to tackle one of the greatest inflationary pressures facing the country — supply chain costs. She says that the Fed has “no control over port congestion (which is the cement in the trade pipes), poor schedule reliability as a result of the congestion and finally, China and its “zero-COVID” policies. All three have created delays that drive up ocean freight costs.”
Related Book: Dynasties of the Sea II: The Untold Stories of the Postwar Shipping Pioneers by Lori Ann Larocco
LaRocco is correct on all accounts… so why do I disagree so fully?
A Failure Of Imagination
The term “Failure of imagination” first showed up on most people’s radars early this century. It was invoked by the 9/11 Commission and other U.S. government officials as a reason that intelligence agencies, such as the Central Intelligence Agency and the NSA, failed to prevent the September 11 attacks.
“The methods for detecting and then warning of surprise attack that the U.S. government had so painstakingly developed in the decades after Pearl Harbor did not fail; instead, they were not really tried,” said the authors of the 9/11 Commission report. “They were not employed to analyze the enemy that, as the twentieth century closed, was most likely to launch a surprise attack directly against the United States.”
Imagination is not a gift usually associated with bureaucracies, but the report insists that a high level of institutional imagination is critical to solving problems.
The Psychology of Government Incompetence
The US Federal Reserve is not the US Maritime Administration (MARAD) or the Federal Maritime Comission (FMC) and no Fed Governor is expected to be an expert in domestic ports or international shipping. Fed Governors do not have the mandate or, as LaRocco correctly points out, any preset tools to fix shipping. Then again, the North American Aerospace Defense Command (NORAD), had no mandate or tools to monitor – and possibly shoot down – a commercial airliner prior to 9/11.
In a video titled “Always Look for New Information, The Psychology of Military Incompetence” – produced in the wake of our nation’s ultimate failure in Afganistan – former NAVY SEAL, leadership guru, and author of the runaway bestselling book “Extreme Ownership” Jocko Willink digs deep into the question of why top military and government leaders continue to fail despite centuries of lessons learned and an abundance of quality information like the 9/11 Commission report.
There is a lot to unpack in the two part, six hour, podcast but the primary lesson is that our leaders need to put aside ego and explore the unknown. This is especially true when new information changes the game on a fundemental level.
Related Book: On the Psychology of Military Incompetence by Norman F Dixon
The alternative, as Jocko points out, is leaders who ingore any information that clashes with their world views and ego. These leaders are intellegent and nice and often appear outwardly concerned but largely ignore any critical information that could force them to admit they are wrong and make expensive changes to intricately laid out plans. This is exactly what top US Navy Admirals have done with regards to the US Merchant Marine over the past few decades – politely ignore the rapid decline of US military ocean logisitics capabilities – just as Air Force Generals did with air terrorists two decades ago.
Adaptability And The Fed
So if the Federal Reserve does not have the tools to fight port congestion (or fix the US Merchant Marine), does not have a mandate to do so, and does not have institutional knowledge in regards to shipping… why should they explore the unknown? What can Fed Governors possibly do to help the supply chain?
Well this is not the first time the Federal Reserve has stepped outside its mandate to help a specific industry that had clogged up the entire national economy. They are not incompetent and, have in the past, embraced imagination and creative solutions.
When the housing bubble collapsed in 2007-08 the Federal Reserve invented a new set of tools called quantitative easing (QE). Similar to conventional open-market operations used to implement monetary policy, under quantitative easing the Fed can purchase non-conventional financial assets directly from commercial banks and other institutions. In 2008 it used QE to purchase a rapidly falling commodity, real estate, via it’s purchase of hundreds of billions of dollars worth of mortgage-backed securities.
Related Book: The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about It by Robert J. Shiller
Possibly more important than the money iteself, the Federal Reserve used it’s enormous influence with policy makers and the media to educate the world on the problems our economy faced. This education allowed others to create new solutions, attract private capital, and guide new legislation.
How Can The Federal Reserve Help Shipping?
I do not have any specific answers but neither did the Fed on the onset of the Global Financial Crisis in 2008. LaRocco is correct, the Fed does not have the tools to help shipping, but that does not prevent them from creating new tools.
If the Federal Reserve can purchase land via mortage-backed-securities, could it purchase port infastructure and shipyard development bonds? Could it back the enormous risk large lenders take when underwriting loans to US shipping companies? I don’t know (and neither does the Fed).
Related Book: Trade War: Containers Don’t Lie, Navigating the Bluster by Lori Ann LaRocco
What the Fed can do today is invite experts like Lori Ann LaRocco and federal agencies like MARAD to help them better understand the problem. They can then use their enormous media and policial influence to inform and educate the public about the true nature of problems we face at sea.
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