With central bank balance sheets and government debt levels exploding, discomfort about future inflation arises. A discussion about the appropriate exit strategy from low-interest rate policies has started. The standpoints of central banks are different. The ECB seems more decisively in favour of an early exit. The Federal Reserve discusses the technical aspects rather than an early timing (see Mario’s earlier blog entry). The Bank of Japan is said not to exit earlier than in five years. What situation are we facing? A return to monetary policies that are neutral to inflation and bubbles is unlikely for four reasons: Read the rest of this entry »
This is the man who presided over the New York Federal Reserve Bank as the Fed assiduously provided the monetary fuel for the over-expansion of credit and the associated property bubble. The eventual implosion of the twin bubbles caused the financial crisis of 2008.
For sure, markets are prone to ups and downs, because people are prone to behaviors like herding. And yes, bankers drank the spiked punch, as did myriad others from mortgage originators and real estate developers to over-extended households. But the Fed provided the heady stuff, thereby creating a boom-and-bust cycle of extraordinary magnitude.
Now, does Mr. Geithner’s proposed regulations seek to prevent similar nefarious policies in the future by limiting the Fed’s discretionary powers? Of course not. Silly even to ask. His quest is to expand the authority of government agencies, not to regulate them.
The Fed has decided to extend, at least through early next year, its program of purchasing mortgage-backed securities. The Wall Street Journalreports:
“The Fed’s action signals its belief that the economy, while in recovery, remains fragile and that housing, which has seen some improvement in recent months, has only started to pull out of its slump.”
I have now read both Paul Krugman’s New York Times essay on the state of macroeconomics and John Cochrane’s reply. They are each, in very different ways, quite disappointing. The level of argument is poor, the prejudices are simplistic, and the tones are annoying. Read the rest of this entry »
In a series of persuasive posts, Steve Horwitz at The Austrian Economists blog (here, here, and here) shows that Ludwig von Mises’s views on monetary economics were more or less the same as the Selgin-White-Horwitz (and I would argue the Garrison) free-banking, monetary-equilibrium view, rather than the Rothbardian one. This is not surprising given Murray Rothbard’s deviation from Mises on questions of monopoly, the minimal state, utilitarianism and other matters. While these posts will no doubt be resisted by some, they should move the discussion out of what Mises meant and into the analytical merits of arguments – and, I hope, into empirical work. (After all, Mises didn’t spend a lot of time on what his forebears really meant!)
I have not posted in a while since I have been on vacation. During that time an interesting dispute has arisen among friends Tyler Cowen, David Henderson, Arnold Kling, Peter Boettke, Bob Murphy, Steve Horwitz and others over whether Ben Bernanke was right to bail out specific banks. (Some of this has gotten mixed up with the issue of what Brian Boitano would have done — oops, I should say Milton Friedman.)
I think the question could be simply stated in two parts. First, is it possible to prevent general deflation and not bail out big banks? Second, if so, what would be the effect on the economy of bringing the banks to bankruptcy court while preventing outright deflation? Read the rest of this entry »
An interesting post by Jeff Hummel over at HNN (History News Network) shows that it is difficult to know the status of the “macroeconomy” even in retrospect. This combined with poor forecasting (by Bernanke, for example) suggests a knowledge problem in the implementation of counter-cyclical policy. We may not know where we were. We do not know where we are. We definitely don’t know where we are going.
Fed independence has come to mean the absence of operational control by non-Fed entities in designing and implementing monetary policy. It also means a presumption (long asserted by the Fed) that its effectiveness in conducting “business” justifies that it operate under a cloak of secrecy, although one that for several decades has adapted to Congressional and “freedom of information” pressures for greater transparency. The call for greater transparency is a public concern because government and its agencies have the ability to affect us directly and massively. But it does not address the more fundamental question of choices in monetary regimes. Transparency matters only because we have central bank. Read the rest of this entry »
Today’s Wall Street Journalhas an opinion piece by Fed Chairman Ben Bernanke. He assures us that the Fed has the tools and the willingness to restrain inflation when that is appropriate (not now). He recognizes it is all about timing. But everything is under control:
“Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period. We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability.”
How good are Bernanke’s abilities as a forecaster? Thanks to YouTube we have evidence (HT: Bob Murphy).
I am not happy at the prospect of the Congress making monetary policy. I am also not happy about the Congress making “countercyclical” fiscal policy. But I am really not happy about the extraordinarily poor quality of the arguments being made by economists so desperate to maintain the “independence” of the Fed. The arguments seem to boil down to mentioning what the Fed has done right (or may be construed to have done right) and ignoring the Fed’s role in creating crises in the past.
Who taught these economists how to make an argument?
I expect to say more later. But for now, please check out Jerry O’Driscoll’s post at the Cato blog.
