A blog of the NYU Colloquium on Market Institutions and Economic Processes
Gerald O’Driscoll explains how the Federal Reserve is bailing out European banks. Click for his insightful piece in the Wall Street Journal.
by Andreas Hoffmann and Gunther Schnabl
It came as a surprise to many: the Swiss National Bank announced an exchange rate target. Accordingly, the Swiss franc will be held above the level of 1.20 francs per euro. Switzerland gives up a part of its sovereignty, when the ECB makes bad press in buying trash-rated euro area government bonds to support unsustainable national budgets.
But, particularly in an environment of global excess liquidity originating in too-easy monetary policies in major advanced economies, small open economies have incentives to stabilize exchange rates. Read the rest of this entry »
by Jerry O’Driscoll
I recently read Money, Markets and Sovereignty by Benn Steil and Manuel Hinds. I highly recommend it. The jacket blurb accurately summarizes the book’s importance: “Benn Steil and Manuel Hinds offer the most powerful defense of economic liberalism since F. A. Hayek published The Road to Serfdom more than sixty years ago.”
Steil and Hinds focus on the institutional underpinnings of liberalism: the rule of law, globalization (free trade and free movement of capital) and commodity money. Their arguments on all points are powerful. Their argument on money runs against the grain of modern monetary theory. They rely heavily on history to buttress their arguments.
Reading the book motivated me to reread Hayek’s Monetary Nationalism and International Stability, upon which a good part of their monetary analysis is based. Though written in 1937, the book makes a powerful argument against the international monetary arrangements of the last 40 years: the 182 national fiat currencies.
Hayek argues the benefits of national fiat currency are largely illusory, and fiat money introduces problems unknown under the gold standard. For instance, Hayek, and Steil and Hinds explain why short-run capital flows can be destabilizing in a fiat money system, while they are stabilizing in a commodity standard. The two works follow the Misesian strategy of criticizing policies (or institutions) by demonstrating that they produce results different from or even the opposite of those intended by their advocates.
This year’s Cato monetary conference (November 16, 2011) will focus on monetary reform. Instead of a keynote address by a senior Fed official (a hallmark of past conferences), the opening address will be by Ron Paul. Panel I will be “Rethinking the Global Fiat Money System.” Chaired by Mary O’Grady of the Wall Street Journal, the panel will consist of Benn Steil, George Melloan and myself.
by Andreas Hoffmann
This is good news for inflationists.
I am shocked that Jürgen Stark quit his job at the European Central Bank. Usually it is a good thing when central bankers quit their job – or at least it does not make a difference. But Jürgen Stark is known as an inflation hawk. Jürgen Stark – like the Mark writes Die Welt.
In my opinion, the main difference between the ECB and the Fed is that the ECB has people like Stark. Unfortunately, there are only a few.
He is opposed to cheap money policies. A while ago, he openly warned of rolling bubbles caused by too low interest rates in the media. Thus, he suggested a timely turn-around in interest rate policy. Recently he voted against further bond purchases of the ECB. More on this recent event can be found here.
Coming shortly after Axel Weber resigned due to his disagreement with Trichet’s policies, Europe’s anti-inflation block is now shattered. Something terrible must be going on at the ECB. I wonder where the ECB is heading?
by Mario Rizzo
In today’s Wall Street Journal frequent contributor to ThinkMarkets, Jerry O’Driscoll, has an important opinion piece, “Why the Fed Is Not Independent.”
There has been much discussion recently of the importance of “preserving” Fed independence. But is the Fed independent? Independent of what? Jerry concentrates on the link between the Fed’s monetary policy and the Treasury’s fiscal policy. Consider:
Today, however one parses the term, the Federal Reserve is not now independent. It has voluntarily relinquished the very independence it secured in 1951 by entering into a modern version of the bond support program. That is what the so-called zero interest rate policy amounts to, reinforced by the quantitative easing implemented through QE1 and QE2.
The Fed is committed to holding interest rates at a very low level by purchasing as much Treasury debt as necessary to maintain those interest rates. That is precisely the position the Fed found itself in before the 1951 accord.
Monetary policy once again is not independent of fiscal policy. None of the Fed’s critics can do as much harm to the institution’s independence as it has done to itself.
The whole article is quite interesting. It raises importance questions not only of economics but of politics as well.
by Jerry O’Driscoll
The monetary analysis of the housing bubble focuses on the impact of low – even negative – real rates of interest on housing demand. That theory suggests the Fed must be inflating new bubbles with its continued policy of a near-zero federal funds rate. Skeptics ask where are the bubbles?
In today’s Wall Street Journal Business World column, Holman Jenkins answers with “Plane Crazy.” He specifically points to the recently announced deal in which debt-burdened and unprofitable American Airlines will take delivery of 460 new planes. How did American pull this off?
Boeing and Airbus will share the order and each will finance a substantial portion of the purchase. “Think about it this way: Two rival banks get together and offer you a ‘no-doc’ mortgage for 115% of the value of your home,” writes Jenkins. He characterizes this as an opportunity for a “go-for-broke shot at a turnaround” for American. It’s an offer the airline could not refuse.
There are an ample number of other candidates for a bubble: gold, oil, farmland in the Midwest and perhaps the S&P. The entire world is awash in cheap dollars and much of the impact of the Fed’s policy has been to inflate bubbles overseas. That can be seen directly with the AA deal. More than half the order is going to Airbus, a European company.
The Fed’s easy-money policy was supposed to stimulate the U.S. economy and produce jobs for Americans. Fed policy has produced prosperity and jobs, just not in the United States.
by Jerry O’Driscoll
“The Weekend Interview” in the Wall Street Journal (A11) is with James Grant. A financial and monetary iconoclast, Grant favors gold over “faith-based” fiat money. He is a trenchant critic of the Fed’s low interest-rate policies for “suppressing the proper functioning of the price system.”
There is an Austrian flavor to Grant’s commentary, as when he defends “good deflation” resulting from “progress.” Bad deflation occurs as the result of a credit crisis. “The Fed refuses to make that distinction.”
Why does he like the gold standard? “The gold standard, he says, citing the ‘late, great’ libertarian economist Murray Rothbard, was the ‘people’s system. If you didn’t like the currency, you could exchange your paper for gold and that sent a message.’”
He also denounces Wall Street bankers, who get the upside while the taxpayer takes the downside. He is describing moral hazard in layman’s terms.
Holman Jenkins did the excellent interview. Read it and enjoy.
by Mario Rizzo
I read with interest Peter A. Diamond’s opinion piece in The New York Times, “When a Nobel Prize Isn’t Enough.” Professor Diamond, by all accounts a very competent economist at MIT, is complaining that he really IS qualified to be a member of the Board of Governors of the Federal Reserve System. He really IS qualified to make decisions about monetary policy. He really IS qualified because he is an expert on labor markets. He really IS qualified because a top priority must be to lower the unemployment rate. And he IS qualified because he knows how to do this.
I might have been forgiven if I had called this blog post, “Peter Diamond is a Crybaby.” Read the rest of this entry »
by Andreas Hoffmann and Mario Rizzo
We know from Wicksell’s (1898) Interest and Prices, there is something important about the interest rate that balances saving and investment in an economy over time. This equilibrium interest rate is called the “natural rate of interest”. When market interest rates are below the natural rate, an unsustainable credit boom which distorts the production structure in the economy and inflation are the result.
In line with this idea, most economists agree – today – that the Fed held interest rates “too low for too long” following the burst of the dot-com bubble. As expected, this contributed to a credit boom in the US economy. With the emergence of the crisis, the Fed lowered interest rates to stabilize the price level, financial system and output. Yet, a year of recovery is over and interest rates are still low. What about the natural rate today? Read the rest of this entry »
