Unintended Monetary Policy Effects – Tale II: ECB Crisis Policies

by Andreas Hoffmann and Nicolás Cachanosky

The Federal Reserve’s (Fed) and European Central Bank’s (ECB) policy responses to the recent financial disasters offer two tales of unintended consequences. Our previous post outlined undesired effects of the Fed’s policies. In this post, we suggest that the ECB’s stabilization policy did not only fail to achieve its goals. Monetary policy has also hampered the structural adjustment of the European economy and prolonged the crisis.

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Two Tales of Unintended Consequences of Monetary Policy – Tale 1

by Nicolás Cachanosky and Andreas Hoffmann

Even when a policy is successful in achieving its desired ends, we have to consider its unintended and unforeseen consequences, resulting from cumulative market adjustments to policy changes that make it hard to judge the overall outcome of a policy in our complex economy. The Federal Reserve and European Central Bank’s monetary policy responses to the 2008 financial crisis offer two tales of major unintended consequences. This post discusses unintended outcomes of the U.S. Federal Reserve’s crisis policies. In our next post, we address ECB policies.

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“Unintended consequences of ‘Smart Growth'”

by Sandy Ikeda

That’s the title of a video interview I did with the Mackinac Center that was posted on their website a few days ago. I did it last summer and it runs about twelve minutes.

It’s very hard to do justice to either the SG side or my critique in such a condensed interview, though I think it gets the main points across fairly well. Still, here’s a couple of things. Continue reading

Unintended Consequences of Mortgage Foreclosure

by Mario Rizzo  

We are a serious bunch here at ThinkMarkets. We make major advances almost daily in all recognized realms of intellectual thought. So now it is time to illustrate the great principle of unintended consequences of human behavior in a very vivid way.  

A brilliant new horror movie was released on May 29th: Drag Me to Hell. It is the story of an ambitious bank loan officer who is keen to get a promotion. Her superior is looking for someone who can make difficult, but profit-maximizing, decisions. Enter now an old lady who has missed payments on her home. She had already been given two opportunities to make up for delays in paying her mortgage. Now she wants a third. The bank officer struggles with the matter – pitting her natural benevolence against the justice of contractual obligation. Since acting on the basis of the latter will improve her chances for promotion, she denies the woman’s request. At that point, all hell breaks loose.   

Forget issues of aggregate demand and wealth effects. Attend, instead, to the perverse multiplier of selfishness. If you like Ayn Rand this movie will drag you to hell.

Infrastructure: Here’s what Robert Moses would do today

by Sandy Ikeda

Mid-Manhattan Expressway
(Map by “vanshnookenraggen.”)

With your indulgence, I’ll get to my main point, and this map, in a moment.

But first, as we all know, the House has just passed a special ex post tax on bonuses awarded to individuals working for companies that received bail-out money. (One egregious violation of the rule of law deserves another then?) Over at Marginal Revolution they’re blogging about one really bad consequence of this hasty piece of policy-making: It seems that any family earning more than $250K with a member connected to a bailed-out institution will be marginally taxed at 90%. If it passes, I’m sure this in turn will give rise to further interventions as Congress tries to deal with THAT snafu (assuming the Supreme Court doesn’t overturn it).

The AIG fiasco is just one, economically insignificant but politically sensitive, instance of the countless unintended consequences that we should expect in the coming months and years issuing from the various bailouts and stimuli. Continue reading