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Archive for the ‘Monetary Policy’ Category

It’s no secret that I’m a huge fan of Ronald Reagan.

He’s definitely the greatest president of my lifetime and, with one possible rival, he was the greatest President of the 20th century.

If his only accomplishment was ending malaise and restoring American prosperity thanks to lower tax rates and other pro-market reforms, he would be a great President.

He also restored America’s national defenses and reoriented foreign policy, both of which led to the collapse of the Soviet Empire, a stupendous achievement that makes Reagan worthy of Mount Rushmore.

But he also has another great achievement, one that doesn’t receive nearly the level of appreciation that it deserves. President Reagan demolished the economic cancer of inflation.

Even Paul Krugman has acknowledged that reining in double-digit inflation was a major positive achievement. Because of his anti-Reagan bias, though, he wants to deny the Gipper any credit.

Robert Samuelson, in a column for the Washington Post, corrects the historical record.

Krugman recently wrote a column arguing that the decline of double-digit inflation in the 1980s was the decade’s big economic event, not the cuts in tax rates usually touted by conservatives. Actually, I agree with Krugman on this. But then he asserted that Ronald Reagan had almost nothing to do with it. That’s historically incorrect. Reagan was crucial. …Krugman’s error is so glaring.

Samuelson first provides the historical context.

For those too young to remember, here’s background. From 1960 to 1980, inflation — the general rise of retail prices — marched relentlessly upward. It went from 1.4 percent in 1960 to 5.9 percent in 1969 to 13.3 percent in 1979. The higher it rose, the more unpopular it became. …Worse, government seemed powerless to defeat it. Presidents deployed complex wage and price controls and guidelines. They didn’t work. The Federal Reserve — custodian of credit policies — veered between easy money and tight money, striving both to subdue inflation and to maintain “full employment” (taken as a 4 percent to 5 percent unemployment rate). It achieved neither. From the late 1960s to the early 1980s, there were four recessions. Inflation became a monster, destabilizing the economy.

The column then explains that there was a dramatic turnaround in the early 1980s, as Fed Chairman Paul Volcker adopted a tight-money policy and inflation was squeezed out of the system much faster than almost anybody thought was possible.

But Krugman wants his readers to think that Reagan played no role in this dramatic and positive development.

Samuelson says this is nonsense. Vanquishing inflation would have been impossible without Reagan’s involvement.

What Reagan provided was political protection. The Fed’s previous failures to stifle inflation reflected its unwillingness to maintain tight-money policies long enough… Successive presidents preferred a different approach: the wage-price policies built on the pleasing (but unrealistic) premise that these could quell inflation without jeopardizing full employment. Reagan rejected this futile path. As the gruesome social costs of Volcker’s policies mounted — the monthly unemployment rate would ultimately rise to a post-World War II high of 10.8 percent — Reagan’s approval ratings plunged. In May 1981, they were at 68 percent; by January 1983, 35 percent. Still, he supported the Fed. …It’s doubtful that any other plausible presidential candidate, Republican or Democrat, would have been so forbearing.

What’s the bottom line?

What Volcker and Reagan accomplished was an economic and political triumph. Economically, ending double-digit inflation set the stage for a quarter-century of near-automatic expansion… Politically, Reagan and Volcker showed that leaders can take actions that, though initially painful and unpopular, served the country’s long-term interests. …There was no explicit bargain between them. They had what I’ve called a “compact of conviction.”

By the way, Krugman then put forth a rather lame response to Samuelson, including the rather amazing claim that “[t]he 1980s were a triumph of Keynesian economics.”

Here’s what Samuelson wrote in a follow-up column debunking Krugman.

As preached and practiced since the 1960s, Keynesian economics promised to stabilize the economy at levels of low inflation and high employment. By the early 1980s, this vision was in tatters, and many economists were fatalistic about controlling high inflation. Maybe it could be contained. It couldn’t be eliminated, because the social costs (high unemployment, lost output) would be too great. …This was a clever rationale for tolerating high inflation, and the Volcker-Reagan monetary onslaught demolished it. High inflation was not an intrinsic condition of wealthy democracies. It was the product of bad economic policies. This was the 1980s’ true lesson, not the contrived triumph of Keynesianism.

If anything, Samuelson is being too kind.

One of the key tenets of Keynesian economics is that there’s a tradeoff between inflation and unemployment (the so-called Phillips Curve).

Yet in the 1970s we had rising inflation and rising unemployment.

While in the 1980s, we had falling inflation and falling unemployment.

But if you’re Paul Krugman and you already have a very long list of mistakes (see here, here, here, here, here, here, here, here, and here for a few examples), then why not go for the gold and try to give Keynes credit for the supply-side boom of the 1980s

P.S. Since today’s topic is Reagan, it’s a good opportunity to share my favorite poll of the past five years.

P.P.S. Here are some great videos of Reagan in action. And here’s one more if you need another Reagan fix.

P.P.P.S. And let’s close with some mildly risqué Reagan humor that was sent to me by a former member of Congress.

Reagan Clinton Joke

If you want more Reagan humor, click here, here, and here.

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Everyone, it seems, is worried about global economic stagnation.

And there is good reason to be concerned. Europe is in the doldrums. Japan is stagnant. The developing world is hampered by intervention, corruption, and absence of property rights. And the United States is stumbling through an abnormally weak recovery.

But what’s the solution to this economic malaise?

The international economic policymaking elite seems to think easy money is the right elixir. The Wall Street Journal editorial page is underwhelmed by this approach.

European Central Bank President Mario Draghi announced a plan to buy what amounts to €50 billion ($56.84 billion) a month in government bonds and other assets at least through September 2016 on top of the €10 billion the ECB already was buying through various programs. …This QE program is more a political than economic triumph. …someone has to point out—since the QE cheering section among the political and investor classes won’t—that Mr. Draghi himself warned in his press conference Thursday that quantitative easing by itself won’t revive stalling eurozone economies… Reforms that would displace entrenched interests, whether domestic businesses or unions, are hard for politicians to enact, while demanding easier money from the central bank is easy.

Unfortunately, the ECB’s easy-money policy will probably give politicians in national capitals further leeway to avoid real reforms.

Politicians should now get serious about reforms on the theory that the central bank has done what they want. Smaller, sicker European economies have no more monetary excuses for their failure to reform. Or at least we can dream. The likelier outcome is that to the extent quantitative easing drives down bond yields, it will reduce market pressure for reforms until another economic crisis or deflationary blip spurs calls for a QE expansion.

Even folks that lean more to the left don’t think dumping more money into the economy will solve underlying problems.

Here are some excerpts from a David Ignatius column in the Washington Post.

A sign of the concern among business and political leaders here about sluggish economic growth is that one of the World Economic Forum sessions this week was titled “Avoiding a Centennial Slump” — meaning a downturn that lasts a hundred years. …The European Central Bank did the equivalent of pushing the panic button Thursday, announcing a bond-buying program of 1.1 trillion euros meant to lower interest rates and encourage investment. …But rates are already rock-bottom, and although the ECB’s “quantitative easing,” as it’s known, will flood Europe with cash, there’s no guarantee that it will be used to cure the region’s structural impediments to growth. Indeed, persistent low rates are one of the attributes of a deflationary economy, rather than a cure.

I largely disagree with the policies that Ignatius then proposes, but at least we generally agree that the European economy isn’t in the dumps because of inadequate liquidity.

The problem isn’t just in Europe. Like the ECB, the Federal Reserve also has tried to goose growth with easy-money policies.

But that’s like pushing on a string. Maybe there are times that the financial system needs more liquidity, but folks shouldn’t labor under the impression that printing more money solves the structural problems caused by too much spending, too high taxes, and too onerous levels of regulation.

And it’s quite possible, of course, that easy-money policies actually undermine long-run prosperity by creating bubbles.

Though as this Chip Bok cartoon illustrates, Wall Street enjoys bubbles, at least when they’re expanding.

P.S. Since I cited a Washington Post columnist who’s attending the World Economic Forum in Davos, Switzerland, this is a good opportunity to share some excerpts from a column Dan Hannan wrote for CapX.

As you can see, he’s not a big fan.

Davos is a place where powerful people pick up consultancies and directorships and international posts. Left-wingers rightly resent this. What they see, in Marxist terms, is a gang of rentiers coming together to devise new means to live off the sweat of the workers. …Yet, when it comes to free markets, Davos Man is often on the same side as the Lefties. He derives most of his income, directly or indirectly, from state patronage. If he is in the private sector – and he is more likely to be a lobbyist, politician or bureaucrat than a businessman – he’ll be an instinctive monopolist, keen to persuade ministers and officials to raise barriers against his potential rivals.

Since I’ve never been to one of these meetings and have never perused an attendance list, I don’t know if Hannan is being overly dour.

But I do worry that folks who are already rich and powerful are probably more focused on maintaining the status quo than on needed reforms.

As such, they’re susceptible to wanting to manage the economy rather than allow unfettered markets.

All right, you say, but surely it’s useful for powerful people to exchange ideas and learn from each other’s mistakes. Well, yes; but this lot rarely seem to learn. Whatever the problem, their preferred solution is always to establish a global bureaucracy staffed by people like themselves. Obviously, they don’t put it like that. “The stability of the global economy” is a much prettier phrase than “a juicy public sector post for me”. It’s like an Ayn Rand novel, where lobbyists reach cosy arrangements with each other in elliptical language. Remember the way she described members of a company board? “Men whose careers depended on keeping their faces bland, their remarks inconclusive and their clothes immaculate”. That’s Davos.

There’s also a bit of hypocrisy at Davos.

One of the big agenda items is the supposed horror of climate change.

So you would think participants would be taking every possible step to reduce their carbon footprints, right?

But according to CNN, not so much.

Look to the skies this week in Switzerland and you’ll see the heavens are cluttered with private jets. Billionaires and world leaders from across the globe are flying en masse to the annual World Economic Forum in Davos, Switzerland — and they insist on traveling in style. Roughly 1,700 private flights are expected over the course of the week.

The problem isn’t that some rich people use private jets. But if they fly in luxury and then pontificate on how the rest of us should accept lower living standards, they open themselves to some well-deserved abuse.

Speaking of Davos, climate change, and hypocrisy, here’s a perfect example of an empty poseur.

Al Gore is teaming up with rapper and producer Pharrell Williams to promote ‘climate change’ awareness through a series of concerts called “Live Earth,” which will take place on June 18th across six continents. The concerts will help “build support for a U.N. climate pact in Paris among more than 190 nations in December,” ABC reports. The announcement was made at the World Economic Forum on Wednesday where Pharrell said he wants “to have a billion voices with one message–to demand climate action now.”

Sounds noble, right? But Mr. Williams isn’t exactly the poster child for energy asceticism.

…when he’s not fighting to decrease your carbon footprint, Pharrell is flying across the planet on his private jet, sailing the seas on fossil fuel-burning yachts, and driving around in his pollution pumping luxury cars. …Pharrell owns a Mercedes-Benz SLR, which gets about 12 miles to the gallon. He has a McLaren Roadster, which gets him about 13 miles per gallon. Pharrell also owns a Rolls Royce Phantom and a Porsche Spyder 550, which both get about 10 and 20 miles per gallon.

Hmmmm…, sounds like another multi-millionaire hypocrite from the entertainment industry.

P.S. Returning to the issue of monetary policy, don’t forget that there are very strong arguments for getting governments out of the business of money.

P.P.S. And on the issue of boosting growth, there’s no substitute for free markets and limited government.

P.P.P.S. Yet most European nations are traveling in the opposite direction. Even more absurd, Obama wants to copy their failures, as captured by these cartoons from Michael Ramirez, Glenn Foden, Eric Allie and Chip Bok.

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Like John Stossel and Thomas Sowell, I’m not a big fan of the Federal Reserve.

It’s not just that I’m a libertarian who fantasizes about the denationalization of money.

I also think the Fed hasn’t done a good job, even by its own metrics. There’s very little doubt, for instance, that easy-money policies last decade played a major role in creating the housing bubble and causing the financial crisis.

Yes, Fannie Mae and Freddie Mac played a big role, but it was the Fed that provided the excess liquidity that the GSEs used to subsidize the subprime lending orgy.

But I’m not writing today about possible alternatives to the Fed or big-picture issues dealing with monetary policy.

Instead, I want to highlight three rather positive signs about the Janet Yellen, the new Chair of the Fed’s Board of Governors.

1. Unlike a normal political animal and typical bureaucratic empire builder, she didn’t assert powers that she doesn’t have. She was asked at a congressional hearing about bitcoin and she forthrightly stated that the Federal Reserve has no legislative authority to mess with the online currency.

The Federal Reserve has no authority to supervise or regulate Bitcoin, chair Janet Yellen told Congress on Thursday. …On Wednesday, Manchin wrote to the Fed, Treasury and other regulators warning that the currency was “disruptive to our economy” and calling for its regulation. “Bitcoin is a payment innovation that’s taking place outside the banking industry. To the best of my knowledge there’s no intersection at all, in any way, between Bitcoin and banks that the Federal Reserve has the ability to supervise and regulate. So the Fed doesn’t have authority to supervise or regulate Bitcoin in anyway,” said Yellen.

This is very refreshing. A government official who is willing to be bound by the rule of law.

President Obama, by contrast, is now infamous for his radical and unilateral rewrites of his failed healthcare law.

Eighteen of them for those keeping count at home.

But it’s not just Obamacare.

Because of my interest in tax competition, fiscal sovereignty, and financial privacy, I’m upset that his Treasury Department pushed through a regulation that overturns – rather than enforces – laws about protecting American banks from tax inquiries by foreign governments.

But let’s not wander into other issues. Today’s post is about positive signs from Janet Yellen.

2. And here’s another one.

Political Cartoons by Gary VarvelThe Fed Chair poured cold water on the left’s fantasy view that higher minimum wage mandates don’t kill jobs.

The new Federal Reserve chairman, Janet Yellen, seemed to offer some support for the CBO’s recent conclusion that increasing the minimum wage to $10.10 an hour, as President Obama and Senate Democrats propose, would cost a significant number of jobs. The CBO projected that the proposal would mean 500,000 fewer jobs by the end of 2016, a conclusion the White House took issue with. Yellen said the CBO “is as qualified as anyone to evaluate the literature” about the employment effects of the minimum wage (some of which argues there would be little to no jobs losses, and some of which suggests there would be significant job losses), and that she “wouldn’t want to argue with their assessment.”

In the cautious-speak world of Fed officials, this is a very strong statement.

Congratulations to Yellen for putting intellectual honesty above partisan loyalty.

3. Most important of all, Yellen also affirmed that she plans on continuing the “taper,” which is the buzzword for winding down the Fed’s easy-money policy.

…she reiterated that it would take a “significant change” to the economy’s prospects for the Fed to put plans to wind down its bond-buying program on hold. …After more than five years of ultra easy monetary policy in the wake of the 2007-2009 recession, the Fed is taking the first small steps towards a more normal footing. It trimmed its bond buying by $10 billion in each of the past two months, and it expects to raise interest rates some time next year as long as the economy continues to improve. Yellen reiterated her concerns about possible asset price bubbles, and suggested the Fed would move to a more qualitative description of when it plans to finally raise rates. …Yellen acknowledged that such low borrowing costs “can give rise to behavior that poses threats to financial stability.”

And she even acknowledged that easy money can cause bubbles.

A refreshing change from some previous Fed Governors.

Now let’s give a caveat. None of this suggests Yellen is a closet libertarian.

She is perceived as being on the left of the spectrum, and it’s worth noting that many hardcore statists in the Democratic Party urged her selection over Larry Summers because he was (incorrectly) seen as somehow being too moderate.

Moreover, I suspect she will say many things in the coming years that will add to my collection of gray hair.

All that being said, I’m glad Obama picked her over Summers. By all accounts, Yellen is honest and will focus her attention on monetary policy.

Summers, by contrast, is a far more political animal and would have used the position of Fed Chair to aggressively push for more statism in areas outside of monetary policy.

P.S. Private financial institutions also played a role in the housing bubble and financial crisis, which is why those entities should have been allowed to go bankrupt instead of benefiting from the corrupt TARP bailout.

P.P.S. Since this post mentions bitcoin and since I sometimes get asked about the online currency, I’ll take this opportunity to say that I hope that it is ultimately successful so that we have alternatives to government monetary monopolies. That being said, I wouldn’t put my (rather inadequate) life savings in bitcoin.

P.P.P.S. If you want an amusing video mocking the Fed, here’s the famous “Ben Bernank” video. And if you want a serious takedown of the Fed, here’s George Selgin’s scholarly but accessible analysis.

P.P.P.P.S. On a completely unrelated topic, if you’re a fan of “House of Cards,” I invite you to pay close attention at about the 30:00 mark of Episode 5, Season 2. If you don’t blink, you may notice an unexpected cameo appearance. Maybe this person has a future acting career if he ever succeeds in restoring limited government and needs to find something new to occupy his time. After all, if President Obama has a future on the silver screen, why not others?

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This is an easy question for me to answer. To be honest, I have no idea.

If I knew such things, I could time the market and I’d be rich beyond my wildest dreams and relaxing on the beach in the Cayman Islands instead of sitting in my kitchen in chilly Virginia.

Heck, I don’t even know whether the Fed’s policy is wrong or just worrisome. It’s possible, after all, that the central bank has provided appropriate liquidity and it will soak it up at the right time.

I don’t think that’s the case. I fear Bernanke is in over his head and that the Fed is engaging in the monetary version of Keynesian economics.

And if that’s true, something bad will happen at some point. If there’s too much liquidity out there, it presumably will show up at some point as either rising prices or an asset bubble.

Then again, we know banks are keeping more than $1 trillion of excess reserves parked at the Fed and maybe it will stay that way forever. In which case the private sector is inadvertently protecting us from bad monetary policy. Thomas Sowell has suggested that something like this is happening.

I can say for sure is that we wouldn’t have to worry if we were in a libertarian fantasy world and the private sector was responsible for money.

You may think that sounds crazy, but that’s the way it used to be, as explained in this short video.

John Stossel has made the same point about competing market-based currencies.

And if you want to see how well money has maintained its value since the Federal Reserve took over, this link has an excellent video.

P.S. I often get asked about the gold standard. It’s good in theory, but the real issue is whether governments can be trusted to operate it prudently and honestly.

P.P.S. Since Christmas is just two days away, we can all wonder whether we will get this present from Ben Bernanke. And if you still have some last-minute shopping to do, here’s a Bernanke t-shirt for your liberal friends.

P.P.P.S. For some laughs, check out Ben Bernanke’s Facebook page.

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In the past, I’ve shared Federal Reserve humor, including this special Fed toilet paper, Ben Bernanke’s hacked Facebook page, the Bernanke-who-stole-Christmas image, a t-shirt celebrating the Fed Chairman, and the famous “Ben Bernank” video.

But this film from Bernanke’s childhood years may be the best of all of them. It is a good symbol of how he learned to conduct monetary policy.

Though, to be fair, it is theoretically possible that the Fed Chairman’s monetary easing is simply the well-timed provision of liquidity and he will soak up all the extra money at precisely the right moment.

But I’m skeptical, as you can see here, here, and here.

The real problem, though, is that we’ve given government a monopoly over money. This video is a good introduction to how governments replaced market-based money with central banking.

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I’ve expressed concern about QE3 and other decisions by the Federal Reserve about monetary policy, but I have also admitted that it’s difficult to know the right monetary policy because it requires having a good idea about both the demand for money and the supply of money.

But this raises a bigger issue. The only reason we expect the Fed to “know the right monetary policy” is because it’s been assigned a monopoly role in the economy. But not just a monopoly role, we also expect the Fed to be some sort of omniscient central planner, knowing when to step on the gas and when to hit the brakes.

And we also are asked to suspend reality and assume that the folks at the Fed will be good central planners and never be influenced by their political masters. Yeah, good luck with that.

With so many difficult – or perhaps impossible – demands placed upon them, no wonder the Fed has a lousy track record (as documented in this powerful George Selgin video).

So let’s ask a fundamental question. Is the Fed necessary? Are we stuck with a central-planning monopoly because there’s no alternative? Professor Larry White says no in this new video from Learn Liberty.

This is one of the best videos I’ve ever seen, so I strongly encourage everyone to share this post widely.

Professor White effectively demonstrates how private markets can replace the five different roles of the Fed. But his arguments are not just based on theory. He shows that the private sector used to handle those roles in the past.

And I especially like his point about how a decentralized market system would operate. Indeed, I would have stressed even more how such a system overcomes the knowledge problem that exists with a monopoly central planner.

Here’s my video on the Fed. I focus more on how central banks developed, but you’ll see some common themes in the two videos.

P.S. Here’s a video with 10 reasons to dislike the Fed.

P.P.S. If you want some Fed humor, we have a Who-is-Ben-Bernanke t-shirt, this Fed song parody, some special Federal Reserve toilet paperBen Bernanke’s hacked Facebook page, and the famous “Ben Bernank” video.

P.P.P.S. Professor White’s video shows how we can improve monetary policy, but let’s also be aware that there are proposals that would lead to even worse monetary policy.

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I posted this t-shirt about Bernanke’s easy-money approach a couple of days ago, but I should have waited ’til today since it would be a perfect accompaniment to any analysis of the Fed Chairman’s unveiling of QE3.

But given the potential economic consequences, I suppose this isn’t a time for jokes. Let’s look at some of what the Wall Street Journal wrote this morning.

This is the Fed’s third round of quantitative easing (QE3) since the 2008 panic, and the difference this time is that Ben is unbounded. The Fed said it will keep interest rates at near-zero “at least through mid-2015,” which is six months longer than its previous vow. The bigger news is that the Fed announced another round of asset purchases—only this time as far as the eye can see. The Fed will start buying $40 billion of additional mortgage assets a month, with a goal of further reducing long-term interest rates. But if “the labor market does not improve substantially,” as the central bankers put it, the Fed will plunge ahead and buy more assets. And if that doesn’t work, it will buy still more. And if. . .

The “And if…” is the key passage. For all intents and purposes, Bernanke has said that the Fed is going to relentlessly focus on the variable it can’t control (employment) at the risk of causing bad news for the variable it can control (inflation).

A trip to the store in Bernankeville

Since that hasn’t worked in the past, it presumably won’t work in the future. The WSJ notes that recent Fed easings have made the economy worse.

Will it work? Mr. Bernanke recently offered a scholarly defense of his extraordinary policy actions since 2008, and there’s no doubt that QE1 was necessary in the heat of the panic. We supported it at the time. The returns on QE2 in 2010-2011 and the Fed’s other actions look far sketchier, even counterproductive. QE2 succeeded in lifting stocks for a time, but it also lifted other asset prices, notably commodities and oil. The Fed’s QE2 goal was to conjure what economists call “wealth effects,” or a greater propensity to spend and invest as consumers and businesses see the value of their stock holdings rise. But the simultaneous increase in commodity prices lifted food and energy prices, which raised costs for businesses and made consumers feel poorer. These “income effects” countered Mr. Bernanke’s wealth effects, and the proof is that growth in the real economy decelerated in 2011. It decelerated again this year amid Operation Twist. When does the Fed take some responsibility for policies that fail in their self-professed goal of spurring growth, rather than blaming everyone else while claiming to be the only policy hero?

For those of us who worry about the pernicious impact of inflation, it’s possible that the Fed will soak up all this excess liquidity at the right time. But don’t hold your breath. The WSJ continues.

The deeper into exotic monetary easing the Fed goes, the harder it will also be to unwind in a timely fashion. Mr. Bernanke says not to worry, he has the tools and the will to pull the trigger before inflation builds. That’s what central bankers always say. But good luck picking the right moment, which may be before prices are seen to be rising but also before the expansion has begun to lift middle-class incomes. That’s one more Bernanke Cliff the economy will eventually face—maybe after Ben has left the Eccles Building.

Last but not least, the WSJ is not terribly happy about the Fed seeking to influence the election.

Given the proximity to the Presidential election, the Fed move can’t be divorced from its political implications. Mr. Bernanke forswore any partisan motives on Thursday, and we’ll give him the benefit of the personal doubt. But by goosing stock prices, and thus lifting the short-term economic mood, the Fed has surely provided President Obama an in-kind re-election contribution.

If we go to the other side of the Atlantic, Allister Heath of City A.M. has some very wise thoughts about QE3.

In the long run, real sustainable growth comes from entrepreneurs inventing better ways of conducting business, from investment in productivity enhancing capex financed from savings, and from more people finding viable jobs. Eventually, the short-term becomes the long-term – and that is where we are today. Cheap money is just a temporary fix – and like all drugs, the economy needs more and more of it merely to stay still now it is hooked. …manipulating the housing and construction markets is a dangerous game that the Fed should not be playing; it would be better to allow the market to clear freely. In a brilliant new paper for the Federal Reserve Bank of Dallas, William R White, one of the few economists to have predicted the financial crisis, warns of the disastrous unintended consequences of ultra easy money. He explains why there are limits to what central banks can do, that monetary “stimulus” is less effective in bolstering aggregate demand than previously, that it triggers negative feedback mechanisms that weaken both the supply and demand-sides of the economy, threatens the health of financial institutions and the functioning of financial markets, damages the independence of central banks, and encourages imprudent behaviour on the part of governments.

In other words, Allister is worried about the Fed acting as some sort of central planning body, attempting to steer the economy.

Sadly, the Fed has a long track record of doing precisely that, as documented in this lecture by Professor George Selgin. It’s 40 minutes, so not for the faint of heart, but if you watch the video, you’ll have a hard time giving the Fed the benefit of the doubt.

And let’s also remember that bad monetary policy is not the only thing to worry about when considering the Fed’s behavior. It also has started to interfere with the functioning of credit markets, thus distorting the allocation of capital.

Here’s the bottom line. I think, at best, the Fed is pushing on a string. Why will it help to create more liquidity when banks already have more than $1 trillion of excess reserves?

The real problem in our economy is the overall burden of government. The tax system is punitive. Wasteful and excessive government spending is diverting resources from productive use. The regulatory burden continues to expand.

These are the policies that need to be fixed. Sadly, they are less likely to be addressed if politicians think they can paper over the problems by figuratively printing more money.

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