The Shape of Things to Come

“Bernanke draws an important policy conclusion from the destructive effect of the debt crisis. Since he view the debt crisis as an exogenous event, he argues for selective bailouts of bankrupt firms. We find this proposal ill-advised and unnecessary. It is ill-advised because it disregards the serious moral hazard associated with such a policy and the incentives it creates in the political process. It is unnecessary, we believe, because the debt crisis, like the banking crisis, is avoidable if the monetary authority prevents the destructive effect of the money-credit decline and the wave of bankruptcies. We conclude that banking crises and debt crises can be prevented with the aid of a suitable choice of monetary arrangements.”

— Karl Brunner and Allan Meltzer, Money and the Economy: Issues in Monetary Analysis (1993, p. 96 – 97)

One response to “The Shape of Things to Come

  1. I wonder if the level of central bank independence moves in cycles. Here I thought (hoped rather) that central banks became increasing independent from fiscal policy over time.

    Am I reading that right, 1993?

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