Monthly Archives: March 2008

Leijonhufvud on the Economy

I found this buried on my desk and found it to be especially poignant given that it was written in October 2007.

Alphabet Soup

Getting lost in all the new Fed speak? The WSJ’s Real Time Economics blog has a guide the the Fed’s alphabet soup.

Quote of the Day

“There seems to be a view that monetary policy is the solution to most, if not all, economic ills. Not only is this not true, it is a dangerous misconception and runs the risk of setting up expectations that monetary policy can achieve objectives it cannot attain . . . to ensure the credibility of monetary policy, we should never ask monetary policy to do more than it can do.”

Charles Plosser

Taking the Money Out of Monetary Policy

A great summary of the recent expansion of the Fed’s tools can be found here.

The Private Sector and Disaster Relief

Steve Horwitz writes:

While the major media and political actors rightly focused on the failures of FEMA, the major government agency responsible for disaster relief, the successes of the private sector and of one particular government agency, the U.S. Coast Guard, have been much less publicized. Their effective responses deserve greater consideration as we seek to improve disaster relief and recovery policies….

Read the whole report.

Deflation…again

The latest EconTalk podcast is a discussion with Tyler Cowen that centers on monetary theory and policy. While the podcast as a whole is worth a listen, I found myself quite disappointed upon hearing Cowen’s views on deflation. Cowen not only rejects modest deflation as an optimal policy, but actually advocates a low, stable rate of inflation. 

In my view, this largely stems from a misunderstanding of deflation prevalent in monetary theory that I have previously detailed here.  Thankfully, David Beckworth, who has done great worth on the topic of malign versus benign inflation, presents a great counter-point to Cowen’s analysis.

The Fed Poised to Move … Big

Bloomberg reports:

Traders predict the Federal Open Market Committee, meeting today in Washington, will lower the overnight lending rate by a full percentage point, based on futures prices in Chicago. That would be the biggest reduction since 1984, when Paul Volcker led the central bank, and would bring the benchmark rate down to 2 percent.

Yeesh.

UPDATE: Robert Murphy and Lee Hoskins plead for a stop to the rate cuts:

The Fed has abandoned the one thing it can truly control–the long-run increase in price levels–in a self-defeating attempt to keep the economy growing. A good portion of the housing mess itself is the result of Fed policy: In response to the 2000-2001 recession, chairman Alan Greenspan brought the federal funds rate down to a shocking 1% by June 2003, then held it there for a full year. The rate was then steadily ratcheted back up, reaching 5.25% by June 2006.

These actions first helped inflate the home-price bubble and then helped burst it. Naturally, there are many factors–and perhaps even villains–that helped create the housing bubble, but excessively low interest rates were surely a necessary ingredient.

Regardless of past mistakes, the Fed must now make the best of a bad situation. It must stop chasing the financial markets, and even the broader economy. Creating more dollar bills will not add to the nation’s wealth, or make workers more productive.

Indeed.