Yaron Answers: Canada And Banking Crises
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Archive for Tag “Fed”
Yaron Answers: What Impact Does Deflation Have In A Free Economy?
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The Fed Turns 100. . .Should It Live To See 101?
Thomas Sowell’s analysis of the Federal Reserve is spot on: it has been a disaster for the economy.
The Federal Reserve was supposed to prevent shocks to the economy that can come from drastic inflation or deflation, and reduce the dangers that can come from widespread bank failures. These are all good goals. But what is the Fed’s track record?
In the hundred years before there was a Federal Reserve System, inflation was less than half of what it became in the hundred years after the Fed was founded. The biggest deflation in the history of the country came after the Fed was founded, and that deflation contributed to the Great Depression of the 1930s. As for bank failures, they reached levels unheard of before there was a Federal Reserve System.
Whole thing here.
QE3 And Our Long-Term Economic Outlook
A short but informative interview on QE3 with economist Steven Horwitz.
1. Should the Federal Reserve have launched QE3?
No. Aside from the fact that QE extends the Fed’s powers beyond what central banks have typically done in the past, thinking that we need more monetary easing misdiagnoses the problem. The Fed appears to be buying into the argument that our slow recovery is the result of a lack of aggregate demand. An alternative view would put the blame on the deep structural distortions that were generated during the housing boom. Those malinvestments take time to unwind and it takes more time for entrepreneurs to reallocate those resources to new, better uses. That readjustment process has been slowed by various misguided policies that have subsidized and thereby locked in the mistakes of that boom. Every time we try to prop up housing prices or bail out failed industries, we slow recovery. Add to that the uncertainties about the election and policy more generally, and private investors are understandably reluctant to commit resources to the private sector.
The danger of QE, of course, is inflation down the road.
The Economy’s Real Problem
Larry White pokes some well-deserved holes in the notion (underlying QE3) that our problem is not having enough money, and concludes with what I think is an on-target diagnosis:
While saluting Sumner 2009, like Dourado I favor an alternative view of 2012: the weak recovery today has more to do with difficulties of real adjustment. The nominal-problems-only diagnosis ignores real malinvestments during the housing boom that have permanently lowered our potential real GDP path. It also ignores the possibility that the “natural” rate of unemployment has been hiked by the extension of unemployment benefits. And it ignores the depressing effect of increased regime uncertainty.
To prefer 5% to the current 4% nominal GDP growth going forward, and a fortiori to ask for a burst of money creation to get us back to the previous 5% bubble path, is to ask for chronically higher monetary expansion and inflation that will do more harm than good.