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It’s Not the Fed’s Fault
By John | January 9, 2010
As analysts try to describe how we got into this financial mess, policies of the U.S. Federal Reserve Bank are frequent targets. The Fed held interest rates too low for too long, encouraging the explosion of debt, and encouraging those who borrowed money to bid up asset prices, including technology stocks in the 90s and real estate in the 2000s. Frequent criticism is leveled at Ben Bernanke for seeming to defend Fed policies during this time frame. Although he won’t come out and say it explicitly, Mr. Bernanke’s comments contain a message we should all be listening to: Fed policy was consistent with the Federal Reserve’s mandated goals of MAXIMUM SUSTAINABLE EMPLOYMENT and price stability.
Translation: You can’t expect the Fed to prioritize price stability as long as you also make the nation’s central bank responsible for full employment, a goal that will always have political priority over price stability. Full employment will always be at the forefront of media and congressional attention. Price stability always functions with a time lag of at least several months, so given a trade-off, let’s flood the banking system with dollars now in hopes of cranking up the economy. We will deal with resulting inflation when the time comes.
This is not only hazardous to the long-term health of the U.S. currency, it makes no economic sense to make a central bank responsible for employment. Employment is the responsibility of employers. Central bankers are supposed to be responsible for money.
Mr. Bernanke repeatedly makes reference to these dual and conflicting responsibilities conferred on the Fed by the Congress, yet no one seems to take the bait and pick up on it. What he is really saying is that if you really expect the Fed to maintain price stability, then give it the necessary mandate. The mandate they have will inevitably result in runaway inflation.
It has, and it will.
Topics: Commentary |
January 28th, 2010 at 5:47 am
Keep posting stuff like this i really like it