Mission Impossible

"As this nation's financial crisis deepens, some have argued that the [Fed] has not done enough. Perhaps the question should be: Has the Fed done too much? Have its earlier actions created the crisis we now face? ... The current crisis is the result of a flood of easy money from 2002 to 2006. ... The party came to an end when the Fed started raising interest rates to more normal levels and investors started pricing risk more stringently. ... America's current fiscal and monetary policies bear a striking resemblance to those of the late 1960s and 1970s, which resulted in more than a decade of stagnant economic growth, a declining dollar and inflation. ... First, America should abandon central planning and allow the market--not the Fed--to set short-term rates. ... It makes no more sense for the Fed to set the price of money--the most ubiquitous of all commodities--than it does for it to set the price of wheat, corn or any other commodity. As with long-term rates, short-term rates should be market-driven. ... During times of crisis, the Fed could continue to provide liquidity to the banking system through its Treasury auction facilities", Haag Sherman (HS) at the Houston Chronicle, 10 August 2008.

"In the dozen or so years until 2007, it had become as close to a global economic orthodoxy in economic policy making as we ever see: Central banks should target a low and stable rate of inflation. This replaced earlier orthodoxies--such as that central banks should maintain a fixed exchange rate with an ounce of gold. ... The U.S. [Fed], the Eurpoean Central Bank, the Bank of England and other rich-country central banks have generally made 2% inflation, give or take a smidge, the touchstone of good performance. Fed officials have for 20 years paid public obeisance to the statutory 'dual mandate,' to maximize employment as well as stabilize prices. ... Yet one of the great attractions of inflation targeting was that it only appeared to constrain central bankers discretion. ... The irony of the collapse of inflation targeting's intellectual edifice is that it has long been championed by Fed Chairman Ben Bernanke. ... A sudden 'exogenous shock' cuts demand to 98 widgets. But the central bank can then print money to induce consumers to buy up the two excess widgets, thereby stopping the factory from cutting production capacity and causing a 'recession.' It claws back the excess money when 'equilibrium' is restored. But what if this analogy is deeply flawed? What if the economy is much more like two factories than one? One factory produces say, real-estate widgets, and the other produces everything else. If consumers decide they want fewer real-estate widgets and more of some other widgets, it will take time and resources for capacity to shift from the first factory to the second. 'GDP' growth will decline during that time. ... By printing more money, the central bank only makes it longer and more painful, not least by producing significant and prolonged inflation", my emphasis, Ben Steil, (BS) at the WSJ, 18 August 2008.

I agree with HS's diagnosis and have said the same thing myself, I disagree with his perscription. The Fed ain't ready for reform. It can only be killed. Who decides when we have a "crisis"? Why should banks get special Fed treatment? Why can't Joe Blow borrow from the Fed?

I concluded inflation-targeting was absurd 28 years ago. Kill the Fed. BS, welcome to the "club". You are beginning to sound like an "Austrian". You recognize there are "real" resources in the economy and that change takes time. See my 1 March 2008 post. Welcome aboard. Next you'll read Human Action, The Theory of Money and Credit and Man, Economy and State and realize how little you know.