Tuesday, December 16, 2008

 

Fed Slashes and Promises to Make It Stick: Let's See if Krugman Is Right

The Fed cut the target today down to "0 to 0.25%" and "made an explicit commitment to keeping official interest rates near rock bottom for an extended period." This is exactly what Paul Krugman has recommended. So let's see if it works.

My point here is that for every period where the standard "cut rates and spend a lot of borrowed money" approaches failed miserably, the Keynesians always say, "It was too little, too late."

For example, Paul Krugman amazingly describes the Bush Administration response to all this as an example of a government too constrained by free-market ideology to actively rescue the markets. (I'm not going to bother digging up cites; I hope I didn't shock you by claiming that he said that.)

My prediction is that the economy will still be in the john come summer. And Krugman will still be saying, "We need to take the gloves off and really stimulate this economy! Man I can't believe how screwed up the free market can get sometimes."

Oh, one last thing: Those who keep saying that the humungous base injections are nothing to worry about, because the wise Bernanke will suck those reserves out once the economy picks up the slack--what do you say now? Is Bernanke going to invent a way to suck out $450 billion in base money without raising the target above 0.25%?




Comments:
I know nothing about economics and only understand about half the posts on your site and the articles at www.mises.org. But is it just me or should that chart frighten the hee-bee-jee-bees out of everyone? What is your prediction as to when I'll need to take a wheelbarrow to the local ATM just to get the cash I need to buy lunch?
 
This comment has been removed by the author.
 
no worries anon. I was in your shoes less than a year ago, and now I understand just about every post pretty well. Keep at it... you'll be happy you did.

(I think) The answer to your question - I don't think things will get that bad (yet). The Fed isn't printing so much money right now... it's mostly buying up treasury bonds. This is causing inflation, but it's not hyper yet.

Also, the natural deflationary crunch is being pitted against the expanding money base, so inflation isn't happening as quickly or as broadly as you might expect.

Of course, once the banks start lending again more readily with all their Fed money, this could easily change.
 
Dr. Murphy,

My whole understanding of monetary policy is fairly rudamentary (I'm getting there...). How bad is this seriously going to make inflation? Zach has some good comments but this just seems like a crazy expansion of the monetary base.

Stupid question(s): is the graph you presented for just some sort of base controlled by the STL Fed or by the entire Fed? And is that M1 or something larger?

What's your fav book to explain monetary policy etc.? For a guy with a MSAE already?

PS - Love the blog
 
Hey everyone,

A few people have emailed me saying they don't know the difference between base, M1, etc. so I will do a post on this, hopefully tomorrow.
 
No need for the wheelbarrow, we have debit card these days. ;)
JR
 
Post a Comment

Subscribe to Post Comments [Atom]





<< Home

This page is powered by Blogger. Isn't yours?

Subscribe to Posts [Atom]