"What you are looking at now is really being determined by other
considerations. How much should we buy of mortgage-backed securities?
How much should we loan to foreign central banks? This is really more
like an industrial policy," he said…"If you have a situation where the Fed is borrowing to invest in all
these sectors it seems to me you have a huge governance issue…that
demands a lot of thought," Taylor said.Taylor said the U.S. Congress has a legitimate right to demand a say
in who the Fed lends money to. The outcome would be "radical reform"
that would risk monetary policy independence, he said.
Here is the full article.
Tyler (or anyone), have the last two years blown up the standard Taylor Rule paradigm the way (I used to think) the stagflation of the 1970s discredited old-school Keynesianism?
It amazes me when people see obvious and completely reasonable assertions of public control over public institutions as dangerous or wacky.
First, the Fed begs for cash, huge amounts of public funds. It then demands that it be left alone, that the public cannot see what it is doing or have their elected representatives have any control over its policy or functions.
I think we are all a little tired of this one-sided free-market system.
“Give us hundreds of billions of dollars. No questions asked. No strings attached. We’ll solve this problem, don’t you worry. Just sign the check and leave us alone”.
Another thing; the Saint Louis Fed can always be counted on for free market hacks. One of their honchos came to my University a year or so ago. Explaining that Europe was definitely not pushing money into our economy to prop us up, no, they were just impressed with our transparency. He later went on to say that the elderly Japanese would soon retire and demand American goods. When questioned as to what products we actually make, he suggested military hardware such as jets and tanks.
I can’t believe such buffoonery; if these are the gatekeepers of our money no wonder our dollar is plunging and our economy is diving down after it.
In response to, “…have the last two years blown up the standard Taylor Rule paradigm…”
That seems hard to argue. One of the main criticisms of the fed that’s been floating around is that the low interest rates from 2002-2006 that helped fuel the housing bubble were deviations from the Taylor rule. (Rates would have been higher under Taylor rule and therefore bubble would have been smaller.) One of the fed responses is that inflation was under control during this period (fed did its job) and that what drove the speculation was a global savings glut.
Supporting the first position, there was a fascinating interview with Anne Schwartz in the WSJ in the past few months where she says, “If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset. The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it’s so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses.”
Inflation was not under control. It just wasn’t showing up in the CPI. Cheap imported goods and labor suppressed inflation in the CPI, but it raged in commodities and assets.
Just focusing on this artificial statistic, the CPI, the core CPI or what new version of it that they come up with to conceal whats actually happening, is the fundamental error that the Fed continues to make.
That’s why I prefer to look at something real, like the price of gold. Its not a damn statistic that they make tell the lies they need to keep the status quo going.
Gold indicated the inflation quite clearly:
http://tinyurl.com/10yeargold
One option: Develop an expanded inflation index that includes some asset prices– probably house prices, possibly stocks. If we’d had that in the past few years, it would have kept interest rates higher in 2001-2004, and the housing bubble wouldn’t have inflated so much.
Is there a welfare case for any particular definition of inflation, I wonder? Any reason to think that *consumer* price inflation is the thing to prevent, rather than asset price inflation, producer price inflation, or whatever?
good post….thanks for sharing….
Comments on this entry are closed.