Financial markets in the United States and around the world are all waiting with “bated breath” for when the Federal Reserve modifies its “easy money” policy and starts to raise interest rates. No one, however, asks a simple question: Why is the American central bank in the interest rate setting business?
Tagged: Monetary Policy
Forty years ago, on October 9, 1974, the Nobel Prize committee announced that the co-recipient of that year’s award for economics was the Austrian economist, Friedrich A. Hayek. Never was there a more deserving recognition for one of the truly great free market thinkers of modern times.
For more than a decade, now, Federal Reserve policy has been guided by the fear of one economic bogyman: the presumed danger of “price deflation.” The fear is unfounded and the inflationary “solution” only leads to disaster.
Since the economic crisis of 2008-2009, the Federal Reserve – America’s central bank – has expanded the money supply in the banking system by over $4 trillion, and has manipulated key interest rates to keep them so artificially low that when adjusted for price inflation, several of them have been actually negative. We should not be surprised if this is setting the stage for another serious economic crisis down the road.
Today’s economy is driven by Washington in more than just determining the location of Maserati dealerships. We see the ramifications of current government policies in numerous obvious ways. Make full-time employment more expensive with required benefits, and suddenly there are more part-time jobs; provide ample benefits and low eligibility standards for defining disabled workers, and suddenly there are more long-term unemployed going on SSDI; keep interest rates at zero, and suddenly there are more elderly workers; end unemployment insurance, and suddenly you see people accepting jobs they were reluctant to take; and as we’ve seen at the state and local level, raise the minimum wage, and suddenly teens are struggling to find work.
Forty years ago, during the week of June 15-22, 1974, the Austrian School of Economics was reborn during a conference in the small New England town of South Royalton, Vermont. Why was this important? Because the economists of the Austrian School have developed the most persuasive understanding of why only economic freedom can give mankind both liberty and prosperity.
For more than two hundred years, practically all of the leading advocates of individual liberty and free markets have assumed that money and banking were different from other types of goods and markets. From Adam Smith to Milton Friedman, the presumption has been that competitive markets and free consumer choice are far better than government control and planning – except in the realm of money and financial intermediation. They have been wrong on this important issue.
Ninety years ago, on November 15, 1923, the Great German Inflation came to an end when the monetary printing presses were finally shut down, and the economic havoc came to an end. Its lessons are worth remembering.
Transparency, therefore, has little to do with being accountable to the political branches of government. It’s about allaying the concerns of the financial market in the face of accommodative monetary policy.
Did Janet Yellen,
(1) see any problem in the housing bubble,
(2) anticipate the bursting of the housing bubble; and,
(3) anticipate its implications for the U.S. economy?
The answers are (1) no, (2) no, and (3) no.
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