Monday, March 31, 2008
This is tight monetary policy???
Unfortunately quite a number of alleged defenders of the free market have been making even less sense, and vigorously defending...um... the Fed? Good grief!
This defense of the Fed by the usually sensible David Henderson and Jeffrey Hummel is one of the less egregious examples, and it's bad. I posted a rebuttal on Tom Palmer's blog.
I just cannot understand self-described free-market advocates arguing that the provision of a crucial economic good can only be handled by government central planning, while everything else should be a market transaction. I cannot understand how they would argue the Fed has been doing a good job with its central planning, or that we've had tight monetary policy. Look at this:
This is the MZM money stock, according to the St. Louis Fed. (Left click on it if you don't have a microscope handy.) Where's the tight monetary policy? Or try this:
This is the year-to-year changes in MZM. Where's the tight monetary policy?
Don't like these, want percent changes? OK:
Tight policy? Where? When? Not when Greenspan was saying that the housing bubble was no reason for tighter policy. It's not there. There is a shrinking of the growth rate that occurs moving towards about 2006, and then when it looked like the housing bubble might pop and the Fed began rate-cutting again, growth picked up as well.
Over the seven years of the Bush presidency, MZM grew 72% by my calculation. The seven year period prior to that it was 68%, and the seven years before that it was 47%. (My calculations using Fed data.) So where's the tight policy? There isn't any!
The financial debacle was created by the Fed, and by the proclivity of the Congress & President for spending beyond our means. By itself, this deficit spending would simply have driven up interest rates and crowded out private investment. By monkeying around with interest rates and the money supply, the Fed has added misinvestment and the destruction of capital into the mix. And since a recession to clear the malinvestments is apparently unthinkable, the Fed is now embarked on a program of accelerating inflation and socializing the losses of big investors (i.e. forcing the taxpayers to take them on), the dollar and the citizen be damned.
It's horrifying, then, to hear self-proclaimed market economists talk about how the Fed has "learned to do monetary policy right," when actually the Fed is taking us to hell.
I should close on a more positive note for change. Robert Murphy (a fellow NYU Austrian Ph.D.!) does a very nice job of rebutting one of the Fed-defenders in the January Freeman, and with colleague Lee Hoskins has a nice comment on the Fed in the 16 March Forbes. Both are worth reading.
(Graphs and data from the St. Louis Federal Reserve.)
No matter how low you fall, Econ will bring you back to the top!