The Fed: Part of the Solution or Part of the Problem?
James Hamilton (an econ professor at UCSD) recently discussed the Taylor Rule and the housing boom. The money quote is at the very end:
There was a lot of discussion at the conference about whether the Fed should have leaned against the accelerating real estate prices during 2003-2005. Taylor's simulations suggest that the Fed should perhaps have been thinking of itself as one important cause of that phenomenon in the first place.Artificially low interest rates caused by printing money eventually leads to inflated prices? Perhaps this is why entrepreneurs don't outsmart the Fed-induced business cycle.
Comments (2)
Adi
Another issue to take into consideration is not just the induced "exhuberance" about investment, but also the flipside. If one knows the Fed is messing up economic signals, one has two options: invest at a higher risk or invest less. We know the higher risks are taken by the presence of the boom. But we can also say that the downturn may last longer than otherwise because people then refrain from investing.
The analogy is driving in a foggy day. Fog will induce both greater accident rates, but also slower drivers.
Published: September 3, 2007 6:15 AM
DickF
I was reminded by a friend that the only institution that has any real influence over the value of money is the FED. If that is the case then the abysmal state of our monetary system over the past 30 to 40 years must fall directly at their feet.
The FED had a conference at Jackson Hole and invited some of the best known economists to present papers. Of all the papers Taylor's was the only one I know of to actually question the FED's policies and theories and even his paper only had one sentence.
Where is the debate on FED policy? Where are the theoretical discussions of monetary policy?
Paper after paper seemed to be written to justify FED actions and praise Ben Bernanke for his actions to deal with the credit crisis. There were papers that recognized that government intervention did have some negative effect on the crisis, but these same papers saw the remedy to be more government regulation.
What is the definition of insanity? One who does the same thing over and over expecting a different result.
Published: September 4, 2007 1:39 PM