Too much power for the Fed?

June 18, 2009

That is the conclusion of my pal Larry Kudlow of CNBC:

This is like the fox guarding the henhouse. After all, the Fed’s overly loose money policies created the asset bubble — including housing, commodities, and energy — in the first place. Near-zero interest rates, huge money growth, and total disregard for the plunging dollar are what set up the housing boom and the unfortunate overleveraging by consumers, mortgage borrowers, and Wall Street securitizers.

It also set up the astronomical $150 oil shock, which came alongside the Fed’s overly tight money policies to offset the prior loose policies that would cause this credit crunch and deep recession. In fact, looking back to the last two bubbles — the tech bubble of 1999-2000 and the housing/energy bubble after that — it was the Fed’s pillar-to-post go-stop-go-stop lurches that deserve the principal blame for the economic messes that ensued.

The Great Moderation of the ’80s and ’90s has given way to extremism in Fed policy. And we may be in danger of repeating it all over again, with a new round of near-zero interest rates and a massive 11 percent growth of M2 over the past nine months. …

Missing from the package is a reform that would put Fed monetary policy back on a commodity-price rule, including gold and the dollar. This rule was basically used from the early ’80s to the late ’90s, during Paul Volcker’s Fed term and the first half of Alan Greenspan’s term. This would have been the best-possible reform, but of course it’s not in the proposal.

So now the Fed has become the supreme Keynesian unemployment vs. growth Philips-curve tinkerer. Until this totally mistaken policy is changed, we can have ten more reregulation plans that will not fix the real problem.

2 comments

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Not sure if you wrote US senators hit at core of Obama financial reforms. But it seems on topic with what you write about. Quick question for you, isn’t the SEC/AICPA/FASB supposed to be the ones that guard us against failures? Why would adding yet another government funded service be any better when the other ones are failing? If we are going to expand the government further shouldn’t we close shop on the other places failing to protect us? To me this seems like a horrible idea. I rather see the money spent on expanding what is already established, not throwing new people into something they aren’t familiar with. This crisis was caused by the democrats on deregulation and the republicans failing to fix this mistake. Now we are on the brink of over regulating and collapsing our market with too much cost and not enough income. Time for a new administration yet?

Posted by Rob M | Report as abusive

Sad to see what America has become and where we’re headed. Dump the fed, return us to a gold and silver coin currency, and cut the federal government down to size if you want to fix something.

Posted by jason | Report as abusive