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Don't Trouble Your Little Heads, Just Trust the Fed
This line would have saved NYT columnist Tyler Cowen a lot of ink, and made his point much more clearly. Mr. Cowen is upset that some people might suspect that the Fed is helping hedge funds and other investors who made bad bets.
Cowen warns readers:
"THE American public has a hard-enough time understanding relatively simple economic issues like the benefits of free trade, much less the Fed or monetary policy. So if the picture sticks that the Fed is a shill for hedge fund managers, or that it is treating homeowners unfairly, the pressure will mount for Congress to limit the Fed’s independence. Yet most economists, on a bipartisan basis, agree that relatively independent central banks have a better record of maintaining economic stability and keeping down price inflation."
While all of us would like to be able to take Mr. Cowen's advice and trust the Fed, we live in the real world. The public has an interest in keeping markets liquid, but it has no interest in making it any easier for investors holding bad debts to dump them on less sophisticated buyers. If the Fed did not want to help out these investors, what was the rationale for encouraging banks to use mortgage backed securities as collateral for their borrowing at the discount window? This is not a normal practice.
There have been many other occasions where the Fed's neutrality between interest groups can be questioned. (Is it really more important to keep inflation under 2.0 percent than to lower unemployment? Why did Greenspan and Bernanke find it impossible to say that we have a stock/housing bubble?
It's touching that Tyler Cowen wants to reassure us that the Fed is neutral, but not very convincing.
COMMENTS (8)
Perhaps Tyler Cowen is not neutral either.
Posted by: Ponzi Q. Globalization | September 9, 2007 7:35 AM
The Fed is all about keeping Citi from experiencing any pain and suffering.
Posted by: black swan | September 9, 2007 9:01 AM
Or the time when Greenspan was pimping ARMs with interest rates at a 40-year low.
Posted by: Derek | September 10, 2007 3:35 AM
Greenspan didn't find a problem with Bush's tax cuts either.
Actually there may be less here than meets the eye- the banks needed to raise capital, fast. The securities are held as collateral for loans- the Fed isn't 'buying' them.
Posted by: ronin | September 10, 2007 10:49 PM
"most economists, on a bipartisan basis, agree that relatively independent central banks have a better record of maintaining economic stability and keeping down price inflation"
HAH! What kind of worthless garbage is this? Since when does printing money keep down price inflation? Maybe I can get a job at the NYT.
Posted by: patient renter | September 11, 2007 1:52 PM
"most economists, on a bipartisan basis, agree that relatively independent central banks have a better record of maintaining economic stability and keeping down price inflation"
and like most economic writing reads pretty much the same backwards as well as forwards.
And, speaking as an American i don't much like the 'American's can understand the benifits of free trade.' We do. We're getting screwed and other folks are making ton's o money. See? It's not hard at all.
Posted by: Professor Fate | September 12, 2007 4:52 PM
It's a real testament to the kind of libertarian that Cowen does both in the same sentence:
- laments the American inability to comprehend free trade
- defends government intervention into the market via the Fed
I just can't understand why Americans are confused. :-)
Loved Conservative Nanny State, BTW - as a libertarian it gives me real ammunition against crypto-small-government Republicans.
Posted by: Jeremy | October 11, 2007 3:15 PM
The fall of the dollar was inevitable. It is the only way to get the trade deficit down to size. The real problem was allowing the dollar to rise to the point that it made such a painful adjutsment necessary. This was the Clinton-Rubin high dollar policy. It felt good in the short-term (except for manufacturing workers), but just like tax cuts that lead to big budget deficits, it could not be sustained.
Posted by: san | April 8, 2008 1:57 AM