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Home Publications Blogs Beat the Press The Fed Is Still Clueless About Bubbles and So Is the WSJ

The Fed Is Still Clueless About Bubbles and So Is the WSJ

Saturday, 28 August 2010 14:26

The economists and central bankers attending the annual meeting of central bankers in Jackson Hole, Wyoming apparently have not noticed the collapse of the housing bubble and the wreckage it has caused. This is the only plausible explanation for a WSJ article that told readers about a paper on a new approach to fiscal policy that argues:

"fiscal policy could benefit from the more scientific approach taken by monetary policy over the past two decades."

The article continues:

"The former U.S. Federal Reserve economist [the person presenting the paper] noted how monetary policy has improved after central banks started to adopt goals such as inflation targeting and as central bankers started to articulate the 'science' in public speeches."

People who pay attention to the economy know that the monetary policy pursued over the last three decades has devastated the economy, leaving tens of millions of workers in the United States unemployed or underemployed. It would be hard to imagine a policy that could produce more disastrous results than the single-minded focus on inflation that central banks followed even as housing bubbles in the U.S. and elsewhere grew to ever more dangerous levels.

If the central bankers and economists at Jackson Hole still don't understand how harmful these policies have been then it should raise enormous concern in Congress and among the general public about the competence of the people controlling economic policy. This should have been the main focus of a news article on the meetings.

Comments (16)Add Comment
Who represents the endless millions of workers
written by Scott ffolliott, August 28, 2010 4:07
At Jackson Hole, who represents the endless millions of workers, who are being squeezed daily.
written by Goldilocksisableachblonde, August 28, 2010 4:21
This paper by Northwestern University economist Lawrence Christiano , also being presented at Jackson Hole , sounds better :


(Reuters) - Central banks should consider the growth of credit, not just inflation, when figuring out the right level of interest rates, according to a paper presented at the closely-watched Federal Reserve summit.

"A monetary policy which implements inflation forecast targeting using an interest rate rule would actually destabilize asset markets," the authors argue."

The paper suggests that those who criticized the Fed for fueling the global financial crisis by keeping rates too low for too long may have a point.
written by izzatzo, August 28, 2010 4:27
It would be hard to imagine a policy that could produce more disastrous results than the single-minded focus on inflation ...

Why do inflation fearmongers always take ice cold showers?

Because when the water is ice cold, it still feels warm, so when it's actually warm, it feels too hot, and when it's actually hot, it feels boiling hot. It never feels cold, the same way deflation never exists.

This condition, also known as Chronic Hypothermic Shrinkinitus, is not only common among central bankers, but also prevalent among lenders of debt and teabaggers. The first sign of this disease is cold feet at the onset of a deep recession.
written by Fed Up, August 28, 2010 8:45
"The former U.S. Federal Reserve economist [the person presenting the paper] noted how monetary policy has improved after central banks started to adopt goals such as inflation targeting and as central bankers started to articulate the 'science' in public speeches."

What a bunch of horse garbage. Price inflation targeting without targeting the amount of debt is nothing more than an excuse for the spoiled and rich to exploit an oversupplied labor market to try to steal the real earnings growth and retirement of the lower and middle class.
written by jm, August 29, 2010 9:08
If it had not been not for the dogma that it's impossible for economists to gauge what asset prices should be, and central bankers had included them in their inflation targeting and had started clamping down on money supply when housing prices headed for the moon, inflation targeting might actually have worked.
On a FED oddity
written by FED Facts, August 29, 2010 1:39
Dean Baker has it out with the Duke,congrats
I, from the other side of the Atlantic, wonder how a meaningful monetary policy, can be enacted
when the FED ( 5000 economists ans statisticians ) does not publish the evolution of M3, that's left to 'shadow stats''s blog...
No worry, as A.Evans-Pritchard estimates, a 10% annualized decrease rate
Glaeser's low interest rates hypothesis
written by bakho, August 29, 2010 2:53
Wondering if you have any thoughts on this?

Can interest rates explain the US housing boom and bust?
Edward Glaeser Joshua Gottlieb Joseph Gyourko

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written by John Jones, August 30, 2010 5:49
Bernanke likes to remind everyone that he is an expert on the great depression and knows how to prevent it from happening again in the US. Apparently he is also an expert on Japan and its struggle with chronic deflation following its housing bubble in the 1980's. In fact Bernanke wrote an article in 2000 titled "Japanese Monetary Policy: A Case of Self-Induced Paralysis," where he goes on to lecture BOJ officials about what they could and should have done differently in order to to avoid a deflationary outcome. He goes on to postulate that the BOJ was not trying hard enough to stimulate the economy and that 0% interest rates are just one tool to beat deflation. The Fed Chairmen even goes so far as to assert that he knows how to escape a liquidity trap caused by 0% interest rates. The reason I bring this up is because it gives people a good idea of what Bernanke's next move may be. The US is dangerously close to falling into the dreaded "liquidity trap" as deflation takes hold and monetary policy loses its effectiveness.

Here are some of his suggestions to the BOJ:
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.