Is the Fed Making the Crisis Worse? - John B. Taylor

[learninglemur]

Going deeper than one Fed failure, Gerald P. ODriscoll Jr. explains how the Fed naturally causes asset bubbles in this article: "Asset Bubbles and Their Consequences".

One key quote: "In a vibrant market economy with technological innovation and ever new profit opportunities, the monetary policy that maintains price stability in consumer goods (or zero price inflation) requires substantial monetary stimulus. That stimulus will have a number of real consequences, including asset bubbles."

[learninglemur]

Our economic bust was caused by the Fed -- they held interest rates below the natural rate of interest, creating an unsustainable credit expansion boom.

For the economic details as to why the Fed is primarily responsible, and why it is flying blind, please see the following paper by economist Roger W. Garrison: "Interest-Rate Targeting During the Great Moderation: A Reappraisal". John Taylor's monetary policy rule is an important part of this analysis.

[espunde]

Anyone who isn't a devotee or acolyte of the great Saint Keynes would answer in the affirmative.

[sharbeth7]

The banks won't lend to each other because they have no money to lend. They are INSOLVENT. That is why they keep asking for billions every month from the fed. You can't have liquidity if your debts exceed your profits. That has been the case for at least 10 years and now the ponzi scheme is unravelling. Printing billions out of thin air is going to kill this country. It is absolutely the wrong thing to do. They should let the mismanaged banks fail and save the American taxpayer.

[bg24955]

economists came out of 70's can't stop talking about inflation (targeting).

[0PsycoDad0]

Now that Bernake has dislocated the bond marked he has severe problems in fixing this issue without triggering inflation on a scale unseen since 1920s Weimar debacle.

[ferrozm]

YESSS. Of course it is!!!