Sunday, May 2, 2010

Disarray Within The Federal Reserve

Lawrence Kudlow writes about two competing financial philosophies at the Fed, and why one of them may be already setting the stage for the next financial bubble to begin forming.


  1. Kudlow gets much of this right.

    In practice, there are many complications to actually using commodity prices to influence monetary policy. But the idea is generally correct.

    Yet the modern Fed - I believe this was Greenspan's innovation - ignores "volatile" inflation components such as energy and food - in other words, commodities.

    Since "core inflation" is therefore mainly a measure of wage inflation, and since nobody's getting raises, the Fed's dual mandate of ensuring price stability and full employment dictates free money indefinitely, since unemployment is so high, and if oil goes through the roof and the dollar weakens, it's like, "so what?"

    Now, before folks get too upset with this policy it's worth taking just a second to understand the implications of following Kudlow's proposed policy: we would be raising rates to keep oil, food, and gold prices down - if economic activity is causing more oil to be used, and thus causing oil prices to rise, Kudlow's solution is to destroy that economic activity through tight monetary policy. Raising rates would slow down the economy and create even more unemployment. If Kudlow were completely honest, he'd spell that out.

    Of course the current trajectory of easy money will eventually result in a collapsed dollar, soaring energy prices, another big bubble, and another big bust.

    It sounds like I'm saying we're f**ked either way. That's right, we are, we're f**ked either way.

    But "let's blow a new bubble" path leads to ever expanding government power.

    If the Fed raised rates, defended the dollar and told the Treasury it was done monetizing bad mortgages and unfunded deficits, government power would be checked, and people's savings would be preserved.

    So I agree with Kudlow and Hoenig.

    I think fiscal and monetary soundness are the way to enforce limits on government power and preserve private economic freedom.

    And while I generally feel like folks here are inclined to agree with this, I'm compelled to point out that there will be a cost to this policy.

  2. Lewy, there will be a cost to any policy that actually works toward fixing the financial problems of the US.

    The trouble is that far too many voters are willing for others to pay any price or bear any burden, just so long as THEY don't have to.

    Which is why, despite the demonstrated falseness of the way things are being done, Barry still has the approval rating he does.

    Most of America is too lazy, too undereducated (in public schools) and just too certain that they have a right not to be part of the solution.

    {As an aside, I like the typeface in the 'Post a comment' box much better than the sans serif version when the comment is actually posted. Anyone else feel the same?}