Ultra Easy Monetary Policy & the Law of Unintended Consequences- A Mutiny At The Fed

August 27, 2012 By 2 Comments

It seems that The Bernank has a dissenter in the ranks in the form of the Dallas Fed’s William White.

In a economic paper just released White states:  ‘In this paper, an attempt is made to evaluate the desirability of ultra easy monetary policy by weighing up the balance of the desirable short run effects and the undesirable longer run effects – the unintended consequences. The conclusion is that there are limits to what central banks can do. One reason for believing this is that monetary stimulus, operating through traditional (“flow”) channels, might now be less effective in stimulating aggregate demand than previously. Further, cumulative (“stock”) effects provide negative feedback mechanisms that over time also weaken both supply and demand. It is also the case that ultra easy monetary policies can eventually threaten the health of financial institutions and the functioning of financial markets, threaten the “independence” of central banks, and can encourage imprudent behavior on the part of governments. None of these unintended consequences is desirable. Since monetary policy is not “a free lunch”, governments must therefore use much more vigorously the policy levers they still control to support strong,sustainable and balanced growth at the global level.’

What did you say Mr. White!?! Monetary policy is NOT a free lunch??  But we were under the impression that your boss believes any economic or fiscal problem can be solved via a proverbial helicopter drop of fiat debt notes?

MUST READ FULL PAPER BELOW!!

 

Dallas Fed QE


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Comments

  1. Avatar of ricin3000 ricin3000 says:
    August 27, 2012 at 9:13 PM

    One thing that immediately sticks: so it’s not merely supply-side reasoning and — I wanted to say fixing but it’s more akin to plumbing — let’s call it engineering the supply side, but just maybe the simple (il-)logical leaps to expected demand behaviour is the weak point in Keynesian thinking? Not to mention that the demand side is hardly investigated let alone formulized in neat axioma’s and formulas. Who would have thought!
     
    Don’t get me wrong, classical, Keynesian, Austrian economic studies they all have their flaws, but the first thing a good theory should have (I’m a physicist) is a clear definition about what has been studied and what not. And I tend to agree with the Popper principle that a good theory is one that is falsifiable. That is it shouldn’t be circular or “magical”. Ideally there should be one or more experiments that can prove the theory wrong even if only postulated (perhaps if not currently possible to do such experiment). Economics is not a hard science. One can in a much simpler way realise that: because it studies the behaviour of people. Not of particles or any such things.
     
    Cheers,
     
    R3K

  2. Avatar of Sumkid Sumkid says:
    August 28, 2012 at 6:52 PM

    “The conclusion is that there are limits to what central banks can do.” They keep raising the limits while everyone still thinks that it’s not so bad cause at least it’s a limit and by keep doing that, the economy becomes in more and more bad shape. I hope that it threatens the independence of central banks cause they are against the Constitution.

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