Why The Fed Makes Matters Worse

For those who don't understand the damage being done by the Federal Reserve, Jerry O'Driscoll provides a short Austrian description why. Mr. O'Driscoll penned this in response to a piece written by John Taylor in the WSJ.

FedFiat-EmpireEasy Money, Slow Growth

January 29, 2013

by Jerry O’Driscoll

In today’s Wall Street Journal, John Taylor explains why the U.S. recovery has been tepid while money growth has been very rapid. The recovery has set records for its weak pace, while money growth has set records for its rapidity. Taylor supplies some of the numbers.

Taylor continues an argument he made at the November 2012 Cato Monetary conference. It is the Fed’s policy that is causing the anemic recovery. To quote, “while borrowers like near zero interest rates, there is little incentive for lenders to extend credit at that rate.” He analogizes the Fed’s fixing interest rates to a policy of price ceilings on housing rents. Lenders supply less credit at the lower interest rates, as landlords supply less housing services under rent controls.

Taylor also notes that the Fed’s policy interferes with the signaling of the price system. It distorts capital allocation. Any decently trained micro economist would understand this. Why cannot the backers of the Fed’s policy? Read the rest of this entry »

Here is an interview with John Taylor on this subject.

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  1. I think the why is that they really have no choice.  What would our economy be like if the feds hadn't plowed trillions into it?  We are maintaining our national lifestyle only on borrowed (or printed) money.  What impact would there be if suddenly the government lived within its means.  If a trillion plus less per year of federal spending was suddenly ended.  Keynesianism is liberal economics and like everything else liberal it has no connection to reality.  

    Our choices are limited.  At practically a zero interest rate, the federal deficit could double and not seriously impact the federal "standard of living".  Whether 400 billion a year or another 400 billion on top of that will not stop what they are doing.  So they believe they have time.  The Chinese can say, heck let's keep this ship afloat while we drain it dry.  They can use our money to create a second to none military and build its own national infrastructure, a key measure of a nation's wealth, then at some point they can do without the United States.  There may be nothing to stop what is happening until some day, our deficit is 30 or 40 trillion and we are Detroit.

  2. It seems to me that this article deals much more with HOW the Fed makes things worse and leaves unanswered the question, WHY are they motivated to do so. What are they really trying to accomplish? Could we find the answer if we were able to peer into Bernank's mind or is he being directed to do what he must know is at best not helpful and at worst outright destructive?

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