What's Ahead for the Fed

[Joe Leote]

Worthwhile interview with Peter R. Fisher concerning US fiscal and monetary policy:

https://youtu.be/iX43sxGHRUw

Joe

[William Meyer]

Good point on Greenspan not being as accomodative on policy as he is remembered for.  Instead he laid the intellectual groundwork for greater intervention with his successors by rewriting the history books to say the depression was caused by an unwillingness to defend asset prices.  I'm not sure those who lived through it or even those who came of age during it would have agreed.  

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[Joe Leote]

Article says Greenspan drank the kool-aid:

Greenspan drank the Kool-Aid – Real World Economics

In my view Greenspan first drank the Monetarist flavor; and then perhaps drank the Keynesian flavor of kool-aid. As I recall Greenspan believed in self-regulating market mechanisms prior to the subprime mortgage crisis. One article says he advocated fiscal policies such as lower taxes and privatizing social security. He blamed the 2008 financial crisis on the failure of markets to self-regulate not on Fed policy. I haven't read any articles or books on Greenspan. Due to the plurality of opinions in political-economic theory I'm sure there is a plurality of opinions on his tenure.

Paul Volcker did not believe in manipulating the money supply (at the time it meant the float of M2 bank deposits). But in my view Reagan used Keynesian stimulus (cut taxes and increase defense spending) while talking up supply side economics. Stimulus tends to increase inflation. Volcker jacked up fed funds interest rates so high that this induced a wave of bankruptcies in the subprime lending institutions and parts of the banking sector during the 1980s. Fed cannot control deficit spending under fiscal policy; and it has limited power to regulate market driven credit growth. But Fed can rapidly increase wholesale market interest rates when necessary to kill a rampant inflation caused by the combination of fiscal spending and private market credit growth. The downside is institutional bankruptcies, rising unemployment, and potential economic recession. Fed can also inject liquidity to reduce or stop the pace of asset price deflation when credit market dealers start to price down assets. In short Fed acts imperfectly to stabilize the economy whenever markets and/or federal policies combine to drive the real economy off the rails. Greenspan's tenure had long term growth with two mild recessions. Some economists see this pattern as fine-tuning of Fed policy under Greenspan's tenure.

I watched the NASDAQ index rise 60% from October 1999 to March 2000, when the so-called NASDAQ bubble began to burst, and I learned more than a decade later that Fed was injecting liquidity via special lending facilities in anticipation of Y2K panic. The Fed facility was open until April, if I recall correctly, and the market peaked in March. Greenspan thought the Fed has no direct control over asset prices. Yet Fed provides liquidity to financial dealers via open market operations under its monetary and credit policies.

Joe

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