A (two volume) history of the Federal Reserve “goes to waste”

This is from Alan Meltzer, the man who wrote it:

How can the Fed know now that a zero-rate policy will be required two years from now? It can’t. Yes, economic growth has slowed, and forecasts of future growth decline daily. But the United States does not have the kind of problems that printing more money will cure.

Banks currently hold more than $1.6 trillion of idle reserves at the Fed. Banks can use those idle reserves to create enormous amounts of money. Interest rates on federal funds remain near zero. Longer-term interest rates on Treasurys are at record lows. What reason can there be for adding more excess reserves?

The main effect would be a further devaluation of the dollar against competing currencies and gold, followed by a rise in the price of oil and other imports. Inflation is now at the edge of the Fed’s comfort range, which is below 2%. Money growth (M2) reached 10% for the past six months, presaging more inflation ahead.

According to him the problems are mainly “structural”!

Our problems will not be solved by stop-gaps like QE3 or lower labor taxes, but they are not intractable. What we need most is confidence in our future.

So tell us, please, Professor Meltzer, that the monetary policy “mishap” depicted in the following picture has no implications for the present “problems”!

And if monetary policy “dug the whole”, shouldn´t monetary policy (at least) help to “fill it up”?

Note: David Glasner has a detailed post contesting the view held by Metzler that the Fed “has no role to play”

3 thoughts on “A (two volume) history of the Federal Reserve “goes to waste”

  1. Confidence in our future?

    Oooh boy. Let’s all hold hands and sing “kum-bi-yah.”

    I’ll get confident when I make sales (I run small furniture making business).

    Metzler is a deeply partisan individual. Be believes it was social spending that set of the inflation of the 1960s and 1970s. He does not even mention the Vietnam War. He believes Carter tried to get rid off Volcker. It was Carter who appointed Volcker, and the Reaganuats who ultimately edged him out.

    I think we should dump Ben Franklins on street corners in low-income neighborhoods. Or run a national lottery that pays more in cash than it takes in. Oddly enough, my wild ideas make more sense than what the Fed is doing.

  2. Marcus, Thanks for mentioning my post. I don’t want to be nitpicky, but you are referring to Alan Meltzer, not to be confused with the late Lloyd Metzler, one of the great American economic theorists of the 1940s and early 1950s, whose career was tragically cut short by a brain tumor which he survived for many years, but left him sadly diminished in his analytical powers. Although he taught for many years at the University of Chicago, Metzler was a Keynesian. It was to fill Metzler’s role as house Keynesian that Harry G. Johnson was invited to join the University of Chicago economics department in 1959.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.