“Passivity” is a killer

Arnold Kling has this post up:

“First, listen to Scott Sumner argue that monetary policy in the U.S. was unintentionally contractionary in 2008. Then, read Izabella Kaminsky on monetary policy today in Europe.”

the central bank transmission mechanism has been compromised because expansion or contraction of high-powered money makes no difference to the overall amount of money which is multiplied into the system.

Pointer from Tyler Cowen.

“One way to look at the U.S. case is that the Fed bailed out the banks but carried out a contractionary monetary policy. The result was a steep recession. Is Europe going down that path?”

I think all the above are quite right to worry. Izabella Kaminsky shows this picture

and goes  “wild”:

¡Ay, caramba!, you might say.

Put another way still, the central bank transmission mechanism has been compromised because expansion or contraction of high-powered money makes no difference to the overall amount of money which is multiplied into the system.

And as we’ve noted before, that is exactly what happened during the Great Depression.

Reason to worry? We would say so.

And as these two charts taken from this post on the US show: “hold on to your seats, the going´s going to get rougher”!

And Tyler Cowen´s pointer is what I have called the “neutron bomb effect”: The Fed worked to keep the “financial houses intact” and “killed the workers”. In Europe it will also “kill the euro”.

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