AEIdeas

The public policy blog of the American Enterprise Institute

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  1. Todd Mason

    I would suggest reading Nobel Laureate Vern Smith instead. Like Robert Hetzel, Smith blames the Fed for the recession — for cutting interest rates in 2001 and setting housing prices on their fateful arc. Hetzel, a favorite of AEI,says the Fed erred by keeping rates too high as the economy approached collapse in late 2007. The difference is more than timing. Smith’s view is that that the markets did it with a Fed assist, that booms and busts are inevitable. Hetzel argues that it was the Fed, period. Thus, Dubya, Wall St and the banks are off the hook. Of course, the markets work. It’s the Fed you see.

    Here is Smith arguing the counterpoint:

    “In every market, there is ultimately only one source of liquidity: buyers. And this is what central bankers hope to see return when they speak euphemistically of “restoring confidence.”

    All other sources of liquidity are stop gaps, bridges, band aids, and now a duct-tape bailout. Every seller in dire need of a buyer is in a liquidity crisis, even if he is a gainfully employed homeowner whose job security requires a move, or a fundamentally solvent bank, holding secured mortgage paper, but in need of immediate cash. Both now find that yesterday’s buyers are in hiding….
    “Starting in 2007, the Fed under Ben Bernanke, did all the right things expected of a central banker facing liquidity problems in the finance/housing sector. He even risked inflation by making it easy for banks to borrow from each other and the Fed. (The dollar did temporarily fall as commodities spiked upward.) But the action failed to solve the problem.”

    online.wsj.com/article/SB122351051370717359.html

    So if market monetarism serves a political function on the right, could it be delusion?

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