Tuesday, July 21, 2009

Bernanke tells Congress Fed has "exit strategy"

Exit strategy?

Someone ought to tell Bernanke that the Fed's only policy tool--indeed, its only function, really--is the setting of interest rates. That's all it does, so any "exit strategy" ostensibly involves raising interesrt rates? I guess that's what Bernanke means.

It just so happens that's what the Fed did from 2005 until 2007, and it caused the real estate market to collapse and it made financing costs far too expensive for companies to continue hiring. In other words, it touched off the downturn.

Why did the Fed raise interest rates?

Because it thought it could "fix" an oil shortage that was driven by strong global demand, tight supply and speculators. (Congress had ther power to deal with the latter, but chose not to.)

So between the Fed wanting to be Johnny on the Spot with higher interest rates as soon as it is feasible and with the Administration planning its own, "exit strategy" (applying fiscal drag--taxes, spending cuts, etc--to bring the deficit down), this recovery has a very shelf life it would appear.

The best thing the Fed and Administration could do would be to use all their tools--monetary and fiscal--to ensure that the economy was running at full output and employment. There's no reason for inflation if we are producing all the goods and services that households and businesses need. And we'd achieve the highest level of prosperity that we could achieve given the physical and humand capital and natural resources of the country.

Instead they're worried about an exit strategy.

"The only bridge to nowhere is the one that you start building and stop halfway across the span." -Mike Norman

1 comment:

googleheim said...

that's interesting.

if the fed did not understand the ramped speculation in the oil market then it was completely fooled by Bush II

BushII : 1
Fed : 0