The Federal Reserve is beginning two days of its policy setting Federal Open Market Committee as the world economy is slowing, Europe is in recession and the tepid recovery in the United States could turn into a double-dip. The conventional wisdom ranges from the Fed doing nothing to extending Operation Twist, a mild effort to sell short-term bonds and buy longer-term securities. This will do little to help.
As a leading scholar on the central bank and the Great Depression, Chairman Ben Bernanke knows that inflation is not the big danger facing the economy, however much the Fed’s portfolio and the monetary base have expanded since 2007. But he faces a divided FOMC, something that Alan Greenspan never encountered as he was, say, helping keep the 1997 Asian financial crisis from becoming a global meltdown. Hawks on the board are against anything that would seem to invite future inflation.
Bernanke led the Fed in doing as Milton Friedman suggested, in his seminal work with Anna Schwartz, on what the central bank did wrong to help make the Great Depression so bad. Deflation was avoided. Unlike the Depression, however, the Fed also enabled saving the too-big-to-exist banks and other dangerous components of an over-financialized economy. And fiscal policy has not been a New Deal, to put it mildly. Since 2011, it has been paralyzed.
What the Fed should do is raise its inflation target and embark on a much more robust QE3, purchasing long-term Treasuries and expanding the money supply. With no fiscal help in getting the economy growing again, this is the best shot. It probably won’t do so, at least until the crisis becomes so bad that it’s too late. For Chairman Ben, history has been an imperfect guide.
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Today’s Econ Haiku:
Can it really beat Apple?
Questions will surface