Five myths about the Federal Reserve
Here are my rebuttals to each of these five statements:
1. What monetarists have maintained is that money supply increases in excess of the real growth in the economy will result in price increases and not real growth increases. The Fed buys gov LTD from money centre banks crediting its current accounts with them. This money will "leak" by lending into the capital markets if businesses and consumers cannot borrow as expected. That money will inflate prices of whatever investments are attractive from gold to services.
2. Interest rate arbitrage AND expectations of further inflation push down the price of the dollar making goods and services for the importing US consumer immediately more expensive from overseas causing US inflation and/or business contraction. Buying/selling dollars is totally irrelevant. A weaker dollar is not welcome as the global protests have shown. Beggar-thy-neighbour policies depressed economic activity in the 1930s.
3. Fed purchases of gov LTD monetise the deficit pure and simple and takes pressure off squeezing the private sector financing which has to be impacted by the huge, ongoing US deficit. There is a shortage of financing for US gov deficit if no one wants to buy US gov debt because there are expectations that it will continuous to balloon. The Fed and Treasury have to work together now like at no other time in history.
4. When it comes to monetary policy integrity of the US, the Fed will be independent of the gov. Witness Paul Volcker's "Saturday Night Special" in October 1979 when he decontrolled the price of money and set money supply growth targets on steady instead of price targets. That was one year before the 1980 national elections. I wonder what Jimmy Carter thought about appointing Paul Volcker in 1979 when short term interest rates soared into an inverted yield curve? Incidentally, Paul Volcker saved the Western world's monetary system by doing so.
5. Ben Bernanke had no choice but to do what was needed to prevent a collapse. He (the Fed) poured in $1.7b of liquidity into the system and did whatever else was necessary. He would have to set it right later, but there are still serious problems that now need $600b in LTD purchases for stability. Alan Greenspan was not the man for the job and "fed" the bankers what they wanted. I suspect there are many who understood what was happening but could do nothing.
I want to hear what Paul Volcker really thinks, and I would like to hear the same from Rupert Pennant-Rea the former Economics Editor and Editor of the Economist before becoming a deputy governor of the Bank of England a job he lost ingloriously after being caught out working too hard and mixing business with pleasure at the Old Lady on Threadneedle Street.