Tags: Taylor | Fed | Interventions | Dangerous

Stanford’s Taylor: Fed Interventions Are Dangerous

Thursday, 29 March 2012 07:28 AM

Stanford economist John Taylor says the Federal Reserve's interventionist policies never work.

"Unfortunately the Fed has returned to its discretionary, unpredictable ways, and the results are not good," Taylor writes in The Wall Street Journal. "Starting in 2003-05, it held interest rates too low for too long and thereby encouraged excessive risk-taking and the housing boom."

The Fed then overshot the needed increase in interest rates, which worsened the bust, says Taylor. Now, with inflation and the economy picking up, the Fed is again veering into "too low for too long" territory.

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

"Policy indicators suggest the need for higher interest rates, while the Fed signals a zero rate through 2014," Taylor says.

Taylor says overstating the extraordinary nature of the recent interventions is tough, even if you ignore actions during the 2008 panic, including the Bear Stearns and AIG bailouts, and consider only the subsequent two rounds of "quantitative easing" (QE1 and QE2)—the large-scale purchases of mortgage-backed securities and longer-term Treasurys.

The result, says Taylor, is that the Fed's discretion is now virtually unlimited. To pay for mortgages and other large-scale securities purchases, all it has to do is credit banks with electronic deposits—called reserve balances or bank money.

“The result is the explosion of bank money … which now dwarfs the Fed's emergency response to the 9/11 attacks,” he says. “A century of experience shows that rules lead to prosperity and discretion leads to trouble.”

The Washington Post reports that, for what seems like the umpteenth time, Fed chairman Ben S. Bernanke offered a defense of the Fed’s unorthodox policy response to the financial crisis of 2008-09, telling students at George Washington University that the world economy might otherwise have gone into a “total meltdown.”

Editor's Note: You Owe It to Yourself to Know What Obama and Bernanke Are Hiding From Americans

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Thursday, 29 March 2012 07:28 AM
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