11/06/2010

Fed's Move Considered Coventional Monetary Policy

Federal Reserve Chairman Ben Bernanke stands behind the Fed's decision to purchase treasury bonds. He argues that despite critics, the move is just a "conventional monetary policy conducted with different tools." The article goes on to suggest that former Federal Reserve Chairman Alan Greenspan is partially to blame for the financial crisis that occurred. Suggesting that his laid back style of controlling monetary policy created the "perfect storm of financial disaster." I argue that the Fed's current move is the correct step to get the economy moving in the right direction, and that inflation should be a long-term issue rather than a short-term concern. Steps to stimulate the economy should be done incrementally, as to not over correct the problem and create some sort of super-inflation. I would also like to defend Alan Greenspan on his policy not being the cause of our financial crisis, but rather it was lending institutions' willingness to over lend to unqualified borrowers. Americans should have calculated what their financial abilities were prior to borrowing amounts of money that they were unable to pay back. Banks should have known better than to have extended credit on such ridiculous ideas as "stated income." We must simply sleep in the bed we made.

2 comments:

Grant said...

It seems to me that the Fed's recent actions are in line with things I learned in Basic Macroeconomics. I think much of the criticism is politically motivated. The recent success of the "tea party" and their rhetoric has attached a stigma to all things debt and deficit without distinction between open market exchanges by the Fed (monetary policy) and fiscal policy practices. While there are some real concerns about inflation and the effect on the dollar, if the Fed is right and we are closer to deflation than rampant inflation, then it isn't a real short term concern. As far as intentionally weakening the dollar, assuming this round of buying stimulates economic growth like the Fed is saying it will, then the dollar will be likely to increase not remain artificially decreased.

Dave said...

It's nice to see students voice sensible opinions about monetary policy.

I think the Fed has become a lightning rod for a lot of things that people don't like: the rich, D.C., Wall Street, smart people who dress formally, and so on.

I don't see a whole lot wrong with the Fed's moves. This is pretty much what we've been saying for decades should be done in this sort of environment. We've also been saying that we shouldn't expect it to work too well, and it hasn't.

I am not a macroeconomist who blames Greenspan. I think this is a convenient excuse: people like to think centralized decision-makers are more important than they are, and it's really easy to blame the one that's retired and won't have their career ruined by overstatements. No one said anything about what Greenspan was doing at the time it was happening - in fact, there was a more "he walks on water" tone to analyzing his actions.

I also think it's naive to think that the Fed has that much control. We have China (and other countries) running huge trade surpluses that generate cash that outmatches their ability to generate investment projects. They choose to invest it in our government's debt, and somehow it's our officials who created that problem. I don't think that holds water.