Sunday, August 29, 2010

Blaming The Fed

Megan McArdle:
everyone hates the Fed! Why won't they get us out of this mess?

Here's one possibility: because many of the people who are now complaining that they are too tight, are the same ones who until very recently were loudly complaining that they were too loose during the last recession. There's been a pretty vibrant cottage industry in placing the blame for the housing bubble squarely on the frail shoulders of one Alan Greenspan. He is a convenient villain for liberals, who hate his politics, and conservatives, who hate the sort of technocratic institution he represents. Blaming Alan Greenspan allows liberals to dodge uncomfortable questions about the unintended consequences of government intervention, and conservatives to dodge uncomfortable questions about whether free markets can produce really, really bad outcomes.

Since the Fed always determines the interest rate, and by extension the money supply, their decisions always impacts the economy. Since Fed policy perfectly correlates with every economic issue and it's easier to ignore that correlation doesn't imply causation, one can always blame the Fed. Policy was too loose or too tight. End of story.

Now, interest rates are a hugely important part of the economy, but since you can always argue with some reasonably that the Fed's policies were the problem I'm very skeptical when people blame the Fed alone for economic problems. I'm not saying that the Fed hasn't or can't cause problems. I'm just saying that since one can always and easily point to the Fed we really should be skeptical that the Fed is really the culprit. Most of the time the Fed's policies alone weren't the problem. It's the Fed's policies plus something else that cause the problem. But since the Fed always has a policy, it always coincides with that something else. So maybe it's more about the something else.

All I'm trying to say is that the Fed, because it always has a policy that affects the economy, makes a super easy scapegoat for anybody who wants an easy answer.

2 comments:

The Ancient said...

All I'm trying to say is that the Fed, because it always has a policy that affects the economy, makes a super easy scapegoat for anybody who wants an easy answer.

Personally, I blame Ben Bernanke for bringing an empty punch bowl to the freaking party.

Anonymous said...

Hank Paulson allowing Lehman Brothers to fail...

Mrs. P

 
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