My Response to An Interesting Article on Talkmarkets by Libertarian Steven Saville

The article link above makes for interesting reading. This is a Libertarian view as opposed to the Keynesians. But I responded with two comments:

Author says: "The fact is that the Fed does cause severe economic downturns, but not by tightening monetary policy. In the real world, every boom that occurs on the back of money-pumping and interest-rate suppression contains the seeds of its own destruction. The reason is that the falsification of prices resulting from the central bank’s efforts to stimulate economic activity leads to widespread malinvestment."
I agree with that, because risk was mispriced. But we know that the Fed failed to make up for the destruction of the commercial paper market and for the pulling of Heloc credit by failing to increase the money supply. So, the Fed probably made the recession much worse by not taking action to make up for that obvious shortfall. The Fed knew that GDP was crashing and just did nothing.
It is the Market Monetarists who correctly pointed this out, not the Keynesians


One more point, it is clear that inflation was continuing, while GDP was falling, in 2007-8. So by monitoring inflation and by ignoring GDP decline, the Fed simply allowed the economy to be ruined. That probably was unnecessary. Look at house prices. They have bounced back, only the middle class doesn't own them now, the wealthy investors do. That seems conspiratorial to me.

So, I do not let the Fed off the hook. The Fed mispriced, risk, causing malinvestment in housing. But it also ignored the crash of GDP. So, the Fed had a part, in the housing bubble and crash, from start to finish. 


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