Monetary Policy: is it here to stay?

2004-02-05 Reserve Bank monetary policy dog 2002226There is an interesting article in The Economist that asks the question of "Is monetary policy still a potent weapon against recession?"

It is an interesting argument that is seen around the fact of what should we do during a recession. This stems back to the Great Depression and how we could prevent another one.

This brought upon the idea of John Keynes. He thought that increasing government spending would create economic growth. He believes that deficits were good for recession time. He continued to say that governments should try to fix things in the short-run because in the long-run we are all dead.

This brought on the idea that it really does not do this at all, which is too complicated to explain here. Milton Friedman and the Monetarist believe that we should instead focus on the monetary area and not fiscal stimulus. That pretty much took over after Keynes, as I am sure most of you have heard of Milton Friedman.

Now The Economist is questioning this motive. It is for sure that Politicians are thinking so because they have passed the fiscal stimulus plan. The article explains that the Fed Chair giving blessing to that plan makes it look like the Fed is loosing its grip for sure.

This is making me doubt the competence of the Fed Chair, who I had high hopes for. This from The Economist on the lost faith in monetary policy:

"One cause is the feeling that overly loose monetary policy got the economy into this mess. Repeated cuts in the interest rates during the last downturn, in 2001-03, fuelled the housing and credit bubbles that are now bursting to such damaging effects."

If this is true then this could derail monetary policy for a long time. The Economist continues and explains how the Fed effects me and you with their policies:

"Monetary policy affects the choice between spending now or spending later… Interest rates are the cost of using tomorrow’s income to pay for today’s spending. Lower rates life spending by more when there is access to borrowing."

As you can see both of the fiscal and monetary policies are moving towards the same ends. They want to increase spending. By doing this they are hoping to push out demand. The problem is these are all short-term policies that may hurt us in the long-term.

F.A. Hayek has an interesting argument against the fiscal part. He says that not only is central planning a bad idea but when you increase government spending you allow these bureaucracy to grow hurting private industries.

So I guess the million dollar question is monetary the same thing? Is there a short-term fix with a long-term problem? Are we seeing the longer term problem that fixed the ’01 recession?

I feel like the more I am educated in economics the more I will be able to answer this question but I am under the impression that we should do nothing.

Leave the money alone… I have a feeling this wouldn’t be a problem if we had the gold standard…

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Published in: on February 28, 2008 at 6:34 am  Leave a Comment  

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