This is one of the most well-written articles I have read in a long time. Mr. Meltzer truly gets the issues at hand and articulates them very well. The multiple mis-steps by the Fed and the Obama administration are leading to repeats of mistakes made in the past - another example of history being destined to repeat itself.
Key Sentences: "Adding another trillion dollars to the bank reserves by buying bonds will not relax a constraint that is holding back spending. There is no shortage of liquidity in the economy - banks already hold more than $1 trillion of reserves in excess of their legal requirements, and business balance sheets show an unprecedented amount of cash and near-cash assets."
Unanticipated Consequences:
Key Sentences: "Adding another trillion dollars to the bank reserves by buying bonds will not relax a constraint that is holding back spending. There is no shortage of liquidity in the economy - banks already hold more than $1 trillion of reserves in excess of their legal requirements, and business balance sheets show an unprecedented amount of cash and near-cash assets."
Unanticipated Consequences:
- Error: The Fed is misguided if it thinks that buying more bonds will prop up the economy. It worked on a temporary basis in 2009, but that ship has sailed.
- Immediate Interests: Focusing on the current state of unemployment, the Fed is ignoring the likely negative long-term effects of ramping up inflation. A return of gas rations and 20% Fed Funds rates is not out of the realm of possibility.
- Self-defeating Prophecy: The Fed is fearful of a double-dip recession and deflation. It is trying to find solutions before those problems occur. I think it would actually do the long-term economy good to retreat into another recession in the short-term and reset asset values (which was not allowed to happen in 2008-2010). On the subject of deflation, there is no evidence that it is anywhere on the horizon; furthermore, mild deflation would not be such a bad thing.
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