Tuesday, September 20, 2011

What should the Fed do?

Is it treasonous to believe what might be the right policy in the abstract would be the wrong policy in practice?

* Can the Fed be trusted to get things right on its own? With 2008-present as evidence, even though I favor targeting a higher NGDP rate instead of 2% inflation, I see a real possibility for them to botch it badly, and for things to get out of control.

* The Fed ultimately relies on its credibility and the expectations of the larger public to act to do this, and memories of the 70s and 80s inflations scare the hell out of people. The real and perceived actions of the Fed in 2008 to present don't add to its credibility.

* If we have a President who fundamentally misunderstands economics but nonetheless holds a lot of both hard and soft power, he could cause a lot of really bad things to happen. Another year of this would suck, but the current situation doesn't portend riots, bloodshed, wide-spread class warfare, constitutional crises, or government defaults.

In short, lots of "very bad things" could happen if the Fed acts in a significant way, and having them not happen depends on lots of people with differently aligned interests all acting in concert. In an election year.

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