The View From 1776
Tuesday, August 03, 2010
Is The Fed’s Monetary Policy Nearing an End?
New Deal, Keynesian theory justifies collectivizing all political power at the Federal level by supposing that the Federal government and the Federal Reserve can manage the entire economy as if it were a two-dimensional board game.
The two main tools with which the government and the central bank presume to do so are fiscal policy (the domain of Congress and the executive branch) and monetary policy (the domain of the Federal Reserve).
Fiscal policy is government spending such as Obama’s stimulus program, cash-for-clunkers, bonuses for home purchases, and TARP. The only real product, in the end, is a much enlarged Federal deficit and an increased Federal debt that tends to crowd private businesses out of the bond and equity markets. None of Obama’s fiscal policy initiatives has worked so far, but a further, vast increase in such spending is the recommendation of Paul Krugman and his fellow liberal-progressive-socialists.
Monetary policy is reducing interest rates by flooding the market with large amounts of surplus (and depreciating) fiat money. Underlying such action, as well as fiscal policy spending, is the Keynesian assumption that human beings - individuals or private businesses - react mechanically by rushing out to spend Federal largesse or that businesses and individuals will automatically borrow more of the Fed’s increased supply of fiat money to buy things. Thereby, according to Keynesian theory, the government and the central bankers can manipulate the economy as if it were a checkers game.
Neither Keynesian fiscal policy, nor the Fed’s monetary policy manipulations having put the economy back on a strong growth track, one can wonder if the Fed can do anything more.