Is Fed still in control?
On CSPAN today Laurence Meyer, a former governor
on the Federal Reserve Board, made a very interesting confession. He claimed
that during the late nineties, when asset prices were skyrocketing out of
control, the Fed continued to believe that stocks would go down by 20%.
Of course, no such thing happened. What, then,
should we make of this confession? Are the Federal Reserve governors as idiotic
in their forecasting as are most economists? Possibly. But there is more to it
than just this. It may very well be the Fed has lost much of its power over
monetary policy; that this power has been seized by non-banking financial
companies, or GSE's like Fannie Mae, who can create money on their own, whether
the Fed wishes them to or not. This would explain also why Meyer would admit
that in retrospect the Fed didin't really have to follow an easy money policy
after the Asian and Russian financial crises, because these other financial
centers spontaneously intervened in the market with their own loosenings of
monetary restraint, thus making the Fed's accommodations superfluous and/or
excessive. The Fed, in any case, has lost control of the economy; or, at the
very least, does not have nearly as much control as it once did, for good or for
evil.
Posted: Sat
- August 7, 2004 at 09:03 PM