John B. Taylor is always worth the time to read when he comments on monetary policy.
Today’s WSJ critique of Fed policy, John Taylor: Fed Policy Is a Drag on the Economy, is no exception.
Some highlights:
While borrowers like near-zero interest rates, there is little incentive for lenders to extend credit at that rate.
“More broadly, the Fed’s excursion into fiscal policy and credit allocation raises questions about its institutional independence and accountability. This reduces public confidence in the central bank.” [This last may be the one good thing in the fed’s misguided policy response to the slow recovery.]
Jeffrey Rogers Hummel in the Independent Review, provides the details. See “Ben Bernanke versus Milton Friedman: The Federal Reserve’s Emergence as the U.S. Economy’s Central Planner.” Keep in mind this was written before the Fed began QE Infinity and its purchase of 75% plus of newly issued Federal debt.
At the very least, the policy creates a great deal of uncertainty.
The low rates also make it possible for banks to roll over rather than write off bad loans, locking up unproductive assets.
As such the response postpones necessary adjustments to malinvestments of the previous boom(s) also prolongong a return to prosperity and sustainable growth. .
For another interesting discussion on the adverse effect of low rates on recovery see part three in Steve H. Hanke’s GlobeAsia column “Rethinking Conventional Wisdom: A Monetary Tour d’Horizon for 2013”
