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QE Infinity as a Hail Mary


U. S. Monetary Policy, during and since the economic slowdown and financial crisis, has been criticized by non-Austrian economists such as John B. Taylor as a mondustrial policy and as a movement from central banking to central planning by John H. Cochrane. Austrians have long viewed central banking and monetary policy as financial central planning. Jeffrey Rogers Hummel, in the Independent Review, “Ben Bernanke versus Milton Friedman: The Federal Reserve’s Emergence as the U.S. Economy’s Central Planner”, provides ample evidence of Fed central planning. He builds his case by illustrating the significant differences in “approaches to financial crisis” between the Bernanke approach and a Friedman approach. In addition to exposing the theoretical foundation of this misguided and dangerous policy, Hummel provides a very detailed almost step by step use of this type of policy in response to the major events of the recent crisis. A must read for anyone interest in the minute details of how and why the Fed balance sheet expanded so significantly and how much of what was done did not and does not show explicitly in ‘regularly’ reported monetary aggregates, their sub components or Fed balance sheet reports.

He argues the differences have been only recently been noticed, but the impact as “those differences resulted in another Fed failure – not quite as serious as the one during the Great depression, to be sure, yet serious enough – but they have also resulted in a dramatic transformation of the Fed’s role in the economy. Bernanke has so expanded the Fed’s discretionary actions beyond controlling the money stock that it has become a gigantic, financial central planner.”

An Austrian would argue that the changes have been of degree only, not of substance.

From an Austrian perspective, central banks, through their ability to create credit and distort interest rate signals, are the major source of boom-bust cycles which are, for all practical purposes, mini-calculation failures. Through their ability to monetize debt, central banks support over expansion of government which retards economic growth and prosperity while putting economies at risk of crack-up booms and hyperinflation.

In today’s Wall Street Journal, Holman W. Jenkins adds another play to Chairman Bernanke’s irresponsible central planning playbook. QE infinity ($40 Billion a month in bond purchases as far as the eye can see), is a “Hail Mary”! What should be added is this is a Hail Mary which could not succeed even in a world with replacement referees, but might succeed in a world where helicopter drops of freshly printed currency could actually create real wealth.

Those who see the economy as suffering from nominal aggregate demand shocks best represented by the failure of the economy to return to its pre-crises trend growth path of nominal GDP are defending the policy (see http://uneasymoney.com/ , http://marketmonetarist.com/ , or http://marketmonetarist.com/ ). Selgin and White provide an Austrian based-criticism.

The defense could be stronger. The U. S. economy clearly suffered two ABCT boom-bust events between 1996 and 2009 as shown Roger W. Garrison in “Interest-Rate Targeting During the Great Moderation, or “Natural Rates of Interest and Sustainable Growth.” Cato Journal, vol. 32, no. 2 [Spring/Summer]: 423-437 and And Ravier and Lewin, 2012, “The Subprime Crisis.” A slow non-recovery due to malivestments, overconsumption, and associated wealth destruction and extreme regime uncertainty continues in to the foreseeable future. What is needed is not more nominal demand stimulus [which would actually be more likely with a helicopter drop than another round of QE], but a dose of Austrian policy. The Austrian policy [from http://mises.org/daily/4730]:

What then would be the Austrian policy recommendations for today’s problems? First, according to Hayek and Rothbard, stop the credit creation and inflation. Then, per Hayek, prevent a secondary deflation. Further, remove all government impediments to effective entrepreneurial planning by avoiding protectionist measures and allowing prices and wages to adjust as needed to restore market equilibrium. Cut tax rates, as was done in the incomplete reforms of the 1980s and during the crisis of 2001–2003, and drastically reduce the government budget.To prevent future boom-bust episodes, reform the monetary system from the current government monopoly to a market-determined medium of exchange.

Even though I first argued this in 2010, it is still relevant, but not likely.

There is, however, still time to turn course and follow the Austrian path to sustainable prosperity. End government intervention in the economy and return to a sound money policy. Such a policy has been dubbed as harsh or too draconian; but the pain of a short, severe recession followed by renewed, sustainable growth and prosperity may actually be “comfortable and moderate compared to the economic hell of permanent inflation, stagnation, high unemployment, and inflationary depression” that is the likely outcome of a continuation of our current policy [Rothbard, America's Great Depression. p. xxvii.v ].

John P. Cochran (1949-2015) was emeritus dean of the Business School and emeritus professor of economics at Metropolitan State University of Denver and coauthor with Fred R. Glahe of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research. He was also a senior fellow of the Mises Institute and served on the editorial board of the Quarterly Journal of Austrian Economics.

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