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Article Artículo

Operation Twisted

The Republican congressional leadership took the unusual step of sending Federal Reserve Board Chairman Ben Bernanke a letter warning against "additional monetary stimulus."This drew an outraged response from many Washington pundits, although for the wrong reasons.

Many in the pundit class expressed outrage that politicians would dare to influence the policy decisions of the "independent Fed." This is the high priest theory of central bankers. In this worldview, the Fed and other central banks are run by people who get the truth directly from the economy and make their judgements after carefully meditating on the latest economic data and connecting it to the sacred texts of the economics profession.

The high priest theory always warranted ridicule, but after the economic collapse of 2008 no self-respecting person should ever be associated with this view. The housing bubble that wrecked the economy was cleaarly visible from at least 2002. If the central bankers had any superior knowledge of the economy, they would have been shooting at the bubble at that point rather than allowing it to grow large enough so that its collapse would wreck the economy.

Note that shooting at the bubble does not mean raising interest rates. Note that shooting at the bubble does not mean raising interest rates [corrected -- thanks Sandwichman]. (Sorry, I had to say that twice for the economists who might be reading this.) It meant first documenting the bubble, showing that house prices had grown far out of line with historical trends and with rents. This information should have been at the center of every public appearance by Greenspan and other Fed officials. The Fed also should have used all its regulatory authority to crack down on the fraudulent mortgages that were being issued.

CEPR / September 22, 2011

Article Artículo

Why Do the Bankers Decide How Many People Will Be Unemployed?

The Federal Reserve Board's Open Market Committee (FOMC) met today and decided on a modestly expansionary monetary policy. It decided to unload $400 billion worth of short-term assets over the next 9 months and replace them with longer term government bonds. The idea is that this would place some downward pressure on long-term interest rates.

The effect on interest rates and the economy is likely to be very modest. It is unlikely that long-term rates would fall by even 20 basis points (0.2 percentage points) as a result of this action and more likely the effect would be closer to 10 basis points, but at least it is a step in the right direction. This will make it cheaper for people to buy a car or refinance a mortgage. It will also be cheaper for firms to borrow to invest. It would have been good to see stronger action, but this is what the FOMC was prepared to do.

However what was most striking about this decision was the breakdown on the vote. Five of the people voting were members of the board of governors. (There are 7 positions, but 2 are currently vacant.) The governors are appointed by the president and approved by Congress for 14-year terms. Of the 5 sitting governors, 3 were appointed by President Obama, 1 was appointed by President Bush, and 1 governor (Chairman Ben Bernanke) was appointed by both.

The other members of the FOMC are the presidents of the 12 district banks. These presidents are essentially appointed by the banks in the district. All 12 district bank presidents sit in on the FOMC meeting, but only 5 vote at one time.

CEPR / September 21, 2011

Article Artículo

Economic Growth

Workers

What Skills Shortage?
I remember well the gas shortages of the 1970s. Long lines at the pumps, and gas prices through the roof. Higher prices are, of course, the textbook free-market response to a shortage. Some economic analysts argue that an important reason we have high une

John Schmitt / September 21, 2011