Fighting the Last Depression: The Fed’s Policy Errors
The government is fighting the current recession as if it were the Great Depression of the 1930s. This reflects a serious misinterpretation of reality, one that will most likely persist beyond Inauguration Day.
Barack Obama’s appointment of Berkeley professor Christina D. Romer as chairwoman of the Council of Economic Advisors is consistent with this orientation, as she is an expert on the Great Depression and may lend support to the unwarranted focus on the Depression. Indeed, Romer has supported the Fed’s current monetary policy because she sees parallels with earlier financial panics.
From this anti-Depression policy has come a stream of costly policy errors that could ultimately prolong the current recession. The Fed’s Dec. 16 decision to drop the target federal-funds rate to a record low of 0% to 0.25% is but the most recent of these. With rates already effectively trading near zero despite the Fed’s previous target of 1%, the decision does not actually change rates and only sends a negative message about the state of the economy. That worsens confidence. And now the target rate has nowhere else to go, so the Fed will have to resort to new means to increase liquidity — a painful irony, since liquidity is not even the problem.
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