William Poole*
THE fundamental causes of this recession, unique in the experience of the United States, were mortgage defaults and the consequent insolvency of major financial firms. These insolvencies, and especially fear of them, damaged normal credit mechanisms.
The self-correcting nature of markets will ultimately prevail. We should not underestimate the power of monetary policy; with the sharp increase in the nation’s money stock starting in September, monetary policy is now extraordinarily expansionary. I believe, though without great confidence, that the recession will end in the second half of this year.
Federal policy is damaging the economy’s prospects. It fails to provide the needed tax incentives for investment in factories and equipment, incentives that were central to efforts to revive the economy during the Kennedy-Johnson era and under Ronald Reagan. But government spending can’t lead the way to sustained recovery, because its stimulating effect will be offset by anticipated higher taxes and the need to finance the deficit.
Heavy-handed federal intervention into the management of companies from banks to auto makers will also delay recovery. And misguided efforts to help distressed homeowners by permitting courts to rewrite the terms of mortgages will cause banks to limit mortgage lending, which will prevent housing from contributing to the recovery.
The unrelenting anger across the country over bailouts of corporations and households that made unwise and even irresponsible financial decisions is influencing federal policy. Punitive measures, like forcing companies receiving federal dollars to cancel employee events, will increase uncertainty over where the government will strike next in its effort to deflect public outrage. Instead of more bailouts, we need a clear and consistent path to fundamental reform of our financial system.
*William Poole is a senior fellow at the Cato Institute and the president and chief executive of the Federal Reserve Bank of St. Louis from 1998 to 2008
By saying Hey, Economists! Money and Interest Are Different Things Robert Murphy comes to the same point from a different angle;
Interest rates are prices, and as such they convey real information about scarcity in the world. People talk of financial affairs spreading into the "real economy," as if the allocation of capital is some minor detail. On the contrary, the capital markets — guided by interest rates — are the single most important "governor" of the "real" market economy over time.Professor George Reisman is also painfully clear on the effects of stimulus packages;
By flooding the credit markets with money created out of thin air, the central banks of the world are interfering with humans' attempts to communicate with each other after the housing bubble popped. It would be as if the governments used military aircraft to jam the radios of rescue workers in a region hit by an earthquake.
The politicians and bureaucrats talk as if the members of the private sector are aloof during the crisis. On the contrary, people the world over are concentrating on their finances more than ever. But the governments of the world keep drowning out the signals people are trying to send to each other.
Money and interest are distinct things. There are times when the "right" market response is an increase in the supply of money and an increase in interest rates. Because modern central banks typically inject new money only by lowering interest rates, they make financial panics much worse.
Despite the fact that what the economic system needs for recovery is saving and the accumulation of new capital, to replace as far as possible the capital that has been lost, the effect of stimulus packages is further to reduce the supply of capital, and thus to worsen the recession or depression.
