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Friday, November 21, 2008

ARE BEN BERNANKE AND THE REST OF THE FEDERAL RESERVE BIG-WIGS PUNCHED-OUT PALOOKAS?

Today's Buggy Topic

Note the subject-title above: arguments of this sort are found daily, even hourly, on the web --- not least put there by economists.  Among them, Professor Tim Duy of the University of Oregon . . . who went on at great length in a diatribe aimed at showing that Bernanke and the Fed don't know what to do; are entrenched in trying to implement a (short-term) interest-rate policy known as ZIRP --- zero-based interest rate policy, of the sort the Japanese implemented in the late 1990s; fail to recognize that a nominal zero-rate interest rate won't reverse deflationary expectations and get banks starting to loan and consumers and businesses to want to borrow money; and should switch to QE --- quantitative expansion of the money supply, supposedly the biggest lesson of monetary policy theorists like the impressive  Milton Friedman taken from the failures of the Fed back in the dark days of the Great Depression between 1929 and 1933.

Enter Prof Bug's Criticisms of Duy

The thread that Duy initiated is found at Economist's View, a centrist-oriented economic blog of high quality run by Professor Mark Thoma of the University of Oregon.  After dozens and dozens of ho-hum and sloppy comments by the posters in that thread, prof bug set out a lengthy, data-based analysis of all the uncertainties and ambiguities and contradictions that mar the historical record of US monetary policymaking in the 1929-1933 period, the problems that appeared for the New Deal in the fairly severe recession that hit the New Deal for several months in 1937-38, and the experience of the Japanese authorities in applying --- after 7 years of a credit crunch and growing deflation in the price-level of the country! --- ZIRP, QE, and recapitalization of the banks by the Japanese Central Bank --- with huge uncertainties still hanging over the success or not of these policies when, after a full decade of stagnation and repeated fall into recession, the Japanese economy finally regained decent economic growth.

Click here for Prof Bug's lengthy, half-technical commentary.