Tom Hoenig, the retiring (October 2011) President of the Kansas City Fed, continues his lonely battle with others in Fed leadership over QEII (and QEI). Per a report in today’s Denver Post (http://www.denverpost.com/business/ci_17739087) points out that the “highly accommodative” [an extreme understatement] policy is partially to blame for the global spike in commodity prices.
Hoenig is quoted, from a speech in London, as saying, “”Once again, there are signs that the world is building new economic imbalances and inflationary impulses. … The longer policy remains as it is, the greater the likelihood these pressures will build and ultimately undermine world growth.”
This voice of reason in the Fed system will be missed. Too bad there are too few of courage and reason like him in decision making circles.
Another interesting commentary, this one from an international perspective, comes from a paper featured on Greg Ransom’s Hayek center Blog (http://hayekcenter.org/). The paper is from
The World Economy, Vol. 34, Issue 3, pp. 382-403, 2011, posted on the SSRN (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1790176##), and it titled “A Vicious Cycle of Manias, Crises and Asymmetric Policy Responses an Overinvestment View “ by Andreas Hoffmann, University of Leipzig – Institute for Economic Policy and Gunther Schnabl , University of Leipzig – Institute for Economic Policy; CESifo (Center for Economic Studies and Ifo Institute for Economic Research
“Over the past three decades, we find that asymmetric policy responses heavily contributed to manias and bursting bubbles that eventually trapped the major industrial economies into near zero short-term interest rates with rapidly rising public indebtedness. The article uses the endogenous business cycle theories of Wicksell, Mises, Schumpeter, Hayek and Minsky to show how ostensible counter-cyclical monetary policies are asymmetric, as central banks are less willing to raise interest rates in booms than cut them when bubbles collapse. After interest rates have fallen towards zero, fiscal policy is called on which sooner or later becomes bounded by extraordinary debt to GDP ratios. Central banks hesitate to raise interest rates even in the face of a partial economic recovery because the cost of public debt service would become prohibitive. The economies then languish at very low interest rates that encourage low productivity real investments and a continual threat of bubbles in asset and raw material markets. This makes them unable to deal with further macroeconomic shocks.”
While one must overlook the use of overinvestment rather than malinvestment, the paper provides an interesting Austrian compatible graphical framework used to analyze the impact of monetary policy on the economy under different conditions. It ends with some very Hayekian sounding conclusions:
“We have shown that monetary and fiscal policies are tools to stabilise the
economy in the face of financial crisis and recession. Yet from the point of
view of the overinvestment theories, the past asymmetric macroeconomic policy
pattern led to a wave of wandering bubbles and structural distortions; and
is likely to paralyse the world’s long-term growth perspective. Because interest
rates cannot be cut forever and government debt cannot grow to an unlimited
extent, a timely turn-around is necessary.
Monetary easing has to be reversed to signal banks and enterprises that the
marginal efficiency of investment projects has to increase. Government debt
has to decline to underpin the credibility of monetary policy. Such a turnaround
in the world macroeconomic policy stance would be linked to a painful
process of reallocation of resources in the short run, while it is the prerequisite
for a sustainable long-term recovery.”
It is good to see some outside Austrian circles recognize the harm done by inappropriate monetary policy and its ability to misdirect production and create not only future inflation but future instability. It is unfortunately too often accompanied not by a call for monetary reform and an ultimate return of money creation to a market process (see Richard Ebelling at http://blog.mises.org/16287/the-gold-standard-and-monetary-freedom/ ), but by call for better policy from existing institutions.