Wednesday, August 26, 2009

Tyler Cowen Is So 1914ish

George Mason University economics professor and occasional NYT contributor, Tyler Cowen, offers a commentary for NYT on what's ahead for Bernanke:
I was glad to see Mr. Bernanke reappointed but he faces a daunting task.Basically the Fed pumped a lot of liquidity into the economy to sustain the banking system. So far all that new money has not caused inflation because banks have sat on much of it rather than lending it out and stimulating expenditures.

His biggest challenge will come when the economy starts to recover and the new money starts to be translated into inflationary pressure on prices. What will he do?

Will growth fade away once the stimulus money is spent? That will be a hardcall to make.

Most likely he will try to withdraw a lot of that new money from the system, so as to keep inflation within a manageable range. That is indeed the right plan but it’s an open question as to whether the Fed gets the timing right. If they withdraw money too quickly, we could see a “double dip” recession. If they wait too long, inflation may rise to unacceptable levels and then the subsequent required monetary tightening could cause a double dip recession as well.
Tyler, this isn't 1914, the first year of Fed operation. Your man, Bennie, has all kinds of new "tools". He is particularly fond, at the moment, of his tool that allows him to pay interest on reserves. His thinking is that he won't have to withdraw reserves, as you suggest he will. He will just pay interest on excess reserves at a rate that will entice banks not to loan money against the reserves. It's all laid out by New York Fed economists, Todd Keister and James McAndrews, in their paper Why Are Banks Holding So Many Excess Reserve? (Pdf).

Tyler, you were glad to see him reappointed? You don't even know what the hell he is doing.

1 comment:

  1. Wenzel,

    Do you ever get the feeling that these Op Ed columns are penned by staff ghost writers and the "big star" names are appended at the top, with permission, after the fact?

    The language is so eerily similar amongst these type of pieces, it's all "on message" with the same metaphors, ideas and language.

    I smell a conspiracy!