Friday, September 4, 2009

Blinder Rants

Princeton economics professor Alan Blinder rants at the horrors of a congressional audit of the Fed, in one of the most backward articles I have seen in some time.

In a Council on Foreign Relations piece, he claims the Fed is just doing a wonderful job:
A noteworthy creation of the Progressive Era, the Fed was designed to conduct monetary policy on decidedly nonpolitical grounds: it has only a vague legal mandate from Congress -- to pursue both "stable prices" and "maximum employment"-- and nearly complete discretion to fulfill its mission as it sees fit. Over the years, the Fed, protected from partisan political concerns, has been able to run a very capable -- which is not to say perfect -- monetary policy, almost certainly keeping inflation lower than politicians would have. Yet, despite this success...
Success, Alan? According to the BLS inflation calculator, it would take $21.54 in current dollars to equal the buying power of just one 1914 dollar, the year the Fed began operations.

That's quite an inflation fighting track record. By the same kind of measure, I guess firefighters could consider it a success if the current fires just north of Los Angeles don't increase beyond 21 times the current size. That would pretty much wipeout L.A., but, hey, under Blinder logic it can be said Denver was saved.

Blinder does have a point that there is a danger with the current audit bill, but it's not that the Fed is doing such a marvelous job, rather it is that big government advocates may gain control of the audit, in an attempt, as Blinder correctly points out, to control the Fed.

I'm all for Ron Paul's audit demand and his end the Fed demand. I'd like to know what the Fed has been up to all these years but, I think the order of how this is done should be reversed. First, we end the Fed, then we do an autopsy.

As far as Blinder actually understanding what the Fed is doing with monetary policy, we have to put Blinder in the clueless camp. He writes:
Here is a not-so-unlikely hypothetical: sometime in 2010, the Fed, wanting to avoid inflation, will likely begin to abandon the hyper-expansionary monetary policy it adopted during the recent crisis as a way to stave off a depression...
Blinder isn't really paying attention to what the Fed is doing. The Fed stopped increasing its balance sheet and the money supply back in March. Who knows what the Fed will do from here but, Blinder doesn't even know what they have done over their history to the dollar, or what they have done this year with regard to monetary expansion.


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