Tuesday, November 25, 2008

Econ 201

Am (re)learning all kinds of fun stuff about monetary policy from the Catastrophe.  The latest strategy from the Fed---'quantitative easing'--is designed to counteract anticipated price deflation, which, if allowed unchecked, would put us squarely on track to a replay of the Great Depression.  The Fed's injection of dollars into the economy through the purchase of mortgage backed securities is an action I was against heretofore, since I was (and still am) unclear about how to value what it was (is) the Fed and Treasury were (are) buying.  Though this is still murky to me, I think I grasp that we are now in the zone where nominal interest rates are close to zero and therefore standard monetary techniques for revving up the economy no longer apply.  If we pump enough dollars into the financial system through these types of initiatives, then dollar denominated goods will rise in price and we will have rekindled inflation as the antidote to further price declines.  Did I get this right?   The broad strokes of what we are now seeing were outlined by Bernanke himself in a speech before the National Economists Club almost six years ago to the day, and you can find it here: http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm

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