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Bagehot's Lessons for the Fed

Apropos to our earlier criticism of the US Central Bank is this piece by Stanford prof Ronald McKinnon, titled Bagehot's Lessons for the Fed.

In today's WSJ, McKinnon writes:

"By slashing interest rates too much in 2007-2008, the Fed has accentuated the foreign drain and thus made the alleviation of the domestic drain more difficult. Yet, despite this mistake, Bagehot would approve of other actions the Fed has taken to deal with the domestic drain by unblocking specific impacted domestic markets. These include (1) swapping Treasury bonds for less safe private bonds, (2) opening its discount window to shaky borrowers, and (3) maybe even rescuing Bear Sterns. He would also approve of the relaxation of capital constraints on Fannie Mae, Freddy Mac and so on, for mortgage lending. Yet these measures will be insufficient if the foreign drain continues.

To repeat Bagehot's Rule: "very large (domestic) loans at very high rates are the best remedy for the worst malady of the money market when a foreign drain is added to a domestic drain." The Fed, and the U.S. government more generally, have so far got it only half right."

The entire piece is worth a read . . .

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Sources:
Bagehot's Lessons for the Fed
RONALD MCKINNON
WSJ, April 25, 2008
http://online.wsj.com/article/SB120908336730343529.html

Friday, April 25, 2008 | 09:25 AM | Permalink | Comments (16) | TrackBack (0)
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Comments

This is only common sense...and our last exceptional man who was chairman of the Fed, Paul Volcker, would absolutely agree with the Stanford professor's comments. I simply do not understand why Greenspan and Bernanke have decided that the recessionary part of the business cycle is to be avoided at all costs....in the long history of the United States, this has not been possible in the past and it won't be now...

Won't somebody please put a balanced budget amendment on the books for this year and stop these people from turning our yearly national budget into just another un-collateralized debt obligation?

Posted by: Alan Greenspan | Apr 25, 2008 9:51:27 AM