The perverse effects of easy money
The curious case of William White
Sep 5th 2012, 17:13 by M.C.K. | WASHINGTON
With a few noteworthy exceptions, mainstream academic economists failed to anticipate that the global financial crisis and ensuing collapse of output was even possible...
He (along with his colleague Claudio Borio), presented one of the earliest and most thoughtful warnings of the financial crisis back in 2003. Anyone with a brain ought to take him seriously, especially when he bucks the conventional wisdom. Thus, this correspondent was very excited to find (via Ed Harrison) that Mr White has just released a thoughtful new paper on the possible “unintended consequences” of actions taken by the big central banks since the crisis. One of its best features is its discussion of the recent literature, including two of the most interesting papers to have been written about the interaction between monetary policy and the financial system since 2007.Mr White’s central thesis is that central banks affect the financial system much more directly than they affect the real economy or even nominal variables such as the rate of PCE inflation or the level of NGDP. As a result, there are times when stepping on the monetary gas pedal does not produce the desired results. During a balance sheet recession, the collapse in interest income hurts savers more than the decline in rates helps prospective borrowers...
Disappointingly, the establishment has not been receptive to this line of thinking. They should not be so quick to judge. Who knows who will be remembered as the modern-day Ptolemaists when the history books are written?
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