Friday, January 29, 2016

Why Not Try Free Markets for a Change?

The financial press seems to be obsessed with central bank policies.  There is little or no real evidence that central bank activity has ever mattered much in impacting real economic growth.  No doubt, as Paul Volcker showed in the early 1980s, central banks do matter in the determination of the rate of inflation.  But, the real economy?  No way.

The highest rate of growth ever achieved in any 50 year period in American history occurred when there was no central bank.  In the 1950's and 1960's when real economic growth exceeded 4.5 percent, the central bank was quiet and inactive.

Only in the 1970's did the Federal Reserve begin to make the front pages of the paper and then, only to show how inept they could be.  The Fed engineered the largest peacetime explosion in the money supply in American history.  The result, easily predictable by a freshman student of economics, was a massive burst of inflation.  Putting that fire out is what made Paul Volcker famous.

Now, the Fed is a constant center of attention.  Why, is not clear.  Nothing the Fed can do or say can matter for real output and real income.  The Fed is simply irrelevant.

Thank goodness.

Because the Fed has an atrocious forecasting record.  As the economy began sliding over the economic cliff in December, the Fed was concerned about an overheating economy and inflation.  Hard to believe that any organization could be that inept.  But, that's the Fed.

Fortunately, the Fed doesn't matter for good or evil.

What the economy needs is free markets not an over-zealous Fed.

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