Two links on the Federal Reserve.
1) Ramesh Ponnuru has a piece in the National Review, Not Enough Money, that is quite good on the importance of monetary policy in the crisis. He’s trying to move the conservative pundit space on the topic away from the Gold Bugs and the Fire Alarm on Noah’s Ark crew towards somewhere where people can discuss the pros and cons of QEII and other post-crisis monetary policy; that’s not easy work, and I applaud it:
As the market became convinced that the Fed planned to act, both expectations of inflation and expectations of real growth increased: the former indicated in the spreads between inflation-indexed bonds and non-indexed bonds, the latter in real interest rates. Nominal income thus moved closer to trend, if not as much as it would have with a bolder Fed initiative. (An explicit announcement that the Fed is willing to do what it takes to restore the trend might itself change expectations enough to make great exertions by it unnecessary.) Stocks picked up too. QE2, though flawed, worked. It began to work even before being formally implemented….
In warning about inflation, conservatives are crying “fire” in, if not Noah’s flood, at least a torrential rain. It may be that they are stuck not so much in the 1930s as in the 1970s — the time when conservatism forged much of its current outlook on economics, and a time when monetary restraint was badly needed. Conservatives also tend to think that loosening monetary policy is a kind of intervention in free markets, and therefore to be suspicious of it. But this is an error. Professor Hendrickson points out that in a system of free banking, with competitive note issue rather than a central bank, the desire for profit and the need for solvency would lead to the supply of banknotes roughly equaling the demand. In a fiat-money regime such as the one under which we, for better or worse, live, a central bank’s withholding of a sufficient supply of money is just as much of an intervention in the economy as its overproduction of it….We are not likely to see a second Great Depression. But it would be tragic if conservatives, moved by hostility to the Fed, led it to repeat, even on a smaller scale, the worst mistakes in its history.
2) Matt Yglesias discusses the Federal Reserve on The Nation’s Breakdown With Chris Hayes. If you don’t subscribe to the Breakdown podcast, you should. It’s a really solid weekly-investigation into a relevant topic suggested by readers. In the interview Yglesias recaps parts of his his Democracy piece on the Federal Reserve, which is also recommended if you haven’t seen it.