I don’t recall how this WSJ op-ed came to my attention again the other day, but, since it did, it seemed worth sharing the paragraphs below. Originally appearing on August 15th last year – on the 40-year anniversary of Nixon closing the gold window – it reminds us of what a swell job economists continue to do for us non-economists in the world.
Most of today’s macroeconomists see surprisingly little wrong with the present system of fully elastic money. This is surprising for two reasons: First, there is the universally dismal historical record of paper money systems. Second, paper money systems are inherently incompatible with capitalism. In a state paper money system, the banking system is de-facto cartelized and the banks’ funding conditions and certain interest rates are determined administratively by a state agency—the central bank. The constant expansion of bank reserves constitutes an ongoing subsidy to the banks, which encourages further money creation through fractional-reserve banking. Credit growth in such an economy is no longer driven by the extent of saving in the economy but the result of central bank policy and the banks’ willingness to expand their balance sheets.
The belief among mainstream economists and central bankers today is obviously that they fully understand and can correctly anticipate the consequences of their monetary manipulations. The effects of money injections appear to them to be simply stronger growth and higher inflation, both neatly captured by the set of macro-statistics that modern economists follow so slavishly. All that central banks have to do, then, is target the right balance between the two. A display of such intellectual hubris was given by Federal Reserve Chairman Ben Bernanke when he explained the Fed’s policy of quantitative easing to the U.S. public in an op-ed last November. Extolling the advantages of artificially depressed interest rates and propped up asset prices courtesy of the Fed, Bernanke promised that, “lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”
This brings to mind the ongoing brouhaha between econo-bloggers and St. Louis Fed President James Bullard who, over the last week, has been taken to task for saying a lot of things that most non-economists would view as simple common sense, for example, that the housing bubble created a lot of artificial demand in the economy in the last decade and attempting to restore aggregate demand to that level through money printing is dangerous.