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91. Limits of Monetary Policy in Theory and Practice

Author:
Vincent R. Reinhart and Carmen M. Reinhart
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The Federal Reserve's conduct of monetary policy casts a spell over market participants, commentators, and academics. The pages of financial newspapers parse subtle differences among the comments of Fed officials and delve deeply into potentially multiple meanings of official statements. Academic discussions argue that the path of the policy rate may (as in Taylor 2009) or may not (as in Bernanke 2010, and Greenspan 2010) have fueled a home-price bubble in the United States.
Topic:
Monetary Policy
Political Geography:
United States

92. The Revived Bretton Woods System, Liquidity Creation, and Asset Price Bubbles

Author:
Harris Dellas and George S. Tavlas
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
In this article, we argue that the present constellation of exchange rate arrangements among the major currencies has led to the creation of excessive global liquidity, which has contributed to asset price bubbles. Although the exchange rates of many of the major currencies—including the U.S. dollar, the euro, the yen, and the pound sterling—float against each other, the currencies of many Asian emerging market economies and oil-exporting economies are pegged to the dollar. Dooley, Folkerts-Landau, and Garber (2004a) labeled this system “Bretton Woods II” (BWII). The original Bretton Woods regime (BWI) lasted for about a quarter of a century. Dooley, Folkerts-Landau, and Garber (DFG) argue that the present regime, despite its large global imbalances, will also be sustainable.
Topic:
Oil
Political Geography:
United States

93. U.S. Decapitalization, Easy Money, and Asset Price Cycles

Author:
Kevin Dowd and Martin Hutchinson
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
In Matthew 25: 14–30, Jesus recounts the Parable of the Talents, the story of how the master goes away and leaves each of three servants with sums of money to look after in his absence. He then returns and holds them to account. The first two have invested wisely and give the master a good return, and he rewards them. The third, however, is a wicked servant who couldn't be bothered even to put the money in the bank where it could earn interest. Instead, he simply buried the money and gave his master a zero return. He is punished and thrown into the darkness where there is weeping and wailing and gnashing of teeth.
Political Geography:
United States

94. Supply: A Tale of Two Bubbles

Author:
Mark A. Calabria
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
To the extent that monetary policy influences asset prices, it does so via the demand for assets, by changing the borrowing costs to purchase assets, or via supply, where movements in interest rates can make investment in assets look more or less attractive. Fiscal policy interventions can also contribute to bubbles by changing the cost of acquiring specific assets. Most discussions of asset bubbles, particularly those involving the role of monetary policy, focus on demandside factors. This article examines the role of supply-side factors in the recent booms in the U.S. housing market and dot-com stocks. The importance of supply constraints in each market is discussed. Policy implications are then presented.
Topic:
Monetary Policy
Political Geography:
United States

95. Incentive-Robust Financial Reform

Author:
Charles W. Calomiris
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Will Rogers, commenting on the Depression, famously quipped: “If stupidity got us into this mess, why can't it get us out?” Rogers's rhetorical question has an obvious answer: persistent stupidity fails to recognize prior errors and, therefore, does not correct them. For three decades, many financial economists have been arguing that there are deep flaws in the financial policies of the U.S. government that account for the systemic fragility of our financial system, especially the government's subsidization of risk in housing finance and its ineffective approach to prudential banking regulation. To avoid continuing to make the same mistakes, it would be helpful to reflect on the history of crises and government policy over the past three decades.
Political Geography:
United States

96. Preventing Bubbles: Regulation versus Monetary Policy

Author:
David Malpass
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Over the years, there has been a lot to consider in the Federal Reserve's choices of monetary policy and their relationship to bubbles. My conclusion is that mistaken U.S. monetary policy, usually related to the Fed's indifference to the value of the dollar, has repeatedly caused harmful asset bubbles in the United States and abroad. Policy is again at risk with the Fed's imposition of near-zero interest rates and its decision to conduct large-scale asset purchases (termed “quantitative easing”). Regulatory policy has often been ineffective at identifying or addressing asset bubbles, especially those caused by Fed policy. The solution is a parallel track to improve monetary policy so that it provides a more stable dollar and fewer asset bubbles; and to strengthen regulatory policy so that it provides a more reliable base for growth-creating free markets.
Topic:
Monetary Policy
Political Geography:
United States

97. Peddling Protectionism: Smoot-Hawley and the Great Depression

Author:
Daniel Griswold
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Let me preface this review with a confession: As an advocate of free trade, I love to link the 1930 Smoot-Hawley tariff bill with the Great Depression at every opportunity. More than 80 years after its passage, the bill still evokes negative feelings about protectionism. After reading Douglas Irwin's Peddling Protectionism: Smoot- Hawley and the Great Depression, I can see I need to curb my enthusiasm. Irwin does not defend the bill, far from it. He concludes that it failed to achieve its objectives and that it did, in an incremental way, make the Great Depression worse. But in the careful language of the professional economist and historian that he is, Irwin documents in rich and often colorful detail that the most infamous trade bill in American history had less impact than either its advocates or its opponents understood at the time or understand today. Even so, the story of Smoot-Hawley offers valuable lessons for today as our politicians seek to craft U.S. trade policy in the 21st century. Irwin is superbly qualified to write the definitive history of what was officially the Trade Act of 1930. A professor of economics at Dartmouth College, he has authored Against the Tide: An Intellectual History of Free Trade (1996), and Free Trade under Fire (3rd ed., 2009).
Topic:
Economics
Political Geography:
United States

98. Robust Political Economy: Classical Liberalism and the Future of Public Policy

Author:
Richard L. Gordon
Publication Date:
09-2011
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Pennington undertakes a needed effort to provide a systematic, analytic critique of recent efforts to discredit what he terms “classical liberal economics.” His is effectively the standard but hard-to-sell proposition that prescient impartial counselors—Plato's philosopher kings—have failed to emerge from the development of modern knowledge. In particular, Pennington makes good use of Hayek's radical contrast between the competitive testing of concepts in a spontaneous market order and the construction of solutions by government monopolies. As Pennington's conclusions nicely summarize, skepticism of limited government is high and fostered by those who are seeking rents from intervention. Thus, ideas that committed libertarians see as obviously absurd need systematic debunking for a broader audience. Pennington, therefore, pretends that he is treating serious arguments and confronts them respectfully.
Topic:
Government and Political Economy
Political Geography:
United States

99. Herbert Hoover: Father of the New Deal

Author:
Steven Horwitz
Publication Date:
09-2011
Content Type:
Policy Brief
Institution:
The Cato Institute
Abstract:
Politicians and pundits portray Herbert Hoover as a defender of laissez faire governance whose dogmatic commitment to small government led him to stand by and do nothing while the economy collapsed in the wake of the stock market crash in 1929. In fact, Hoover had long been a critic of laissez faire. As president, he doubled federal spending in real terms in four years. He also used government to prop up wages, restricted immigration, signed the Smoot-Hawley tariff, raised taxes, and created the Reconstruction Finance Corporation-all interventionist measures and not laissez faire. Unlike many Democrats today, President Franklin D. Roosevelt's advisers knew that Hoover had started the New Deal. One of them wrote, "When we all burst into Washington ... we found every essential idea [of the New Deal] enacted in the 100-day Congress in the Hoover administration itself."
Topic:
Economics, Markets, Political Economy, Financial Crisis, and Governance
Political Geography:
United States and Washington

100. Publication Practices for Transparent Government

Author:
Jim Harper
Publication Date:
09-2011
Content Type:
Policy Brief
Institution:
The Cato Institute
Abstract:
Government transparency is a widely agreed upon goal, but progress on achieving it has been very limited. Transparency promises from political leaders such as President Barack Obama and House Speaker John Boehner have not produced a burst of information that informs stronger public oversight of government. One reason for this is the absence of specifically prescribed data practices that will foster transparency.
Topic:
Democratization, Political Economy, Politics, Communications, and Governance
Political Geography:
United States