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101. The Conduct of Monetary Policy

Author:
Kevin Warsh
Publication Date:
10-2013
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The Federal Reserve's independence is essential to the conduct of monetary policy. But while the Fed is independent within government, it is not independent of government. The grant of authority to the Fed comes from Congress, to which the Fed is ultimately accountable. In my view, the Fed was granted significant powers by Congress, but those powers were not unlimited. The grant of authority was constrained. So by my measure, the Fed is a powerful institution, but a bounded one.
Topic:
Government

102. The Fed Needs to Change Course

Author:
David Malpass
Publication Date:
10-2013
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
This article describes the Federal Reserve's monetary policy, examines its economic impact, and discusses possible exits. Federal Reserve policy is on the wrong course: it is harming economic growth, hurting savers, damaging markets, setting dangerous precedents and misallocating capital away from job-creating parts of the economy. The Fed's September 2012 policy change, in which it announced a third round of quantitative easing (QE3), was a major increase in the aggressiveness of monetary policy and, in my view, another drag on economic growth.
Topic:
Economics

103. Avoiding the Next Crisis: Can Central Banks Learn?

Author:
Robert L. Hertzel
Publication Date:
10-2013
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Any effort to avoid future recessions must rest on an organized way to learn from the past. However, the absence of such efforts within central banks renders such learning problematic and makes likely the recurrence of episodes of recession and financial market turmoil. Critical to learning is the use by policymakers of models to evaluate the past performance of monetary policy. These models should not be the complicated, multiequation models favored by the forecasting departments of central banks. Rather, they should be simple models that require policymakers to take a stand on the basic issues in monetary economics: the nature of the price level (monetary or real) and how well the price system works to maintain output at potential (full employment). They should serve as a safeguard to the understandable tendency of central bankers to attribute economic disturbances exclusively to real shocks rather than monetary shocks.
Topic:
Economics

104. Should Policy Attempt to Avoid Financial Crises?

Author:
Jeffrey A. Miron
Publication Date:
10-2013
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The 2008 financial crisis and the 2007–09 recession have predictably spurred interest in how policy can avoid financial crises. A prior question, however, is whether policy should avoid financial crises. The answer might seem obvious. But I argue here that if policymakers focus on avoiding crises, they will generate undesired side effects and typically fail to avoid crises in any case.

105. What's Wrong with the Fed? What Would Restore Independence?

Author:
Allan H. Meltzer
Publication Date:
10-2013
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
On September 1, 1948, Allan Sproul, president of the Federal Reserve Bank of New York, commented on Fed independence: I don't suppose that anyone would still argue that the central banking system should be independent of the Government of the country. The control which such a system exercises, over the volume and value of money is a right of Government and is exercised on behalf of Government, with powers delegated by the Government. But there is a distinction between independence from Government and independence from political influence in a narrower sense. The powers of the central banking system should not be a pawn of any group or faction or party, or even any particular administration, subject to political pressures and its own passing fiscal necessities [Letter to Robert R. Bowie, in Meltzer 2003: 738].
Topic:
Government
Political Geography:
New York

106. Federal Reserve Independence: Reality or Myth?

Author:
Gerald P. O'Driscoll Jr. and Thomas F. Cargill
Publication Date:
10-2013
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The Federal Reserve was founded in 1913 during the Wilson administration to end banking panics and depressions, and was part of the Progressive agenda for a more activist role of government (see Kolko 1963). By the 50th anniversary, the conventional wisdom was that the Fed's performance was overall satisfactory, especially after the Treasury-Federal Reserve Accord of 1951 that permitted independent monetary policy. While the decision to double reserve requirements in 1937 was judged a policy error, the Federal Reserve was not held responsible for the Great Depression.
Topic:
Government

107. Balance Sheet Crises: Causes, Consequences, and Responses

Author:
Steven Gjerstad and Vernon L. Smith
Publication Date:
10-2013
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Balance sheet crises, in which the prices of widely held and highly leveraged assets collapse, pose distinctive economic challenges. An understanding of their causes and consequences is only recently developing, and there is no agreement at all on effective policy responses. A preliminary purpose of this article is to examine in detail the events that led to and resulted from the recent U.S. housing bubble and collapse, as a case study in the formation and propagation of balance sheet crises. The primary objective of the article is to evaluate similar events around the world with a view toward assessing the economic performance of countries that have pursued varied alternative policies.
Political Geography:
United States

108. Antifragile Banking and Monetary Systems

Author:
Lawrence H. White
Publication Date:
10-2013
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
“Fragility” is the well-known property of being easily breakable, of failing under moderate stress. The opposite property is “antifragility,” a term coined by Nassim Nicholas Taleb (2012a) and the title of his recent book. Taleb (2012b) defines antifragility as the property exhibited by “things that gain strength from stressors and get stronger from failure, like evolution.” An antifragile thing or system is stressloving. What doesn't kill it makes it stronger. We exercise, for example, because our muscles grow stronger from moderate stress. Robustness, an intermediate concept, is the property of being unaffected either way by moderate stresses. Taleb illustrates the threefold distinction this way: We stamp “handle with care” on a package containing something fragile; we needn't stamp any instructions on a package containing something robust, because it won't be affected by handling; but we would stamp “please handle roughly” on a package containing something antifragile, because such handling would make it emerge stronger.

109. The Case for Simple Rules and Limiting the Safety Net

Author:
Thomas Hoenig
Publication Date:
10-2013
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
For the last 100 years, government officials and bank CEOs have insisted that new policies, rules, and laws—combined with greater market discipline, resolution schemes, and enhanced supervision—would ensure that future financial crises, should they occur, would be more effectively handled. In the United States, the creation of the Federal Reserve System and Federal Deposit Insurance Corporation are examples where such assurances were given to the public. More recently, the FDIC Improvement Act of 1991 and other legislation were intended to end public bailouts of failing banks and, in particular, prevent the moral hazard problem inherent in “too big to fail.” Such assurances seem even more significant following a U.S. Treasury (1991) study that found that “too big to fail” resolution policies used for six of the largest banks cost taxpayers more than $5 billion (in current dollars). If only the cost of the six largest bailouts in this recent crisis were just $5 billion. Unfortunately, it was many times greater.
Political Geography:
United States

110. The Gold Standard, the Euro, and the Origins of the Greek Sovereign Debt Crisis

Author:
Harris Dellas
Publication Date:
10-2013
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
The entry of Greece into the euro zone in 2001 was widely expected to mark a transformation in the country's economic destiny. During the decade of the 1980s, and for much of the 1990s, the economy had been saddled with double-digit inflation rates, double-digit fiscal deficits (as a percentage of GDP), large current-account imbalances, very low growth rates, and a series of exchange rate crises. Adoption of the euro—the value of which was underpinned by the monetary policy of the European Central Bank (ECB)—was expected to produce a low-inflation environment, contributing to lower nominal interest rates and longer economic horizons, thereby encouraging private investment and economic growth. The elimination of nominal exchange-rate fluctuations among the former currencies of members of the euro zone was expected to reduce exchange rate uncertainty and risk premia, lowering the costs of servicing the public sector debt, facilitating fiscal adjustment, and freeing resources for other uses.
Topic:
Economics
Political Geography:
Europe