Is the Fed Sadistic?

| Thu Aug. 26, 2010 11:51 PM EDT

Arnold Kling on current Fed policy:

I call it neutron-bomb monetary policy. The banks are still standing, while the people are getting killed. I don't think that is the explicit intent of the Fed, but the structure of the organization makes it much more responsive to the thought process of bankers than to that of ordinary Americans.

Scott Sumner:

Central bankers are a bunch of well-meaning (or at worst amoral) people who act like sadists because they have the wrong model in their heads....What the Fed considers normal, I consider sadistic. Not just this Fed, but earlier Fed’s, and foreign central banks as well. If I knew there was 10% unemployment, I couldn’t sleep at night knowing the markets were predicting only 1% inflation, whereas the target was 2%. I’d keep asking myself; “Why not do more stimulus? We’d improve both the unemployment and inflation situations at the same time.”

Andy Harless:

How does the Recession allow the government to bail out banks? With the recession going on, people are afraid to do anything risky with their assets, so they keep them deposited in banks, earning no interest. Banks can then invest these deposits in Treasury notes and credit the interest on those Treasury notes to their bottom line, thus improving their balance sheets.

...Now this bailout program is not without its risks. The biggest risk is that the economy will recover, which would be a disaster for the program....So the success of this bailout program depends on avoiding recovery, avoiding increases in inflation expectations, and avoiding major declines in Treasury note yields. Now do you understand why the Federal Reserve Bank presidents — representatives of the banking sector — are the most hawkish voices at the FOMC’s policy meetings?

And of course, Paul Krugman:

Why are people who know better sugar-coating economic reality? The answer, I’m sorry to say, is that it’s all about evading responsibility.

In the case of the Fed, admitting that the economy isn’t recovering would put the institution under pressure to do more. And so far, at least, the Fed seems more afraid of the possible loss of face if it tries to help the economy and fails than it is of the costs to the American people if it does nothing, and settles for a recovery that isn’t.

The Fed has very few admirers anywhere on the ideological spectrum these days. And now there's this about tomorrow's economic report from the BEA: "The widening consensus that the U.S. economy has slowed to a crawl will be hammered home Friday with the government's expected announcement that the nation's second-quarter growth was far more anemic than previously estimated. Many economists believe the Commerce Department will revise its estimate of growth in gross domestic product to 1.3% or lower, down from 2.4% — a dismal performance, especially as the country struggles to rebound from recession." Perhaps the Fed should actually consider doing something to help?

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