Friday, January 20, 2012

Amity Shlaes on the Meddling Fed

Readers of this blog know that the negative consequences of Federal Reserve driven inflation is a not infrequent topic for discussion. Amity Shlaes, columnist for Bloomberg, has just identified another way Ben Bernanke's Fed policy makes things worse. In her words Bernanke "tarnishes trust" with a new case in point being a white paper authored by the Fed Chairman. In the paper, Bernanke calls for banks to essentially rewrite mortgage rules in numerous ways in mid-stream, so that reducing borrower burden trumps the right of banks to foreclose.

Shlaes also nails a very important point.
The more general problem is that the Fed -- the bank, in game terms -- has been playing so prominently in the first place. Even if the new paper is only recommending what other authorities have already said, its very publication represents another signal from the Fed that it will keep its hand perpetually and unpredictably in the game, even in periods of recovery like the current one. Monopoly works best when the bank has no discretion: It pays $200 as you pass Go, and otherwise mostly keeps quiet.
Finally Shlaes rightly concludes that the Federal Reserve needs to just get out of the housing market and out of the "rest of day-to-day commerce." The more the Fed meddles, the longer the market is hampered. The longer the market is hampered, the longer it will take to get back on the path to true recovery.

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