Friday, August 27, 2010

Kling on What's Wrong with the Fed

Arnold Kling wrote what is to my knowledge one of the best passages on the monetary policy mistakes in the US since the beginning of the crisis:
I think that the main effect of the Fed's "non-traditional policies" of the past two years has been to transfer wealth from ordinary citizens to bank shareholders and executives. I do not think that the bailouts undertaken by the Fed and the Treasury helped the overall economy. I think that the message of the markets to the financial sector in 2008 was, "Shrink!" The Fed has been doing its best to fight against that message, in part because of institutional bias in favor of big banks, and in part because of a misguided analogy with the 1930's, when the demise of banks hurt the economy. This is not 1932. In 1932, the banking sector shrank too much. In 2009, it shrank too little.

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