Re: FED's exit strategy spelled out
In my opinion what matters most is that we have a fiat money system. Do you recall how EJ argued against the deflationists, saying that the Fed would be infinitely inventive in coming up with ways to supply the banks with money, and that in a fiat system, there is no limit to how many zeros one can type? Before the crisis, the deflationists looked at precedent and current rules, and concluded the Fed couldn't or wouldn't intervene effectively. But in the event, precedent was broken and rules changed... and we didn't get a deflationary spiral. Now turn this around. If the Fed wanted to mop up the excess reserves -- or at least restrain commercial banks from lending against them -- as much as it wanted to prevent a deflationary spiral, then there should be no doubt that it will find a way to do so. The policy Ben annunciates today doesn't limit what his policy will be tomorrow; little things like interest rates offered and deposit terms can change... much more significant things like reserve fraction rules can change. I think the word can't has very little meaning as it relates to fiat money. I doubt that the Fed's efforts would be perfectly calibrated or timed, but in the end, it can put the genie back in the bottle if it wants to. (The Fed wasn't able to avoid a short period of CPI deflation and a credit crunch, either, so by the same token, we are going to see some inflationary effects from all the excess reserves; I'm just saying that the Fed certainly has the ability to prevent us from experiencing the full measure of the potential inflationary effects.) In my view, the problems are actually that
Originally posted by Raz
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(a) the Fed probably doesn't want to mop up that liquidity as badly as it wanted to avoid a deflationary spiral, what with a desire for job growth and all, and
(b) these tools won't especially help with a price shock born of a foreign exchange crisis.
(b) these tools won't especially help with a price shock born of a foreign exchange crisis.
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