The ongoing financial crisis and the U.S. Fed

Greg Mankiw has pointed to the U.S. Fed’s “exit strategy.” It seems very Austrian!

In effect, what we have is a balancing act by the central bank.  Feed it liquidity for now, even as the commercial banks “sleep.”  But when they wake up because recovery has set in, withdraw that liquidity.

But what happens if the Fed withdraws too quickly?  Or too slowly?  We would know because in the first, we nip the recovery in the bud.  In the second, we see inflation in commodity markets and real asset prices.

Can it really be done?  That seems to be the “Hamlet” of the macroeconomics profession today.

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6 thoughts on “The ongoing financial crisis and the U.S. Fed

  1. Dear Prof,

    Whether the word was “seems” or “is” is really semantics. The point is you made a connection between the US Fed “Exit Strategy” and Austrians. The hyperlink in your original post points to a WSJ Op-Ed whose author is Bernanke, the US Fed chief.

    I doubt any Austrian mind would see Bernanke as a bird of the same feather. Bernanke is a Keynesian. That’s why it baffles me to read how you could connect Bernanke’s article on the Fed’s Exit Strategy with Austrians.

    It’s like hearing someone say that the Koran “seems” to have been authored by Christians. It would be a strange allegation.

    While I understand that there may be differences within Austrian thought, yet such differences would be analogous to the different sects of Christianity. In the final analysis, Christian sects, no matter how they argue against each other, are still fundamentally different than Muslims.

    Thus, it simply makes no sense to ascribe to Austrians an idea that was clearly written by a true-blue Keynesian.

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  2. It is a strange allegation. My last sentence even questions if the balancing act would work, which is my own seemingly Austrian, but not quite, way.

    I wanted people to think that the Austrian/Keynesian splits are not always black-and-white. So many Grays out there, including my hair! Try to lighten up – economists should learn from the kindergarten playground. We play even with the bully, up to a point!

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