ML-Implode News - Defending the Bernanke Fed

The bottom line is that current criticism of the Bernanke Fed is unjustified. Whereas the Fed was slow to respond to the crisis as it began unfolding in the summer of 2007, it has now caught up and the stance of policy seems right. Liquidity has been made available to the financial system. Low interest rates are countering the demand shock. And the Fed has signaled its awareness of inflationary dangers by speaking to the problem of exchange rates and indicating it may hold off from further rate cuts.

We thought we'd give this point of view an airing.

Now that we've done our duty, I have to say, I think this is totally wrong for two reasons. One - lowering rates cannot possibly solve a demand shock that was caused by low rates in the first place.

Two - this is no longer the era of the lone nation-state (which is what the economic conventional wisdom assumes); this is the era of globalized finance. Interest rates that are too low in any relative sense (i.e. commodities inflation, or compared to the interest rates of other countries) will just get arbitraged all to hell. The money flows immediately out, defeating the purpose of the "stimulus". This reality relentlessly punishes the tinkering of economic bureaucrats.

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Defending the Bernanke Fed