I suppose it wasn’t supposed to just slip under the radar of other events but that is how it has come to pass. The great Keynesian folly, that an economy can be resurrected from the demand side, is about to be pushed one more time, on this occasion by the Federal Reserve in the US. Flood the markets with more US dollars, that will work a treat, just as it has on the two previous occasions that this same strategy has been used. What is one really to make of this:
The Federal Reserve fulfilled expectations of more stimulus for the faltering economy, taking aim now at driving down mortgage rates until an improvement in unemployment that the central bank says will be a problem for several years.
The Fed said it will buy $40 billion of mortgage-backed securities per month in an attempt to foster a nascent recovery in the real estate market.
Do these people never learn?
More along the same lines: George Will has a column today on these same issues which the folks at Powerline have nicely titled, “The Fed’s Monetary Morphine”. The frame for the story are the views of Esther George, the President of the Federal Reserve in Kansas City. This was the part of the story that caught my eye:
With corporations holding upward of $2 trillion in cash, and 30-year mortgages at 3.5 percent, George, speaking several weeks before this week’s meeting of the Federal Open Market Committee, asked: ‘Is there anyone not borrowing today or purchasing a house because interest rates aren’t low enough? Do we expect that businesses will hire if their long-term rates are lower?’
Very low interest rates discourage saving, punish retirees living off interest-bearing assets and, George says, ‘incent people into riskier assets.’ These include commodities, farm land (for the first time on record, prices of cropland in George’s district have risen more than 20 percent for two consecutive years) and equities.
Low interest rates do not give an economy momentum, it is the availability of saving that does it. The Keynesian low-interest mantra/mania is coming to an end and the classical theory of interest rate adjustment is coming back into play. It’s a painfully slow return, but if you would like to understand the underlying theory better, have a look at the last two chapters of my Free Market Economics. From what Esther George has said, you would almost think she’d read the book herself but she probably read Wicksell instead. That’s where I found it too, from a book written more than a century ago.