Thomas Jefferson said about Shays' Rebellion: "I hold it that a little rebellion now and then is a good thing, and as necessary in the political world as storms in the physical."
Applying this idea to economics, some would argue that market forces, unimpeded, should be allowed to take their due course.
From the Economist, a contrarian view that the Fed might be doing more harm than good if it lowers rates to help the economy, and especially the financial markets.
3 comments:
Recessions are part of the economic cycle, but the Fed should not influence the economy in a preemptive effort.A little interference from the Fed can't hurt especially if interest rates are set according to the immediate needs of the economy once the recession is happening ("Taylor Rule"). Letting a recession play itself out can cause it to evolve into a depression. But, short and contained recessions can remove from the economy failing businesses and keep people from speculating, as long as the Fed doesn't act too soon.
Predicting recessions is very difficult and often futile. But, trying to prevent them altogether by constantly adjusting interest rates can lead to economic stagnation at best and detrimental speculation at worst. It can make people believe that there is a cure for all economic ills, ultimately leading to speculation as seen right before the Great Depression.
There is obviously a dilemma in Economic interference as we've seen in the recent trend of housing morgage foreclosures and bankrupcies, in large (if I've been understanding the news lately) a misconception about the inflation rates and interest rates. Which, of course, is why they have recently lowered intrest rates, to try and fix this 'housing thing'. So, in large, the Fed made a problem, but the Fed is fixing the problem. Does this mean that they shouldn't interfere in the first place? I don't think I've been in economics long enough to know the actual answer, but I feel like a regulating force is something kinda necessary to keep anything remotely functional.
Of course, my main point is that such an experiment (to eliminate the Fed for a bit) would be stupid, and not worthwhile risking.
Recessions are necessary in keeping the wealth of a nation. This might sound oxymoronic but picture this. When the economy seems to go down the Fed Bank will try to prevent a recession by lowering interest rates. This will put more money in the system, making people feel richer than they real are. People in turn tend to save less and buy more. The economy increases back to normal but what happens to the money spent. The business the consumers bought from will buy more of there products from other countries. This devalues our dollar and makes other countries richer. Also, the Fed Bank will raise interest rates to get more money saved so they can afford to lower interest rates again later. People will then save more and buy less, which hurts our businesses.
Instead of lowering interest rates from the beginning, the Fed Bank should keep its course letting a recession occur. This will bring a lesser of two evils.
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