Discussion about this post

User's avatar
UM Ross's avatar

I suppose you're correct in saying that some of the current inflation is due to exogenous factors and thus isn't entirely the Fed's fault, but enabling our government to "borrow" $6T more during the "pandemic" via continued ZIRP was certainly a contributing factor. The classic cause of price inflation is "too much money chasing too few goods." Certainly there's a shortage of certain types of goods, but there's also an awful lot of cash in the system. Ask any real estate agent what percentage of transactions that have been all-cash over the last two year and they'll tell you it's at an all-time high. Where did all that cash come from? Could it be the "easy money" policies that the Fed has pursued for 20+ years, and that they double-down starting in the spring of 2020? ;)

Expand full comment
UM Ross's avatar

"Regulatory powers"

The Fed certainly has them, but has historically failed to exercise them in a prudent manner. There's a solid argument to be made that if they had done so during the early 2000s, the GFC of 2008 would have been much milder, and things have only gotten worse since then. Before 2008, we had a clean separation between commercial banks and investment banks. That's no longer the case. We "rescued" some of the investment banks by allowing them to merge with commercial banks, while others were allowed to declare themselves "bank holding companies", when by all rights, their investors should have been wiped out. This creates a great deal of moral hazard. Investors get the idea that no matter how imprudently these companies act, the Fed and Treasury will always bail them out. But this is not new; the precedent was set in 1987 with the bailout of Continental Illinois. It's almost like the Fed doesn't really want to engage in prudent regulation of the financial industry. If they were the FDA, I'd say we've got prime example of regulator capture. But the Fed isn't a government agency, the Fed is literally owned by the industry it's supposed to regulate, so expecting them to regulate it in a sensible manner may not be entirely realistic. Now even if they were willing (i.e. if we gave you absolute power over Fed policy), I think it's more than a few years too late to for the Fed to use their regulatory powers to restore sanity and safety back to the financial markets.

Expand full comment
7 more comments...

No posts