29 Oct 2008

The Fed Really Wants to Test Whether Low Interest Rates Mess Up the Economy

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Ironically, just after I posted (below) that Brad DeLong has finally come around to questioning whether Greenspan made the right move in cutting interest rates so much, I see the headlines that the Fed has once again lowered rates down to 1%.

Let me say it once again, for the record: Suppose that Ludwig von Mises and Friedrich Hayek were right, and that really low interest rates (caused by the central bank flooding the market with artificial credit) screw up the market’s coordination over time. Then that means we are now sowing the seeds for an even bigger crisis four or five years from now.

It’s true, many people would say, “That’s irrelevant. Right now the pain is so bad, we need to stop the bleeding and deal with future problems down the road.”

However, that’s exactly what people were saying in light of the “unacceptable” pain that would have occurred due to the dot-com crash and 9/11 attacks. It never occurred to people back then, how bad the housing boom would end up being.

Oh, another little twist: Keep in mind we will probably have very liberal Democrats running all branches of government when the chickens come home to roost. So on top of the Fed distortions, let’s throw in some tax hikes, and maybe some explicit price controls too. And maybe some more concessions to unions–why not?

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