E Forget Keynesianism And Market Monetarism. New Monetarism Rules The Federal Reserve

You can just forget the noise from the New Keynesians and Market Monetarists. New Monetarism is the economic school that rules the Fed. And you should know more about how that works out. [There is a chart below that shows the big banks are lending like crazy while inflation is practically non existent. That makes no sense, but these are not normal times.]

New Monetarists are Austrians like Greenspan was an Austrian economist. Greenspan thought that the invisible hand of self interest and deregulation would not allow the housing bubble and crash of the last decade.

Of course if you believe like I do that the Fed mispriced risk and that the housing bubble was inevitable, you wonder if the New Monetarists will be any more honest than Greenspan wasn't.

After all, it was Greenspan who said in February, 2004, that you could get a "better deal" obtaining an adjustable mortgage.

Through Stephen Williamson's blog, we can catch a real glimpse of what the New Monetarists are about. Keep in mind that the blog is not an official statement of the Federal Reserve, but really, this is the Vice President of the St. Louis Fed speaking. So people should pay attention.

NK's  and MM's want a piece of Milton Friedman, but the Fed and the New Monetarists (NM's) think they know all about Friedman. You can study all that for yourselves. But the practical implications of NM thought is to do nothing, or very little, in the working out of monetary policy.

Stephen Williamson has said on more than one occasion on his blog that deflation is not such a bad deal. He said he went to Switzerland and deflation there was not very problematic at all. Of course, the Swiss give loans, make fine watches and snow, and probably could care less about the appreciation of their currency.

The Swedes do diddly squat in the real world, in the real manufacturing world. They are the worst example of problems or lack of problems with deflation.

Dr Williamson said here that the Fed controls inflation and deflation. I thought that was a significant statement. It is especially significant when one considers that the Fed is failing to push inflation to the 2 percent target! Has the Fed lost power or does it just not care because of globalization? Read on.

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Disclosure: I am not an investment counselor nor am I an attorney so my views are not to be considered investment advice.

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