E Central Banker ProCyclical Craziness

Indeed, countercyclical behavior makes a lot more sense. This Wikipedia definition in the same article comes close to capturing the definition but monetarists have a slightly different application that I will share after the quote:

 Keynesian economics advocates the use of automatic and discretionary countercyclical policies to lessen the impact of the business cycle. One example of an automatically countercyclical fiscal policy is progressive taxation. By taxing a larger proportion of income when the economy expands, a progressive tax tends to decrease demand when the economy is booming, thus reining in the boom. 

Since Keynesian Economics does not always work, many economists have turned to monetarism in the belief that monetary policy can work, and even give fiscal benefits. I wrote a couple of articles about some new thinking about this view here and here.

This monetary stimulus, based upon the issuance of a large infusion of base money by the central bank, could really help the economy with tax breaks, while still funding government without budget cuts. In a slowing cycle, this would be countercyclical. It would be not be QE, but would be better than QE as it would be done without taking scarce long bonds out of the system, and it would be for everyone, not just the banks or wealthy holders of assets. This action could redeem the Fed in the eyes of the people.

Even Basel 3 acknowledges the need to reduce procyclicality. Well, even a 6th grader could see that is needed. The Fed could have done things to help out in 2007-2008.  The Fed could have bought bad paper. The Fed could have minimized the credit crisis. Before that, the Fed could have restrained the bubble just a little. But procyclicality prevented those actions. And it damaged the middle class and confidence in the economy by main street. Main street has been shunning the markets for this very reason. Procyclicality hurt the nation, both in the Great Depression, and in the Great Recession.

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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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