Writes Bob Higgs:
"... Like nearly all modern macroeconomists, Bernanke’s focus on aggregates alone prevents him from asking, “spare capacity” for what? He sees unemployed labor and capital, and he concludes that overall monetary stimulus will remedy these apparent wastes. But the effects of expansionary monetary policy will not be felt equally in every part of the economy, nor should they be. He fails to see that the unemployed labor and capital are concentrated in places to which they were drawn as a result of malinvestments made during the (Fed-fueled) boom, especially in housing construction and finance and related industries. When the Fed now creates new bank reserves via QE2, the banks, if they increase their lending at all, may simply finance—directly or indirectly—investments in commodity speculation, stock speculation, or other expenditures that only inflate new asset bubbles.This policy-making on the basis of the latest observations of inflation and unemployment not only demonstrates a supremely unjustified faith in the Fed’s ability to micromanage the macroeconomy, but also betrays an obtuseness to one of Milton Friedman’s best-known empirical claims, namely, that between changes in money and changes in macroeconomic aggregates such as output and inflation lie long and variable lags. So, even if the latest observations of aggregate variables were accurate and were all the information that matters, the Fed’s belief in its ability to make successful policy on that basis would be utterly unfounded. When the Fed throws a rock into the lake, the ripples keep spreading, and future changes in winds and water currents affect precisely where and how quickly those ripples spread..."
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