Entries Tagged as 'monetary policy'

Premature Euro-Skeptics

David Frum November 18th, 2011 at 12:07 am 14 Comments

The New York Times’ profile of Euro-skeptic Bernard Connolly–who warned early of the danger of creating a single currency for a polyglot continent–is one more reminder of the enduring force of the old common-law rule: truth is not only no defense; truth actually compounds libel.

People who know him say that his public reticence is also fed by a lingering anxiety that officials will exact some form of revenge.

The origins of that fear as well as the anger and passion that drive him date to 1995, when he took a leave from his job to write “The Rotten Heart of Europe,” an excoriating history of the failure of the euro’s predecessor, the European Exchange Rate Mechanism.

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`In Time’ is a Parable Against Tight Money

October 31st, 2011 at 4:10 pm 7 Comments

I can’t recommend the new Justin Timberlake and Amanda Seyfried sci-fi action thriller In Time on the basis of its acting or plot (both are mediocre) but I can recommend the film as a parable about bad monetary policy.

Here is the premise of the film: in the future, humans are genetically modified to stop aging when they turn 25. They are capable of living forever but the catch is that they only keep living in perpetual youth if they have enough “time” on them. Every person walks around with a bioluminescent clock on their arm showing the amount of time they have, counting down.

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Still Sound as a Dollar

September 23rd, 2011 at 2:32 pm 22 Comments

Conservatives nowadays routinely worry about the dollar’s strength and stability. The dollar, tadalafil however, illness refuses to cooperate. Instead, malady it lately has been rising in foreign-exchange markets, as it typically does in times of international economic and financial stress.

The dollar serves as a safe haven. Investors tend to transfer funds into dollar-denominated assets, such as U.S. Treasuries, at moments when financial markets around the world are being buffeted. This occurs even if the U.S. economy is not in good shape. As long as the dollar and dollar-denominated assets are seen as relatively safe, the dollar will tend to strengthen in times of trouble.

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The Hobgoblin of Little Minds

David Frum September 21st, 2011 at 10:29 am 33 Comments

At the end of the 1980s, the US was hit by a severe financial shock: the Savings & Loan crisis. I’ll spare you the antique details of the crisis, but in 1990 the US found itself looking at perhaps $200 billion in federally insured bad loans by the failed S&L industry. The economy slipped into a recession, nothing like so severe as the present-day recession, but bad enough.

Soon afterward, Saddam Hussein invaded Kuwait, shocking global oil prices.

Responding to the crisis, the Federal Reserve rapidly and repeatedly lowered interest rates. It cut the Federal Funds rate 18 times between 1990 and 1992, reducing it from 8% to 3%. These bold monetary actions failed however to produce recovery on a timetable to gain re-election for President George HW Bush.

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Nominal Growth Targeting …

David Frum September 13th, 2011 at 11:16 am 7 Comments

… sounds technical doesn’t it? But those dry words represent a direct challenge to the GOP’s current deflationary orthodoxy. Bravo to NRO for offering space to an economist to make the case.

It’s time for conservative politicians to be bold and serious about monetary policy and not simply use rhetoric to capitalize on a popular view of the conservative base.

Red Gold

August 29th, 2011 at 1:13 pm 14 Comments

During Hurricane Irene, I took some time to read Barry Eichengreen’s overview of international monetary history: Exorbitant Privilege. I’m only halfway through but the most interesting anecdote so far has to be Eichengreen’s description of why the Soviet Union and Charles de Gaulle supported the world returning to a Gold Standard to gain an advantage over the United States.

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Nice Central Bank You Have Here

David Frum August 22nd, 2011 at 1:15 am 31 Comments

One of the highest forms of political jiu-jitsu is to accuse your opponents of exactly the same offense that you yourself then proceed to commit.

If executed properly, the audacious maneuver will stun critics into silence – and overwhelm spectators so impressed by the Parson’s sermon against Sabbath-breaking that they won’t believe their own eyes if they should glimpse him later in the day knocking back a Sunday afternoon bottle of whisky in the next town’s saloon.

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How America’s First Central Bank Was Killed

July 3rd, 2011 at 12:15 am 57 Comments

This year is the 200th anniversary of a political fight that terminated the Bank of the United States, the nation’s long-ago central bank. Amid current political pressures to audit and abolish the Fed, this Independence Day weekend is a good time to look back at the now largely forgotten episode that put an end to the Fed’s early precursor.

The key figure in this episode is now also largely forgotten. He was George Clinton (1739-1812), fourth U.S. vice president and, before that, first governor of New York state. Clinton was uncle and political mentor to the later governor DeWitt Clinton (about whom I wrote for FrumForum a year ago) but is not related to either Bill Clinton or the George Clinton of Funkadelic music fame.

In early 1811, Congress was considering whether to renew the soon-to-expire 20-year charter of the Bank of the United States. The House of Representatives had defeated a bill authorizing renewal, by a razor-thin 65-64 vote. The matter would be taken up again in the House if the Senate voted for renewal, but that body deadlocked 17 to 17.

Clinton, presiding over the Senate, cast the tie-breaking vote, against the central bank — and also against the policy of President James Madison, who supported the renewal. The vice president was “going rogue,” making a particularly strong show of independence even for an era marked by chilly relations between presidents and VPs.

Central banking had been a contentious issue in American politics for two decades. The Bank of the United States was chartered by Congress in 1791 at the behest of Alexander Hamilton, then treasury secretary, over the objections of Thomas Jefferson, then secretary of state. This rift fed into the nascent two-party system of Hamilton’s Federalists and Jefferson’s Democratic-Republicans (later known just as Democrats).

To the Jeffersonians, a central bank was a dangerous concentration of federal power, and something not authorized by the Constitution. To the Hamiltonians, a central bank was needed to modernize government finances and the money supply, and was justified by implication of the Constitution’s wording about government financial duties.

Clinton, by squashing the Bank of the United States’ renewal in 1811, was holding to the old-line Democratic-Republican hostility to central banking. It was a position that Madison, persuaded by Treasury Secretary Albert Gallatin, no long held. The central bank had proven useful for government borrowing and transferring of funds. And contrary to fears of a monopoly, banks and financial markets were proliferating.

Clinton long had an independent streak. As governor, he had been a staunch defender of New York’s prerogatives against encroachments by the federal government. As vice president, he was an outsider in the administrations of Jefferson and Madison. At age 71 and in declining health, he saw fit to vote his antipathy to central banking.

That decision, though, had terrible consequences (which Clinton, dying in office the next spring, did not live to see). When the U.S. went to war with Great Britain over a range of issues in June of 1812, it lacked a central bank to help fund the war effort. This placed the U.S. in financial straits that not only almost caused it to lose the war but also prolonged the fighting, as the British, aware of America’s financial condition, stalled on peace negotiations. (Consider that when you hear Ron Paul say that abolishing the Fed will keep the U.S. out of “unnecessary wars.”)

The federal government’s desperation for funds was such that it even pulled troops away from the strategic St. Lawrence Valley in upstate New York — and into disadvantageous positions further west — to secure a loan from a financier named David Parish, who wanted to protect the area’s cross-border trade with the British, an episode recounted in historian Alan Taylor’s recent book The Civil War of 1812.

The war ended in 1815 after the U.S. had scrapped together enough money to achieve a military stalemate (while Britain was preoccupied with the Napoleonic Wars). The following year, Madison signed a bill granting a 20-year charter to the Second Bank of the United States. The new central bank had legislative supporters including Henry Clay and John Calhoun, prominent opponents of the first one.

In the early 1830s, President Andrew Jackson launched a campaign against the Second Bank, ushering in further calamity. But that’s a story for another day.

Noah and Conn Debate Cranks in the GOP

June 22nd, 2011 at 12:00 am 18 Comments

On Monday, try I recorded a bloggingheads with the Washington Examiner’s Conn Carroll. We discussed the current state of the GOP presidential field whether monetary policy cranks like Ron Paul should be welcomed into the party:

I apologize for the atrocious quality of the video from my end! If the prospect of watching to a dialogue where one person talks from a super-blurry camera is unappealing, you can always listen to just the audio podcast.

In a bit of fortunate timing, Newt Gingrich will be giving a speech criticizing the Federal Reserve early on Wednesday morning. Conservative opposition to the Federal Reserve was something that Conn and I spent a lot of time debating.

Want Big Budget Cuts? Weaken the Dollar

May 31st, 2011 at 1:12 pm 46 Comments

Republicans promise that rapid action to cut government spending will lead to a quick return to prosperity.

They have some evidence on their side: the experience of some small countries that used these methods back in the 1990s (Finland, Ireland, Netherlands, New Zealand, Norway and Sweden).

Republicans could cite another example, a bigger economy more similar to America’s: Canada. Canada cut spending in the 1990s, balanced its budget, and ignited rapid economic growth.

But here’s the problem: Canada and the six small countries cited by Republicans all allowed their currency to depreciate deeply. The cheaper currency triggered an export boom, and since these economies were small and depended heavily on foreign trade, the export boom translated into more activity throughout the whole economy.

The cheap currency was essential to reinvigorate each economy.

Canadian economists admit to this even while they insist they don’t advocate a weak currency as policy. Ross Laver, Vice President of Policy and Communications of the Canadian Council of Chief Executives, explained some of the benefits of a devalued currency: “To the extent that a weak currency helped exports – well, yes, that encouraged economic growth which in turn led to higher government revenues.” He made clear that the government did not seek this: “But that weak currency was imposed on Canada by international markets – it wasn’t something we went looking for, or for that matter celebrated.”

It may not have been a “deliberate strategy” but there is no denying that the policy helped.

The following is data on the volume of Canadian exports courtesy of information from the Canadian government. [The data only goes back as far as 1992.]

It shows a significant increase in exports from Canada to both the United States and to all countries globally, which can at least in part be attributed to the weak currency in the nineties.

However, it is questionable whether the larger and less trade-reliant US economy can benefit as much from rising exports as Canada did, let alone Finland. In the nineties Canada’s currency was cut by a third to instigate the export boom (90 cents on the dollar to 60).  Given that the US economy is even bigger than Canada’s and the percentage of exports is smaller, one wonders how weak the dollar would have to become before we would see real change.

Republicans, however, demand a stronger US dollar at the same time as reduced government spending.  This would mean that there would be no export boom at all while the government would be withdrawing its purchasing power from the domestic economy.

This certainly raises questions about whether implementing the Republican approach is necessarily the best way to balance our budget, or whether it would even work at all.