April 13, 2009

GAS PRICES AREN'T INFLATION:

HOW DID THIS HAPPEN?: Why the Economic Crisis Was Not Anticipated (RICHARD A. POSNER, 4/17/09, The Chronicle Review)

Moreover, taking action to reduce the risks warned against by Roubini and a few others would have been costly. Had the Federal Reserve caused interest rates to rise in order to curtail risky bank lending, that would have accelerated the bursting of the housing bubble — and then, since no one could be certain that it was a bubble, the Federal Reserve would have been blamed for the fall in home values and the increase in defaults and foreclosures. Those benefiting from the bubble would deny it was a bubble, and sometimes they would be right, and if they were wrong but the bubble was pricked before it had expanded to a very large size, there would be great difficulty in proving that it had been a bubble.

Instead the Fed took that precise course of action but ostensibly to fight "inflation," though with exactly the same dire results. What economists failed to anticipate--once again--was the consequences of raising rates into a continuing climate of global deflation.

Posted by Orrin Judd at April 13, 2009 1:08 PM
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