interview: George Selgin on Money & Banking

Hayekian economist George Selgin talks about money, banking and his new book on coinage in an interview with the Richmond Fed.  Worth quoting:

RF: Do you see recent approaches to monetary policies and Fed actions as contributors to the current economic tumult?

SELGIN: I agree entirely with those who blame the Fed for fueling the subprime housing boom by holding interest rates at such low levels for the early part of this decade. I think that was a very irresponsible policy. It was so even according to a conventional sort of Taylor rule, which, in my opinion, would itself have been too easy. Elsewhere I’ve defended the view that, in periods of growing productivity, central banks ought to allow some deflation — that is, monetary policy ought to be tighter than a standard Taylor rule would have it be. If you view the Fed’s actual policy in light of this argument, then the policy was very expansionary. Taylor’s own simulations suggest that if his rule had been followed, the housing boom would have been something like two-thirds as big. If the “productivity norm” I favor had been followed instead, the boom would have been much smaller still.

Still, it’s a mistake to blame the Fed alone for the crisis. And, to some extent, one wants to pity the Fed because the truth is that central banks cannot get the money supply right. They are trying to centrally plan it and they do not have adequate information to go by. They could do better than they have done, I think, by adopting the right rules. But they are fundamentally flawed institutions.

In any event, the Fed provided fuel for the fire, but the fuel was being directed into the mortgage market, and specifically into the subprime market, by an array of other government policies all aimed at increasing homeownership, especially among less creditworthy persons, and at helping the construction industry. The story is more complicated than that, of course, but these are the essential points.

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One Response to interview: George Selgin on Money & Banking

  1. Vangel says:

    Sorry but I don’t buy the excuse. Without the Fed, the federal government would not be able to pursue its political goals of spending more than it takes in taxes and of diverting investments to activates preferred by politicians.

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