But the main point that I took from Stephen Roache's account was that Burns surrendered to the conventional monetary wisdom only after reducing the CPI to smaller and smaller "core" indices had made his initial position untenable. And the new effects of crypto-currency (aka, virtual gold) on monetary policy are yet to be determined. Now, it would probably cause a huge (though necessary) decline in speculative stock, bond, and housing prices. Mostly agree, except that interest rates ought to have been increased well before this in order to forestall asset inflation. But the Fed is cornered today since increasing rates to decrease money supply and curbing inflation will stall the economy and printing more money is counter productive in this stage. The course of inflation will depend on how fast the supply chain can be restored today and how far by then inflation has spread through the economy. Having said that, such exogenic shocks can of course reveal the sins of the past, as it seems more likely to be the case today. Sometimes doing nothing is better then doing just something. If an economy experiences such a huge exogenic shock were the price of a very important commodity is increasing rapidly rising rates would have made money and credit even more scarce when needed most! In 1973 there was no substitute for oil and so no matter what the Fed would have done it wouldn't have helped. Furthermore not a signgle drop of oil would have been produced more. It would have messed up the entire price structure of the economy and not only the price of oil. Increasing interest rates to curb money supply wouldn't have helped but it would have made things worse. Quadrupling oil prices in 1973 were a geopolitical and not monetary issue. Like business cycles, he believed price trends were heavily influenced by idiosyncratic, or exogenous, factors – “noise” that had nothing to do with monetary policy.Īrthur Burns was right in the first case, of course. As a data junkie, he was prone to segment the problems he faced as a policymaker, especially the emergence of what would soon become the Great Inflation. Yet Burns, who ruled the Fed with an iron fist, lacked an analytical framework to assess the interplay between the real economy and inflation, and how that relationship was connected to monetary policy. I found quickly that you couldn’t tell him anything. He used that knowledge to poke holes in staff presentations. I had been tasked with formal weekly briefings on the very subjects Burns knew best. Working for him was intimidating, especially for someone in my position. In 1946, he co-authored the definitive treatise on the seemingly rhythmic ups and downs of the US economy back to the mid-nineteenth century. Burns, who brought a unique perspective to the US central bank as an expert on the business cycle. They center on the Fed’s legendary chairman at the time, Arthur F. That left me with the recurring nightmares of a financial post-traumatic stress disorder. Fifty years ago, when I had just started my career as a professional economist at the Federal Reserve, I was witness to the birth of the Great Inflation as a Fed insider. I have long been haunted by the inflation of the 1970s.
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