I just happen to come across this entry of mine from just about a year ago. Can I get some partial credit in Pete's Cassandra poll?
One worry is that even in this world, a
monetary inflation that did not show up as significant price inflation
due to a productivity increase that offset the upward pressure on
prices would go unnoticed as the price level remains the official gauge
of inflation.
Another worry is that we'll see more sector-specific "booms" thanks to unwarranted credit expansion, possibly due to a regulatory intervention that distorts interest rates and the risk-return trade-offs in those sectors. The S&L crisis might fit this story in some ways and so might the housing bubble.
However, the bigger problem at the moment is the moral hazard issue the Fed has created via the housing market. Jerry O'Driscoll has a nice piece in the November Freeman that makes the argument that the "Greenspan doctrine," whereby monetary policy makers cannot detect asset bubbles but can detect their collapse and should offset their fallout, led mortgage lenders to believe that their actions were risk-free because the Fed would inject funds to bail them out. Well guess what we're seeing right now? Having created this precedent, what is to stop other sectors from figuring their losses will get bailed out as well? The result of this might well be both serious micro distortion directly and inflation more generally. Both the gold standard and free banking would be unable to create this moral hazard problem.
Another worry is that we'll see more sector-specific "booms" thanks to unwarranted credit expansion, possibly due to a regulatory intervention that distorts interest rates and the risk-return trade-offs in those sectors. The S&L crisis might fit this story in some ways and so might the housing bubble.
However, the bigger problem at the moment is the moral hazard issue the Fed has created via the housing market. Jerry O'Driscoll has a nice piece in the November Freeman that makes the argument that the "Greenspan doctrine," whereby monetary policy makers cannot detect asset bubbles but can detect their collapse and should offset their fallout, led mortgage lenders to believe that their actions were risk-free because the Fed would inject funds to bail them out. Well guess what we're seeing right now? Having created this precedent, what is to stop other sectors from figuring their losses will get bailed out as well? The result of this might well be both serious micro distortion directly and inflation more generally. Both the gold standard and free banking would be unable to create this moral hazard problem.
A fake fortuneteller can be tolerated. But an authentic soothsayer should be shot on sight. Cassandra did not get half the kicking around she deserved.
Posted by: Robert Heinlein | December 15, 2008 at 09:53 AM
Why only partial credit? In the world of prediction this is quite good.
Posted by: Mario Rizzo | December 15, 2008 at 02:09 PM
Yes but you lose points for misspelling O'Driscoll's first name (right?) and for making me wade through the Freeman archives with your non-specific link.
Posted by: Bob Murphy | December 15, 2008 at 05:12 PM
Bob Murphy: so where is your link? Anyway Gerald O'Driscoll's nickname is spelled Jerry is it not.
Posted by: Jule Herbert | December 15, 2008 at 06:51 PM
Sorry Jule, here ya go.
http://www.katethaxton.com/survivingpc/wp-content/uploads/2008/02/bart-simpson.jpg
Posted by: Bob Murphy | December 16, 2008 at 09:26 AM