I came across this NY Times article a few weeks ago describing Treasury Secretary Timothy Geithner statement that banks are now able to raise capital.
The country’s biggest banks have made moves to bolster their balance sheets by about $56 billion since the government disclosed the results of its financial “stress tests” two weeks ago, Treasury Secretary Timothy F. Geithner said Wednesday.
So the question that came to my mind after reading the article is, “Where is all this money coming from?’
That’s right. The Federal Reserve has been expanding the money supply so quickly that banks that only a few months ago couldn’t raise capital and were looking at a qquick demise are now able to raise $56 billion.
It is har dto measure precisely the amount of monetary expansion occurring as a result of numerous actions by the Federal Reserve. This analysis has it pegged at close to $1,100 billion. Another shows the increase at closer to $700 billion.
So what’s the problem with such a quick and extensive expansion of the money supply. This is the debated questions, or rather more specifically the debate is two parts (1) is the monetary expansion needed and (2) will the long term consequences be worth the debated short term gains.
Simply put, excessive monetary expansion creates inflationary pressure which devalues the US dollar making it less attractive to foreign investors and creates uncertainty and instability. The argument is that the benefit of monetary expansion is to stimulate the economy in the short run. There is little to no empirical evidence that this is true and economist do not agree on this being true.
During Federal Reserve Chairman Bernanke’s December 1, 2008 remarks he states,
Expanding the provision of liquidity leads also to further expansion of the balance sheet of the Federal Reserve. To avoid inflation in the long run and to allow short-term interest rates ultimately to return to normal levels, the Fed’s balance sheet will eventually have to be brought back to a more sustainable level. The FOMC will ensure that that is done in a timely way. However, that is an issue for the future; for now, the goal of policy must be to support financial markets and the economy.
Obviously in Bernanke’s mind, this is something to think about in the future, or in economist’s jargon, in the long run. Keynes was a proponent and some say the creator of monetary expansion policy and a critic of Keynes, Ludwig von Mises, stated in response to Keynes arguments for monetary expansion,
…we have out lived the short run and are suffering from the long run consequences of [Keynesian] policies.
In response Keynes simply states,
In the long run we are all dead.
Well in the long run for the current monetary expansion, we may not be all dead, I will be alive, Bernanke will likely still be alive, albeit likely no longer the Federal Reserve Chairman. What I think is the more realistic retort to the reasonable criticism of von Mises is “In the long run, people tend to forget what caused the mess.” They might not be dead, but the problem is dead as people tend to only think of things statically and don’t see connections between past behaviour and decisions and current unfavorable predicaments. When the long run comes, they’ll likely blame something that is occuring in the short run.
Just as the current economics crisis is thought to be a result of short term speculation rather than the long term consequences of government intervention in the economy, and most notably the housing market (see article on the relationship between the economic crisis and government policy). I’m excited to see how people perceive the future inflation and devaluation of our currency.
Well as an economist I tend to think of incentives, what is it that the United Steelworkers like, what reward would they possibly seek…protectionism.