Monday, March 02, 2009
There it is again on the back page of the WSJ op-ed section - another pitch for sound money. Representative Paul Ryan (R-Wisconsin), whose name is nearly an anagram for Representative Ron Paul (R-Texas), thinks that money may be at the root of our problems.
Guarantee sound money. For the last decade, the Federal Reserve's easy-money policy has helped fuel the housing bubble that precipitated our current crisis. We need to return to a sound money policy. That would end uncertainty, help keep interest rates down, and increase the confidence entrepreneurs and investors need to take the risks required for future growth.This was part two of a four part plan to fix things and, yes, tax cuts were numero uno (he is a Republican after all).
I believe the best way to guarantee sound money is to use an explicit, market-based price guide, such as a basket of commodities, in setting monetary policy. A more politically realistic path to price stability would be for the Fed to explicitly embrace inflation targeting.
Transcripts from recent meetings of the Federal Open Market Committee meetings suggest that the Fed may already be moving in this direction. This would be an improvement over the status quo: It could help combat near-term deflation concerns while also calming the market's longer-term inflation fears.
The inflation-targeting would work particularly well over the next few months, supplying cover for the central bank to push the printing presses even harder. However, over the longer term, as currently constructed, it would just foster more asset bubbles.
As for the "commodity basket" approach, it's not clear how this would work if and/or when financial markets and the economy regain some sense of normalcy. It's hard to imagine how, in any sort of "stagflation" scenario, the Fed would be raising rates or contracting the money supply with economic growth still sluggish.