Better explanations needed

The actions of the central banks, the Bank of Canada and the Federal Reserve System have a profound effect on all of us, most aspects of our lives, and our economy.

Hence, what they are doing should be reviewed and questioned.

Perhaps it is presumptuous of this economist/columnist to evaluate their opinions and central banks activities in Canada and the United States; the result calls into question their policy moves.

It must be recognized however, that the U.S. Federal Reserve Board has 450 employees in its headquarters in Washington, and half of them are economists.

Furthermore, the Fed has unrivalled access to data, but nevertheless, it is not infallible, as the record so clearly shows.

In May 1990 the Fed, which has boosted interest rates to slow the economy in its fight against inflation, reversed course in its late autumn meeting to permit interest rates to drop significantly.

Then, in its December policy review, it called for measures to foster stronger economic growth. These kinds of policy twists and turns seen to reflect uncertainty and confusion, hampering business planning.

In the following decade, beginning in the year 2000, despite a very strong economy and rising inflationary trends, the Chairman of the Federal Reserve Alan Greenspan kept money and easy credit flowing in abundance.

Also, at that time asset prices, the stock market, and house quotation soared.

When he was questioned if he saw a bubble in the economy, particularly in house prices, Greenspan stated that no one could determine if they were in a bubble. Leaving aside his myopia, he argued that if housing were in a wild frenzy, corrections would occur automatically with no intervention necessary. That proved to be nonsense.

The financial community welcomed that free rein and treated the Fed chairman as hero. Upon his retirement he was able to command a fee of $100,000 for any speaking engagements.

Bob Woodward, the Washington Post star reporter of Watergate fame, wrote a book, The Maestro, exuberantly praising Greenspan. As the decade preceded and the economy and markets plunged with financial shenanigans exposed, this enthusiasm was dispelled. So much for recent misguided opinions.

Nowadays, the U.S. Federal Reserve is repeating many of the policies of its predecessor. It provided extraordinary, easy credit and unprecedented low interest rates to stimulate the economy.

If that did not work they said (seriously?) the Fed would fly a helicopter and drop dollar bills over the land! These statements ignore the fact that so much easy credit always has been a precursor of troubles.

Clearly, better explanations of central banks’ policies should be forthcoming.

Otherwise the mistakes of the past seen sure to be repeated.



Bruce Whitestone