Steve Hanke wrote a nice piece in the Globe Asia Magazine (February 2104) on the Bernanke legacy. It is nice piece from Steve perspective, but it is not a nice view of former Chairman Benrnanke.
The mistakes at the Fed started with loose monetary policy in the post 2000 period. Inflation was not up but financial prices or relative prices for financial assets exploded. This lead to the crisis in 2008. Now when rates are driven down to zero you are not going to get more local investors to put their money in short-term lending. You can see that from the carry trade. Everyone headed for the exits and into, say, emerging markets. This put upward pressure on exchange rates which was offset by foreign central bank buying of Treasuries. Then we came to the post-crisis period where we are now stuck in the zero rate bound environment. The only policy choice is to increase money through quantitative easing except if this money high powered money is not translated into more bank money - short-term lending or near money, there is a contraction of credit. We have less liquidity than before the crisis. Kill the shadow banking system and increase capital requirements and the credit transmission channel is strangled.
Yes, but financial marts are booming. Still the real economy is not very excited. Relative prices are tilted to liquid assets not new long-term investments. This is coupled with the search of yield away from short-term rates.
We are careening back and forth from one side of the road to the other trying to get control but just over steering.
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