Tuesday, February 16, 2010

Tim Cavanaugh...

...of Reason.com gets it right.

This is one of the reasons why the monetary channel is broken and QE, ZIRP are not going to have the effects the Fed thinks they will have. The "loanable funds" theory of reserve banking makes no sense in a fiat currency world, but that is framework the Fed is operating under when making decisions and suggesting action to congress.

Krugman is the same way, and intellectual ponzi schemes have the same effect as ones based in the real world. At some point, doctrine ossifies itself within its Economist host and mental pliability becomes impossible: defending the existing framework becomes more important than the search for truth...and humans are very, very good at that as well.

But I don't want to argue against Krugman with macroeconomics, a pseudoscience in which he is just one of a million witch doctors. Krugman doesn't need to be wrong in theory because he's wrong in reality. Nobody's lending because nobody's worth lending to. We are all worse credit risks than we were believed to be just a few years ago. That epiphany is going to take a long time to sort out. Runaway inflation will definitely make banks desperate to find places to put their money, but it will not suddenly make Americans into better credit risks. That can only be done through reducing borrowing, upping savings and employing policy that encourages frugality -- or actually, just policy that fails to punish frugality. The good news is that a big chunk of that work has already been done, despite the best efforts of the Keynesians in charge of U.S. economic policy. The bad news is that, just as he famously did in 2002, Krugman is arguing for the creation of another asset bubble, and too many people still take him seriously.

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