Thursday, January 23, 2014

The Fed Should Try Using Common Sense Instead of Rules and Formulas to Solve Our Economic Problems

Interest rates are at historic lows and the Federal Reserve is buying billions of bonds to keep rates low. This was done with the initial intention of keeping the economy from imploding in  2008-2009, and the easy money 'stimulus' has worked. But now it's back to 'normal.'

So now what the Fed should or should not do, will or will not do, and when they should and will do whatever they are going to do, with respect to letting interest rates return to 'normal' and over what period of time is very much at issue.

And while the experts have lots of opinions, as usual there is no consensus. Let's see what a common sense approach might entail.

Notable & Quotable tells the story of using common sense instead of math to solve our economic problems:

{NOTE: Sir John Cowperthwaite Hong Kong's free market oriented financial secretary from 1961-71.}

"Cowperthwaite was a humanist in a field that had fallen victim to social science. I have no great confidence that Chairman Yellen (Fed Chairman Bernanke's replacement) will follow his lead . . . and banish statisticians from her cold marble temple on Constitution Avenue. As a highly decorated economist, she has reached the top of a trade that considers statistics indispensable to its own functioning.

But Cowperthwaite didn't believe it. Stripped of his numbers an economist would have to resort to the old home truths about how the world works: If you tax something you get less of it; as a general rule an individual manages his own affairs better than his neighbor can; it's rude to be bossy; the number of problems that resolve themselves if only you wait long enough is far larger than the number of problems solved by mucking around in them. And the cure is often worse than the disease.

In the long run, the aggregate of the decisions of individual businessmen, exercising individual judgment in a free economy, even if often mistaken, is likely to do less harm than the centralized decisions of a Government; and certainly the harm is likely to be counteracted faster.

Somehow the most successful practical economist of the twentieth century knew this was true, and he didn't have to work out a single equation."

Summing Up

Sadly, the use of common sense these days isn't all that common, especially by government officials.

But we sure could use some right now.

That's my take.

Thanks. Bob.

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