Rethinking Conventional Monetary Wisdom…

Steve Hanke of Cato institute writes a food for thought piece.

He offers a monetary tour to 2013 and points to 3 ideas for 2013:

  • Rethinking the Money Supply: He talks about a new measure of money supply which shows higher growth than traditional money supply. In the new measure (called divisia mon aggregates) there are weights attached to components of money supply. Higher weights given to components which have  more moneyness to it.
  • Rethinking Basel III: Basel norms have led to stiffening of credit norms.
  • Rethinking the Fed’s Monetary “Stimulus”: As per Hanke Fed. ZIRP policy has led to contraction of credit.

In short, the Fed’s zero interest-rate policy has exacerbated a credit crunch that has been holding back the economy. The only way out of this trap is for the Fed to abandon the conventional wisdom that zero-interest-rates stimulate the creation of credit. Suppose the Fed were to raise the Fed funds rate to, say, two percent. This would loosen the screws on interbank lending, and credit would begin to flow more readily to small and medium size enterprises. If this were to happen, we would see higher rates of growth in bank money, and thus in the total money supply

Interesting ideas.


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