Thursday, July 28, 2011

Gerald O’Driscoll on the WSJ Opinion Page - Federal Reserve Engages in Fiscal Policy

Economic Illiteracy Reaches a New High (Low?)

Writing on the opinion page of the Wall Street Journal is Gerald O’Driscoll, who is  described “as a senior fellow at the Cato Institute. He was formerly a vice president at the Federal Reserve Bank of Dallas and later a vice president at Citibank.”  He says this

The Fed's foray into fiscal policy makes for a volatile political mix that all but guarantees control from without.

Now  basic, basic, basic macro economics (we're talking grade school here) defines fiscal policy as changing government spending and/or taxes to impact economic conditions.  The Federal Reserve System manages the nation’s monetary policy.  It has absolutely nothing to do with taxes or government spending.

The Federal Reserve Board, 1914

The seven original members of the FRB sit for a group portrait, shortly after being sworn in. They include the first
The First Federal Reserve Board - With New Socks

Mr. O’Driscoll wants to make the point that he believes the Federal Reserve System should not be purchasing government bonds on the open market, something it has been doing for decades as part of its mandate on monetary policy to promote price stability and economic growth and employment. This is neither new, nor even controversial.  But Mr. O’Driscoll doesn’t want the Fed to do it anymore.

 Unfortunately,  it is apparent that Mr. O’Driscoll does not have a valid argument to support his position, else he would have presented it.  So when one finds oneself on the Opinion pages of the WSJ and one finds oneself without a valid argument the solution is to go to the invalid one.  As long as the conclusion is editorially correct, they don’t care.

So how can a person like Mr. O’Driscoll have ever been a VP at a Federal Reserve Bank or a VP at Citibank?  Don’t ask. 

Really, don’t ask, The Dismal Political Economist has no idea.

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