The American Spectator

Thank you to the Spectator and Mr. Lawler for at least talking about monetary policy — a most timely subject, and perhaps the most neglected item in the current debate, if one can call it that, over economic policy.

With respect, though, the review’s conclusion that inflation is the relevant danger is symptomic of the heydey of Volckerism and the near disaster it wreaked on the Reagan presidency. (Please see my article for the Spectator way back in those days, Paul Volcker as Man of the Year.)

The proper end of monetary policy, of course, is to avoid both inflation and deflation, in favor of a steady price level. But since monthly CPI, employment, housing prices, and the price of the mortgage-backed derivatives that are now the foundation of our whole banking system are, in large part, smoke coming out of the tailpipe, how do we judge which direction in which current monetary actions are pulling us?

While $2.30 a gallon gasoline and $700 gold may seem high, these levels are well below where they were when the stock market was near its peak and the economy was at full employment. A full employment price of gold would appear to be, empirically, above $1000.

These are also price levels that markets were (alas, incorrectly) anticipating before the collapse of the mortgage-backed securities market in late 2007. And with nearly a quarter of U.S. homeowners at or close to negative equity, and the entire U.S. and global banking system suffering from the perverse incentives to default which this brings, surely there are much greater dangers in the current monetary course.

Once we avoid that cliff, won’t there be a danger of steering back too far in the inflationary direction? Of course. It is still better to pull back from the cliff.

Hence the proper course for the Fed is to substantially ease monetary policy, taking interest rates to close to zero and purchasing Treasuries across the board, until gold, and the housing market show signs of health — which is to say, ending the current thirst for liquidity.

Then, as per Jacques Rueff, Will Clayton, and, indeed, Ronald Reagan, we will be in the right position to adopt a classical regime of price stability. This will mean setting a monetary standard, removing the power to inflate or deflate from the hands of an arrogant, self-promoting elite at the Fed and Treasury.

Namely, a gold standard. (Please see my Spectator article, circa 1984, on setting the right price of gold.)

Still, let’s fight the war that is raging first. There is a global thirst for liquidity. The sooner policy-makers recognize this, the better.
— Gregory Fossedal

GREAT EXPECTATIONS
Re: M. Delphia Block’s letter (under “Proof’s in the Pudding”) in Reader Mail’s Forget Family Values:

Wow! I owe a big thanks to Delphia Block for opening my eyes. And all this time I never knew that massive government spending was solely the Republicans fault and it was the Democrats who were actually the fiscally responsible ones. How misguided I was! Who would have thought the blame for all of the trillions wasted on Johnson’s Great Society were secretly due to Republicans? I never realized it was the Republicans pandering to the teacher’s unions that has created the pathetic — and apparently massively under-funded — public education system we are all stuck with.

So, now that the Democrats have the whole enchilada, we can finally provide Americans with a job, healthcare, an education (college too?) and most of all, HOPE. Whew!

But I do have one question for Ms. Block. If you need the government to provide you with all of the necessities of life, and you have no hope unless they do, what should your fellow Americans expect of you?
— Garry Greenwood
Gearhart, Oregon

M. Delphia block quotes lefty NYT columnist Paul Krugman on lefty NPR’s ”Fresh Air,” hosted by lefty Terry Gross. Krugman (a shrill, strident Bush critic) asserts that Freddie and Fannie weren’t major players in the financial meltdown.  From there, she opines that the entire mess is of the GOP’s doing.