Hooray for economic Darwinism!
Back in the dark ages when I was a physics major, I was probably even more stubborn than I am today. I would routinely reject theories that were taught to me and try to think about how things really should be. I would occasionally come up with whacky ideas only to later discover that other physicists much more talented than I (since I had no talent) had come up with the same or similar ideas one hundred years or more earlier. Now that I spend a considerable amount of time thinking about markets and economies, I am quite certain it would be nearly impossible to come up with a “new” idea, but it doesn’t stop me from trying. One of my ideas, which is admittedly not very deep, is that monetary policy should not necessarily attempt to avoid recessions. Recessions can actually be good for long term growth. A concept, I’ve been referring to as economic Darwinism for lack of a better word.
That is why it was so cool to see the recent article in The Economist
Thanks to The Float.
A necessary evil
But should a central bank always try to avoid recessions? Some economists argue that this could create a much wider form of moral hazard. If long periods of uninterrupted expansions lead people to believe that the Fed can prevent any future recession, consumers, firms, investors and borrowers will be encouraged to take bigger risks, borrowing more and saving less. During the past quarter century the American economy has been in recession for only 5% of the time, compared with 22% of the previous 25 years. Partly this is due to welcome structural changes that have made the economy more stable. But what if it is due to repeated injections of adrenaline every time the economy slows?
PS: I’ve been ignorantly harsh on both Greenspan and Bernanke, but I have to say that I am quite impressed with Bernanke’s recent performance maneuvering through the current credit crisis. I expect him to hold the target rate at 5.25% on September 18. If he does, I’ll gladly apologize for anything less-than-flattering I’ve ever said about him. If he lowers rates, I’ll lose respect and throw him back in the Greenspan “save my Wall Street buddies” bucket.