Wednesday, August 16, 2006

Who's That Guy Making All That Economic Sense?

Read an article by Professor Christopher Lingle at Tech Central Station, that really hits the nitty gritty of my own economic monetary philosophy.

chris_lingle
[Thanks to Professor Lingle and www.ufm.edu for the photo.]

His main point is that Federal Reserve and other central bank loose monetary policy has created a global credit glut that has and will continue to harm both emerging and leading economies alike at some point in the future. The piper must be paid.

Recent tightening measures taken by the Asian countries are in the right direction, but they are after the fact, and will only be too late, if not too little.

Here are the best points Professor Lingle makes:

"For his part, Alan Greenspan recently pointed to the fact that asset prices have been outstripping GDP and declared this to be an unsustainable phenomenon. Unfortunately, he figured it out too late, since his policy decisions were behind the unprecedented era of unusually cheap credit that contributed to artificial 'booms' in so many economies."

"Much of the pain that awaits the global economies was set into motion by decisions of central bankers to pump air into economies with artificially-low interest rates. As such, it is NOT the fact that interest rates are currently being pushed up that will cause the problems. The problems were actually set into motion when interest rates were pushed down artificially by central banks!
"The blame for impending corrections and recessions must be shouldered by central bankers that often worked in tandem with finance ministries to inflate their money supplies. Irresponsible policy makers seemed to believe that something real and sustainable can be created out of the 'nothing' of cheap credit and more pieces of paper money."

"As it is, global capital inflows and outflows are only a symptom indicat[ing] the response of investors in terms of their approval or disapproval of policies and conditions in a country. In this sense, capital outflows are not the cause of internal economic turmoil but should be seen as the messenger of good or bad tidings.
"It turns out that the observed instability will be the outcome of [past] policy choices relating to monetary and fiscal policy."

"[I]t should be clear that initial inflows of capital were induced by misguided finance ministries and central banks that made capital so cheap in the first place. The irony (and tragedy) is that the very same logic of the very same groups that initiated policies that created the instability will be asked to use the same dubious wisdom to sort things out."

Now there's an economist after my own heart and mind.

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