The book from which the below excerpt was taken was not well written and a long slog of read, yet there were some gems buried in it. I thought I’d post it for a bit of perspective between two dichotomies. Can you guess who wrote it? One hint is that he was a believer in a light-touch managed economy. He often quarreled with Richard Nixon whom he considered an extreme interventionist to be blamed in large part for 1970’s inflation. He also appeared to not like the idea of targeting the yield of government bonds.
“Although our ability to limit recessions and prevent depressions has not yet been fully tested, we have made considerable progress in understanding economic fluctuations and we have learned to profit from the mistakes of the past. No government nowadays would tolerate the destruction of one-third of the nation’s money supply during a period of depressed economic activity and prices. Yet that is precisely what happened between the fall of 1929 and the spring of 1933. No monetary authority is likely to repeat in the near future the blunder of the Federal Reserve System in the autumn of 1931 when, in the face of widespread economic fear and trouble, a tightening of credit was allowed to occur. Nor has the ineffectiveness of the liberalizing actions that followed in early 1932 escaped the attention of experienced observers. It is not enough to increase the availability and reduce the cost of credit during the declining phase of a business cycle. If such action is to be effective, it must come when the level of business and consumer confidence is high. This condition is much more likely to prevail in the early than in the advanced stage of a business contraction, particularly if the government pursues policies that otherwise encourage individual enterprise.”
As an item to note, I have not heard much about the idea of targeting the yield of government bonds. Unless we’re talking about TIPs spreads, I would probably agree that it isn’t a great idea, but it seems interesting enough that I will have to learn more about it.
BTW: This guy was politically savaged as he was thrown under the bus that ran him down and then backed over him in perpetuity. Very sad. If anyone deserves a reputational make over, it is him – not Ben Bernanke.