Later On

A blog written for those whose interests more or less match mine.

Will auditing the Fed reduce the trade deficit?

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Robert Samuleson of the Washington Post thinks so, though he apparently doesn’t realize it. (I get the strong impression that Robert Samuleson is often out of his depth in his writing about economics.) Dean Baker writes:

Robert Samuelson Argues that Auditing the Fed Could Reduce the Trade Deficit

That is what his column implies, even if Robert Samuelson doesn’t know it. Samuelson warned that a Fed audit could led to a "rapid fall in the dollar’s foreign exchange value."

Of course the over-valuation of the dollar is the main reason that the United States has a large trade deficit. If the dollar fell in value then imports to the United States become more expensive. People who took econ 101 know that if imports become more expensive, we will buy fewer imports.

A lower-valued dollar will cause U.S. exports to become cheaper to people living abroad. People who took econ 101 know that if exports become more cheaper, foreigners will buy more exports. If the U.S. imports less and exports more, then our trade deficit falls. It sounds like a good reason to audit the Fed.

Samuelson is also appalled that people would blame the Fed for downturn. Of course the Fed bears primary responsibility for the downturn in the same way that a drunken school bus driver bears responsibility for the death of his passengers.

The downturn could have been easily prevented if the Fed had targeted the $8 trillion housing bubble before it grew to such dangerous levels, as some of us advocated since 2002. It could have targeted the bubble first and foremost by providing investors and the general public information, using its staff of hundreds of economists to carefully document the evidence for a housing bubble and using its enormous public platform to transmit this information at every opportunity. It could have also cracked down the on the garbage loans that fueled the bubble, which were quite apparent to any remotely observant analyst.

Finally, if necessary, it could have used interest rates to prick the bubble. This would have been easiest if interest rate hikes were explicitly tied to bursting the bubble (e.g. the Fed commits to raising interest rates until the real Case-Shiller index falls back to its 1996 level).

There was absolutely nothing more important that the Fed could have been doing during this period than combating the housing bubble. The fact that it did nothing was an astounding failure for which it deserves to be held responsible.

Written by LeisureGuy

30 November 2009 at 9:59 am

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