64 comments on Minimal Behavioral Adaptations to Oil Shocks
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The FED was authorized a couple of days before Christmas 1913, supposedly to smooth the savage business cycle.
Before there was a Federal Reserve there were about as many economic dislocations as there are now. They were caused by all sorts of things. For example, problems in agriculture would produce price shocks in food, leading to problems not entirely different from the problems we see with oil price shocks. There were also plenty of monetary shocks which were quite a bit like the ones that flow from the Federal Reserve. The big ones have their roots in war, inflation (even pre-Federal Reserve, inflation went hand-in-hand with war), and the decline in the money supply that resulted when pre-war currency values were restored.
None of which is to say that the Fed hasn't had a hand in every US recession and depression since it was created--it has. But, you know, the US Air Force has had a hand in pretty much every US war since it was created, and nobody is saying that wars are usually caused by the US Air Force.
supposedly to smooth the savage business cycle."
Very inexact of me... recessions since the Fed was created are a function of the Fed restricting the growing supply of money and credit, after they have inflated same money and credit.
Without the Fed we still would have had recessions. Would there have been more or fewer? Shallower or deeper? There's no way to know.
With few exceptions recessions are caused by overinvestment in assets that turn to be unproductive in the long run. Of course FED can artificially cause a recession as it did in the 80-s, but usually it follows the economy not directs it.
For the current situation I expect that it will try to cool down the economy by raising the interest rates gradually in the near future.
Overinvestment occurs because interest rates are too low - and those rates are set by the Fed. But recessions also happen when interest rates are too high, choking investment and starving marginal enterprises of liquidity or revenues. Recessions happen for lots of reasons.
Not always, sometimes it is because of a bubble (like in 2000) and sometimes there is simply a change in the environment. If you take a different point of view the oil shock recessions were actually caused by long-term overinvestment in unsustainable oil-dependant way of life.
What the FED has to balance is capital flow in market bubbles and bad credit (unproductive assets) and expensive money and investment mostly in T-Bills (also unproductive assets).
But there are also changes in environment that cause significant adjusments hence drop in GDP. Consider the oil shocks of the 70-s - much of the pain came from the USA auto industry which was totally unprepared for oil supply constraint. Or consider the number of the local boom-and-bust cycles, e.g. the oil shale mania of the late 70-s.
FED may cause economy slowdown/expansion by dropping/raising money supply but it can not control resource constraints or international market events. In other countries weak local currencies are also a factor of the business cycle.
Of course, before 1916 the US was a net debtor and each time the Bank of England caught cold the US got pneumonia when the gold denominated debts from the US were called in to repay depositors of the British banks that needed the money.
Interesting that we are now a net debtor again. I wonder what will happen if we discover a hundred mile per gallon carburetor or fuel cell or super super capacitor and the Arabs need their money back?