Wednesday, April 6, 2016

Blame Congress For The Next Economic Crisis

The GOP Congress has been critical of the Federal Reserve's policies which have kept interest rates very low for a long time.  Some Republicans have even promoted a move to the gold standard in order to protect the value of the dollar from hyperinflation which they have been predicting for several years.  This article, by the former President of the Federal Reserve Bank of Minneapolis, explains why there is little risk from the Fed's low interest rate policy.  The real risk to financial stability, according to this analysis, will be caused by the over use of leverage by consumers and by banks.  Congress encourages leverage by subsidizing mortgage debt and student loans.  Instead of encouraging debt Congress should subsidize desirable spending more directly.  For example, the government could reduce the cost of higher education in a number of ways.  That would be better than loading up households with debt.  Banks are also encouraged to increase their risk by the use leverage.  They, and their creditors, assume that the government will not let systemically important banks fail.

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