While the title is certainly true, some money creation may be necessary to grease the wheels of the economy. It is excessive money/base creation that is the problem. This is the foundation for the money supply growth rate rule that Friedman proposed. The existence of the Fed can be debated, but a rule for their actions should be a must. Even the Taylor Rule would have the Fed funds rate be closer to 1-1.5%, definitely not 0-.25%.
Although Bernanke may have formulated the path to not have another “Great Depression” in his academic research and is the reason that the Fed’s assets have increased from $800 billion to almost $3 trillion since Sept. 2008, he certainly has no clue on how to exit the horrific increase in less liquid assets that is now on their balance sheet. In addition, previous research that I have published shows that many of their liquidity programs were not effective in stimulating particular markets and their quantitative easing (QE) programs have been a disaster!
Government spending restraint in Washington should start now and higher interest rates should be in the near future to provide the means for an independent central bank and reduce the Fed’s incentive to monetize the debt. Unfortunately, the market for interest rates is being distorted by the Fed; therefore, economic growth moving forward will be uncertain and more sluggish than otherwise would be the case.
-Vance GinnResearch Fellow, Center for Energy and the Environment