Perhaps I did not construct my sentences carefully enough.
I meant that to judge from the rate at which the monetary aggregates (M1,M2,M3) increased over the last few months, it looked as if the Federal Reserve of the United States feared that a major contraction in the U.S. stock market was imminent, perhaps triggered or reinforced by all the problems in Asia. It looked as if the Fed was trying in advance to soften the blow, or to accommodate in advance --to second-guess, if you will-- the movements of the U. S. markets. The result seems to have been to help the markets to continue inflating.
Here I am completely in agreement with Milton Friedman. The Fed should just keep the money supply growing at a constant pace, which it has the power to do, at about four percent per year, instead of "fine tuning" or as I have called it, second-guessing.
In any case, by "going too far," I meant, too far DOWN, not up--I meant, it looks to me as if by expanding credit at such a rate they wanted to provide a safety net to catch a falling market. Instead, they added more helium.
Now they are really stuck. If they pull back either by constricting money supply or raising interest rates they can be blamed for any setback in the stock market or the economy. I think that if they are smart they will use open-market operations, without overtly raising interest rates; open market operations can covertly which will raise long-term interest rates. They could sell bonds from their inventory. This would mop up cash and credit, reduce the money supply, and raise long-term rates. Doing this would be much less noticeable than overtly raising short term interest rates. As the stock market stalls, investors would buy these bonds for the increased interest rate, and this would pull the stock market back to more realistic levels.
But I think they are petrified about doing anything. They would prefer to react than to cause. Because at this point a really terrific crash is possible, and they know it. |
