Abstract: It is the consensus opinion that monetary policy and banking regulation contributed to the boom. The charge lodged against the Fed is that it held the Fed funds rate too low for too long; that its loose monetary policy exacerbated the credit boom. There is a simple answer to this charge. The Fed had no choice but to do so. Its mandate from Congress required it to support employment to the maximum extent possible, subject to maintaining price stability. In the early 2000s, after the dot-com boom had ended, the current account deficit began to grow rapidly, which caused the hole in demand to expand and created deflationary pressure. The recovery from the 2001 recession was slow and tepid. It was dubbed a “jobless” recovery at the time. As late as 2004 Ben Bernanke, then a member of the Fed’s board of governors (but not yet it chairman), posed the question: Two-and-a-half years into the economic recovery, the pace of job creation in the United States has been distressingly slow. Job losses in manufacturing have been particularly deep, with employment in that sector apparently only now beginning to stabilize after falling by almost 3 million jobs since 2000. Why has the recovery been largely jobless thus far? The fundamental problem faced by the Fed (whether or not the members of its policymaking Open Market Committee recognized it at the time) was that the large current account deficit presented it with a Faustian bargain; either to induce a deflationary monetary contraction in order to enable the US economy to adjust the terms of trade with China and reduce the trade deficit (since lower prices US goods would be more competitive on world markets), or to acquiesce in the expansion caused by the capital flow bonanza, albeit at the cost of accommodating a potentially destabilizing credit boom.2
Publication Year: 2016
Publication Date: 2016-01-01
Language: en
Type: book-chapter
Indexed In: ['crossref']
Access and Citation
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot