The Federal Reserve announced it will pour $600 billion dollars into the banking system in hopes of jump-starting the economy. A new Reason Foundation study argues this kind of quantitative easing distorts the market and helps create bubbles that pose serious risks to the economy.
“The Fed is trying to make it easier for Americans to borrow money, buy houses, and spend,” said Anthony Randazzo, project director of the Reason Foundation report. “But we’ve seen this failed policy before. Unfortunately, for several years the Fed has been a destabilizing force in the economy, preventing markets, like the housing sector, from bottoming out, and continually coming back to the table with new and more elaborate market-distorting intrusions. It is time to focus reform efforts beyond just mortgages and repair the underlying monetary system that helped facilitate it.”
Randazzo suggests that the Fed’s bond purchases will lead to future financial imbalances and inflation. The study argues that a new monetary rule based on the work of F.A. Hayek would stabilize the number of dollars in circulation and put the economy on a steady path to recovery. This ‘Hayek rule’ would allow for asset price growth without creating the conditions for the boom and bust cycles the current Fed policies have helped create.
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The complete study, The Hayek Rule: A New Monetary Policy Framework for the 21st Century, is available online here.
Submitted by Anthony Randazzo of the Reason Foundation