Naked Economics by Wheelan, Charles (spanish books to read .txt) 📕

with more direct impact on the global economy than any other institution in the world, public or private. During the economic crisis that began to unfold in 2007, the Federal Reserve used everything in that toolkit—and then acquired some new gadgets—to wrestle the financial system back from the brink of panic. Since then, some have criticized the Fed and its chairman, Ben Bernanke, for doing too much; some have criticized the Fed for doing too little. Everyone agrees that what the Fed does matters enormously.

From where does the Federal Reserve, an institution that is not directly accountable to the voting public, derive such power? And how does that power affect the lives of everyday Americans? The answer to all those questions is the same: The Federal Reserve controls the money supply and therefore the credit tap for the economy. When that tap is open wide, interest rates fall and we spend more freely on things that require borrowed money—everything from new cars to new manufacturing plants. Thus, the Fed can use monetary policy to counteract economic downturns (or prevent them in the first place). And it can inject money into the financial system after sudden shocks, such as the 1987 stock market crash or the terrorist attacks of September 11 or the bursting of the American real estate bubble, when consumers and firms might otherwise freeze in place and stop spending. Or the Fed can tighten the tap by raising interest rates. When the cost of borrowed funds goes up, our spending slows. It is an awesome power. Paul Krugman once wrote, “If you want a simple model for predicting the unemployment rate in the United States over the next few years, here it is: It will be what Greenspan wants it to be, plus or minus a random error reflecting the fact that he is not quite God.” The same is now true of Ben Bernanke.

God does not have to manage by committee; Ben Bernanke does. The Federal Reserve System is made up of twelve Reserve Banks spread across the country and a seven-person board of governors based in Washington. Ben Bernanke is chairman of the board of governors—he’s the “Fed chairman.” The Federal Reserve regulates commercial banks, supports the banking infrastructure, and generally makes the plumbing of the financial system work. Those jobs require competence, not genius or great foresight. Monetary policy, the Federal Reserve’s other responsibility, is different. It might reasonably be described as the economic equivalent of brain surgery. Economists do not agree on how the Federal Reserve ought to manage our money supply. Nor do they even agree on exactly how or why changes in the money supply have the effects that they do. Yet economists do agree that effective monetary policy matters; the Fed must feed just the right amount of credit to the economy to keep it growing steadily. Getting it wrong can have disastrous consequences. Robert Mundell, winner of the 1999 Nobel Prize in Economics, has argued that bungled monetary policy in the 1920s and 1930s caused chronic deflation that destabilized the world. He has argued, “Had the price of gold been raised in the late 1920s, or, alternatively, had the major central banks pursued policies of price stability instead of adhering to the gold standard, there would have been no Great Depression, no Nazi revolution, and no World War II.”1

The job would not appear to be that complicated. If the Fed can make the economy grow faster by lowering interest rates, then presumably lower interest rates are always better. Indeed, why should there be any limit to the rate at which the economy can grow? If we begin to spend more freely when rates are cut from 7 percent to 5 percent, why stop there? If there are still people without jobs and others without new cars, then let’s press on to 3 percent, or even 1 percent. New money for everyone! Sadly, there are limits to how fast any economy can grow. If low interest rates, or “easy money,” causes consumers to demand 5 percent more new PT Cruisers than they purchased last year, then Chrysler must expand production by 5 percent. That means hiring more workers and buying more steel, glass, electrical components, etc. At some point, it becomes difficult or impossible for Chrysler to find these new inputs, particularly qualified workers. At that point, the company simply cannot make enough PT Cruisers to satisfy consumer demand; instead, the company begins to raise prices. Meanwhile, autoworkers recognize that Chrysler is desperate for labor, and the union demands higher wages.

The story does not stop there. The same thing would be happening throughout the economy, not just at Chrysler. If interest rates are exceptionally low, firms will borrow to invest in new computer systems and software; consumers will break out their VISA cards for big-screen televisions and Caribbean cruises—all up to a point. When the cruise ships are full and Dell is selling every computer it can produce, then those firms will raise their prices, too. (When demand exceeds supply, firms can charge more and still fill every boat or sell every computer.) In short, an “easy money” policy at the Fed can cause consumers to demand more than the economy can produce. The only way to ration that excess demand is with higher prices. The result is inflation.

The sticker price on the PT Cruiser goes up, and no one is better off for it. True, Chrysler is taking in more money, but it is also paying more to its suppliers and workers. Those workers are seeing higher wages, but they are also paying higher prices for their basic needs. Numbers are changing everywhere, but the productive capacity of our economy and the measure of our well-being, real GDP, has hit the wall. Once started, the inflationary cycle is hard to break. Firms and workers everywhere begin to expect continually rising prices (which, in turn, causes continually rising prices). Welcome to the 1970s.

The pace at which the economy can grow without