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What should the Fed fear?

M1X00228_9.JPGThe blogger Thorstein Veblen -- not to be confused with the Thorstein Veblen -- thinks the Federal Reserve should fear doing too little.

Someone please tell me how the risks of doing too much and of doing too little are symmetric?

If the Fed "does too much" and unemployment in one year is at 8.3-8.7%, while inflation is at 2.7%, there is no loss to society whatsoever. If the Fed "does too much" and unemployment in one year is 7.3% and inflation is 3.7%, that is still a tradeoff I would make in a heartbeat. Above 4%, and I would reconsider, but there would be plenty of time between now and 4% inflation in which the Fed could roll its stuff back ... And I'm aware that once inflation starts to increase, the Fed may have to roll it's stuff back quickly, but since the Fed can increase the Fed Funds rate, but cannot cut it, it should be easy to keep inflation under 3%, much less 4%.

On the other hand, if the Fed "does too little", and unemployment in one year is at 10.3-10.7%, and inflation is at .3-.7%, that would be a total nightmare for millions of people, and the Dems will be bloodied in a landslide. If the numbers get worse, and unemployment rises to 11.3-11.7, that would be a total nightmare for millions of people, and the Dems will be bloodied in a landslide. Of course, in either of these latter two scenarios, what would happen is so much pressure would build on the Congress, that we would get more stimulus, and at some point, if the economy continues to do badly enough w/ no inflation, Bernanke might recalibrate and do more [quantitative easing].

The most likely scenario from my vantage is the "boiled frog" scenario, by which the economy continues to get better, albeit slowly, and may even beat unemployment predictions next fall, falling to 8.9% by election day! In this case, of course, there would be no urgent need for more QE, no need for more stimulus, but it would be a total nightmare for millions of people.

I should note that I've removed a bit of profanity to conform to Post style rules. The unnecessary economic misery of millions is no reason to use strong language.

Photo credit: By Karen Bleier/Getty Images

By Ezra Klein  |  December 18, 2009; 1:52 PM ET
Categories:  Federal Reserve  
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More than anything, the Fed should fear that main house-fire that Eisenhower (President and Supreme Allied Commander WWII) warned us against:

Uncontrollable military-industrial defense spending that takes over a nation's culture and dominates the federal budget and deficits.

$626 Billion for "defense" for 2010.

When we do not face any large, armed enemy or hostile force of significant strength.

What if...Republicans filibustered this massive budget-busting defense bill?

heh...sounds too good to hope for, right?

Posted by: HalHorvath | December 18, 2009 1:55 PM | Report abuse

To connect the dots, in case anyone doesn't already know the connection between the quandary for the Fed and U.S. defense spending.

It's the national debt.

The fed is between a rock and a hard place.

The hard place is the $10 Trillion nation debt Bush left for Prez #44.

It took away part of the room-to-run that is sorely needed now.

Posted by: HalHorvath | December 18, 2009 1:58 PM | Report abuse

That was irony wasn't it? I mean, protesting the "unnecessary economic misery" of millions IS the proper place for strong language.

Posted by: danwhalen2 | December 18, 2009 2:00 PM | Report abuse

@danwhalen2 it's actually called sarcasm

The Fed should really fear that the moving the interest rate lever or doing QE doesn't actually improve the rate. It's also short term thinking, we're making the future worse. We have to pay these bills back.

How did we lose the Clinton way so badly?

Posted by: staticvars | December 18, 2009 3:00 PM | Report abuse

And Grade A sarcasm at that. Sarcasm that the Washington Post fully deserves being on the receiving end of.

Posted by: rt42 | December 18, 2009 3:24 PM | Report abuse

No, it *is* a reason to use strong language, just not *vulgar* language.

Posted by: ajw_93 | December 23, 2009 2:50 PM | Report abuse

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