The Federal Reserve's Utter Policy Failure

Karl Smith:

While central banks can -- and have -- stabilized things, there is little they can do on their own to engineer the fundamental realignments that must accommodate seven specific dynamics in advanced economies (something that we will come back to later in discussing the way forward):

• Accommodating the "safe" debt de-leveraging of the private sector by enabling high sustained growth
• Safely de-risking the financial sector
• Clearing or replacing clogged credit pipes
• Achieving a sustainable trajectory for public finances
• Improving the functioning of the labor market
• Compensating for inadequate past investments in human resources, productive capacity and infrastructure
• Adjusting to the ongoing developmental breakout phase in several systemically important emerging countries (including Brazil, China, India, and Indonesia).

To be effective, central banks in advanced economies needed -- and need -- help from other policymaking entities to deal with the twin unfortunate realities of too much debt and too little growth. They must be assisted with the engagement of the healthy balance sheets around the world, and fortunately there are quite a few of them in both the public and private sectors. And this must be done in an internationally coordinated fashion in order to accommodate the new global realities.

I thought this blog post made an interesting point about how the main function of macro policy is to balance maximum employment against stable prices, not necessarily facilitate growth.

The Federal Reserve's Utter Policy Failure