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Thinking ahead of the next big Crash

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  • Bitros, George C.

Abstract

The real estate bubble which burst in 2008 in the USA was not exclusively the result of “animal spirits”, “crowed madness” or “irrational exuberance”. It resulted primarily because of the specific policies that the government, the Federal Reserve Board, and the regulators pursued. Actually, on account of these policies, the surprise is not what happened. The surprise would have been if it had not happened. The reason for this assessment is that such central bank notions as “commitment” and “credibility” are pious pronouncements that do not amount to much when the push by organised interest groups comes to shove by politicians. In the face of this development, the urgent question is how to forestall the Federal Reserve Board from creating or coalescing to the creation of the next asset bubble, the crash of which may bring down the international monetary system. According to this paper, the solutions range from introducing an extended list of far-reaching institutional reforms to the monetary system in place, to upgrading the constitutional status of the Federal Reserve Board by transforming it into a fourth power of government, much like the judicial, to replacing it by a market based system of money provision and circulation. Which of these solutions is appropriate depends crucially on whether the Federal Reserve Board has control or not of either the money supply or the policy interest rate. But what is utterly inappropriate is not to do anything and wait until the next big crash.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 51486.

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Date of creation: 15 Nov 2013
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Handle: RePEc:pra:mprapa:51486

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Keywords: Asset bubbles; monetary policy; monetary rules; central bank credibility; central bank constitutional status; free money;

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  1. Selgin, G.A. & White, L.H., 1993. "How Would the Invisible Hand Handle Money?," Papers, Georgia - College of Business Administration, Department of Economics 380e, Georgia - College of Business Administration, Department of Economics.
  2. Charles W. Calomiris, 2009. "Financial Innovation, Regulation, and Reform," Cato Journal, Cato Journal, Cato Institute, Cato Journal, Cato Institute, vol. 29(1), pages 65-91, Winter.
  3. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  4. Adam S. Posen, 2011. "Monetary Policy, Bubbles, and the Knowledge Problem," Cato Journal, Cato Journal, Cato Institute, Cato Journal, Cato Institute, vol. 31(3), pages 461-471, Fall.
  5. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1411-28, November.
  6. Pier Francesco Asso & Robert Leeson, 2012. "Monetary Policy Rules - From Adam Smith to John Taylor," Book Chapters, Hoover Institution, Stanford University, in: Evan F. Koenig & Robert Leeson & George A. Kahn (ed.), The Taylor Rule and the Transformation of Monetary Policy, chapter 2 Hoover Institution, Stanford University.
  7. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  8. Roger W. Garrison, 2009. "Interest-Rate Targeting during the Great Moderation: A Reappraisal," Cato Journal, Cato Journal, Cato Institute, Cato Journal, Cato Institute, vol. 29(1), pages 187-200, Winter.
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