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The Fed's Dangerous 'New Normal'

May 29, 2019 in Economics

By George Selgin

George Selgin

The American public doesn’t have much appetite for
monetary matters, and most of that limited attention has been
riveted on the political fights over President Donald Trump’s
controversial nominees to the Federal Reserve Board. But
there’s a far more serious piece of news on the Fed
front.

The Fed’s once-revered independence and traditional
controls on government spending have been dangerously eroded, with
almost no public notice or debate. And unless the Fed itself or
Congress does something about it, our financial system is at
risk.

When did this happen? In a news conference in March, Fed
Chairman Jerome Powell announced that the central bank would stop
unwinding its balance sheet this September. That decision, phrased
in the typically dry language of central bank news releases,
didn’t make headlines. Yet it was a watershed: It was the
most obvious sign yet that the Fed’s program to
“normalize” monetary policy, as it had promised to do
since 2009, was coming to an end. In essence, the Fed has decided
to keep its emergency monetary powers and stick to its new methods
of managing the supply of money in the economy indefinitely.

Is the Fed becoming the
president’s piggy bank of choice?

That “new normal,” which the Fed adopted during the
financial crisis, includes novel methods for controlling interest
rates. During the crisis, those methods allowed the Fed to engage
in “quantitative easing,” meaning large-scale purchases
of government bonds and other securities. But while they helped it
fight the Great Recession, the Fed’s quantitative easing
powers also fudged the traditional boundary line between fiscal
policy, which Congress controls and which includes decisions about
government funding, and monetary policy, which the Fed controls and
which is supposed to be dedicated solely to fighting recessions and
limiting inflation.

BY BLURRING THAT boundary line, the Fed’s
new methods threaten to undermine its critically important
independence. An independent central bank ensures that neither the
president nor Congress can decide to fund special projects or tweak
economic growth by compelling the Fed to print more money. But the
longer the Fed retains its “new normal,” the more that
independence is at risk.

To understand why this new normal is so risky, you first need to
understand how we got here.

Before the 2008 financial crisis, the Fed controlled inflation
by creating or destroying bank reserves. When the Fed created
reserves, interest rates declined, banks increased their lending
and the supply of money in the economy expanded. When it supplied
fewer reserves, it checked inflation.

But after the failure of Lehman Brothers in September 2008, the
Fed started paying interest on banks’ reserves — the cash that banks must hold
to meet …read more

Source: OP-EDS

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Justice Reform: A Surprisingly Hot Topic

May 29, 2019 in Economics

By Michael D. Tanner

Michael D. Tanner

While we should expect the upcoming presidential campaign to
focus on traditional issues of the economy, taxes, foreign policy,
trade, and immigration — as well as the elephant in the room
that is Donald Trump — criminal-justice reform has become a
surprisingly hot topic on the campaign trail.

At one point, every presidential candidate pretended he was
running for sheriff. “Tough on crime” was considered
the ultimate badge of honor — in both parties. Bill Clinton
even rushed home during his campaign to execute a mentally disabled
murderer. Times have clearly changed.

This is in part due to the growing evidence of racial and class
inequities within the criminal-justice system. Studies also show
that failures within our criminal-justice system contribute to
poverty and dependence. A recent YouGov poll conducted on behalf of
the Cato Institute found that 22 percent of the unemployed and 23
percent of people on welfare had been unable to find a job because
of a criminal record. Scholars at Villanova have concluded that
mass incarceration increases the U.S. poverty rate by as much as 20
percent. It has also become clear that overcriminalization and mass
incarceration have not necessarily made us safer. Support for
criminal-justice reform now cuts across party lines.

Criminal-justice reform
has become a surprisingly hot topic on the campaign
trail.

But there is also a large degree of politics behind the sudden
importance of criminal-justice reform on the campaign trail. Most
important, Democratic front runner Joe Biden is perceived as being
vulnerable on the issue. Biden’s supported and partially
wrote the 1994 Violent Crime Control and Law Enforcement Act, which
led to an increase in incarceration — especially among
African Americans. He also supported and sponsored several pieces
of legislation that enhanced sentencing for drug-related crimes,
once again contributing to the mass incarceration of
minorities.

Even President Trump has taken the opportunity to tweak Biden on
the issue, tweeting, “Anyone associated with the 1994 Crime
Bill will not have a chance of being elected. In particular,
African Americans will not be able [sic] to vote for you. I, on the
other hand, was responsible for Criminal Justice Reform, which had
tremendous support, and helped fix the bad 1994 Bill!” And in
a second tweet, Trump noted that “Super Predator was the term
associated with the 1994 Crime Bill that Sleepy Joe Biden was so
heavily involved in passing. That was a dark period in American
History, but has Sleepy Joe apologized? No!”

Trump is not exactly the best messenger on this front, given his
at least implied support for police abuses. But he is correct that
he signed the FIRST STEP Act, the …read more

Source: OP-EDS