“Too low too long” Fed Policy; It’s back!
In a previous post, (http://bastiat.mises.org/2012/04/rules-discretion-or-no-central-bank/ ), I argued John Taylor would be better able to defend his criticism that the Fed kept rates too low for too long prior to the crisis if he used Mises-Hayek. Axel Leijonhufvud, in 2008 (“Keynes and the Crisis.” Center for Economic Policy Research Policy Insight No. 23, May ) made such an argument, “Operating an interest-targeting regime keying on the CPI, the FED was lured into keeping rates far too low far too long. The result was inflation of asset prices combined with a general deterioration of credit quality. This, of course, does not make a Keynesian story. It is rather a variation on the Austrian overinvestment theme.”
Leijonhufvud, with a nod to Mises and Hayek, makes the claim again with the additional argument, “We are now trying to cure the consequences by maintaining still lower interest rates for a lengthy period” supplemented with the note,”Ludwig Mises and Friedrich Hayek would have told us that this is not a good idea.”
HT to Greg Ransom at Taking Hayek Seriously. See: http://hayekcenter.org/?p=5299
Axel Leijonhufvud’s INET Berlin paper at “The Unstable Web of Contracts”.