Why The Fed Hates Inflation More Than It Hates Unemployment

It’s really not complicated; the Fed is run by creditors:

David Levey, a former managing director at Moody’s and another critic of Fed inaction, points out that banks often have more to lose from inflation than from unemployment. Inflation reduces the future value of the money that their debtors – homeowners, car buyers, small businesses and the like – will repay them.

Also: while unemployment might decrease the number of credit-worthy borrowers, it increases the number of borrowers who need credit. Given the willingness of banks to lend to anyone with a pulse — and their proven ability to make money doing so, in aggregate — this makes for good arithmetic.

Are the banks short-sighted? Wouldn’t higher employment and economic growth be better for them in the long run? Almost certainly. But equally certainly, nobody is accusing American business — especially American financial business — of concentrating too much on the long term.

So we have short-sighted bankers maximizing short-term profits at the expense of everyone — including themselves. Welcome to modern macro policy.

via NYT: Dissecting Why the Fed Does What it Does







One response to “Why The Fed Hates Inflation More Than It Hates Unemployment”

  1. The Arthurian Avatar

    Once upon a time, monetary policy dealt with inflation and fiscal policy dealt with growth and unemployment. But Congress shirked its responsibility by making unemployment a second responsibility of the Fed. And now economists all seem to say that fiscal policy is ineffective, validating the shirk.