Are Interest Rates Really That Important?

There is something I never got about interest rates. There is a consensus across economists that interest rates have a very important impact on the economy. Economists of all stripes agree that lower interest rates boost economic growth and higher rates reduce growth. Some go as far as saying that it is through interest rates and monetary policy (not spending and fiscal policy) that governments should manage the economy. It’s a standard classroom exercise to draw curves showing the impact of interest rates on growth. Too low interest rates are one of the main factors blamed for causing the bubble and resulting recession. But I always felt that something didn’t quite add up and I began to doubt how important interest rates really are. Continue reading “Are Interest Rates Really That Important?”

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The Impossible Trinity

Most economic concepts are pretty dry, but the Impossible Trinity sounds like one of those dilemmas where you are in a burning house and can only save two out of three people. The term refers not to religion (that Trinity is impossible in its own way) but international trade and how governments can only two out of three options, each of which is desirable in its own way. The three options are fixed exchange rates, independent monetary policy and free movement of capital. If they don’t sound that exciting, they are crucial to understanding the crisis with the Euro and what we can do about it. Continue reading “The Impossible Trinity”

The Fool’s Gold Standard

Having money linked to a Gold Standard is an idea that almost every economist opposes. It is described as the economic equivalent of creationism and a major cause of the Great Depression. It is ignored by policymakers and no country has one anymore. Yet there is some support for it on the internet. It is one of Ron Paul’s main ideas in his campaign for the Presidency and is supported to some extent by Paul Ryan. The Republican platform promises a commission to consider reintroducing it. So what is a Gold Standard and why is it so bad? Continue reading “The Fool’s Gold Standard”

Government Did Not Cause The Recession

We are in the midst of the worst recession since the Great Depression. Economists and commentators alike are united in blaming the banks and the lack of restraint on them for driving us over the cliff. Yet there is a myth common on the internet that it was the government that caused the recession. Allegedly it was the government that forced the banks to lend extra and fueled the boom. There are three parts to this argument. It is claimed the government caused the recession by guaranteeing to bail out banks if they got in trouble, by forcing banks to lend more through the Community Reinvestment Act, Fannie Mae and Freddie Mac and by keeping interest rates artificially low. These arguments are unable to explain the timing of the crisis, its magnitude and the fact that it’s global effect. These claims simply do not stand up. Continue reading “Government Did Not Cause The Recession”