Big Picture Economics: How to Navigate the New Global Economy

Chapter 9

Monetary Policy: Money, or Maybe the Federal Reserve, Makes the World Go 'Round

The Fed is assumed to be all-knowing and all-powerful: wrong and wrong. How monetary policy works is discussed in this chapter, but much more important, how the same policy can be successful or a failure depending on the type of policy and the context in which it is implemented.

In the past two chapters, we saw how difficult it is to create fiscal policy even if the government wasn't as dysfunctional as it is. Whether it is raising taxes or lowering them, how that is done, and the economic implications are frequently unknown even to those making the decisions. Worse, the differential effects of alternative policies may not even be a factor in many fiscal policy decisions since politics rather than economics usually drives taxation decisions.

When it comes to the expenditure side of the budget, be it cutting spending, funding massive stimulus projects, or implementing mindless sequestration, the government rarely has any idea what it is doing. There are even politicians who think it is possible to balance the budget. In other words, fiscal policy is more a matter of political dogma and expediency than any logical or rational approach to economic growth.

In the face of all that chaos, the members of the Federal Reserve have to determine what is the best course for monetary policy. Is this a job that even Superman would hesitate to take on? Probably. But someone has to do it, and it does get ...