Prologue

When there are two opposing camps (or schools of thought) with intelligent, knowledgeable people on both sides, we should treat any decision carefully. This is especially true in the case of monetary policy decisions, mainly due to the fact that they are made by a small committee and based on a majority vote. To me it seems it would always be wise to follow the rule "first, do no harm". Should the banks be encouraged, or even pushed, to lend more freely? And should households and firms be encouraged to borrow more? Not if that puts us in harm's way later. Does it? We just don't know.

Why is the Fed, or central banks in general, currently erring on the side of loose monetary policy and have been doing so since Greenspan, whenever we have been facing a small recession, or even a sign of it coming? Well, loose monetary policy is more or less the only weapon against recessions the Fed has at hand, and either a) it has been seen that we should avoid even a small recession whenever we can, or -and I find this more likely- b) any recession has been seen as a potential deep recession that should be fought decisively.

This is where we stand even today. Ultra-loose monetary policy for an ultra-long time is seen as the best option IF we want to avoid a deep recession. Why shouldn't we do everything we can to avoid a recession? Well, one could argue that we should take the recession now if fighting it with loose monetary policy would make matters worse in the long run. And, of course, we would still have the chance to look for other -albeit most likely less effective- "weapons" against the recession, or at least against the negative consequences of a recession (some kind of "managed decline" approach). But prevailing economic theory does not explain why loose monetary policy would lead to an even worse recession later, why it would be even worse than just "kicking the can down the road". Of course, very few things are inevitable (death and taxes?). Even if we got ourselves in trouble, a miracle can always save us. But if we are accumulating harm for the future through the current policy, then we will for sure need an even bigger miracle to save us?

This blog describes my (as) honest (as possible) struggle to understand if we are making matters worse in the long run -time before most of us, or if not us then our children, are dead- by continuing with the current monetary policy and monetary system. My understanding is that this is a systemic, not just policy, issue.