Thursday, November 15, 2007

1.Repeal Humphrey-Hawkins, 2.Establish Price Rule

From today's WSJ editorial, a 2-step plan to improve monetary policy and avoid monetary-induced cycles of booms and busts in the housing and financial sectors.

Step 1. Repeal the Full Employment and Balanced Growth Act of 1978.

Also known as Humphrey-Hawkins, this is the law that mandates that the Fed consider both price stability and full employment in making monetary policy decisions. Mr. Bernanke noted yesterday that this dual mandate makes it impossible for the Fed to target only inflation the way, say, the European Central Bank is mandated to do. It is in pursuit of this dual mandate that the Fed sometimes takes its eye off the prize of price stability, most recently with Alan Greenspan's decision to hold interest rates too low for too long this decade. We are now living with the housing and financial boom and bust consequences.

Step 2. Establish a genuine price rule, i.e. an inflation target, like Canada, New Zealand, Australia, Sweden, and U.K.



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