Saturday, March 03, 2012

Here's How Screwed Up the Conventional Economic Wisdom Is

Conventional economic wisdom:
1. Interest rates for government debt are determined by the market, and are susceptible to strikes by bond vigilantes.
2. The Fed (central bank) is all powerful and can control inflation and unemployment. The only thing it can't do is control interest rates (see item 1 above).

Real World:
In fact, the only the thing the Fed does control is the interest rates on government debt.

The conventional wisdom on the role of the central bank and monetary policy is exactly wrong...