The Atlantic: How Sharknado Explains the Federal Reserve

| July 16, 2013



Matthew O’Brien over at The Atlantic has a post explaining the conundrum that the Fed has created for itself with quantitative easing (QE):

For the last five years, the Fed has been in the business of persuading investors that it can be irresponsible. Now, in normal times, the Fed is anything but; it’s boring. It just raises short-term interest rates when the economy is too hot, and lowers them when it’s too cold. But when short-term interest rates are at zero, the economy is stuck in what economists call a liquidity trap. The Fed can’t really cut interest rates below zero, because if it did, people would move their money from bank deposits that were costing them to cash that weren’t. The only way the Fed can get the economy moving again is to cut real interest rates by, as Paul Krugman originally put it, credibly promising to be irresponsible.The Fed has to say it will run looser policy than it should in the future to raise expected inflation now — and markets have to believe it won’t go back on this.

In other words, the Fed has to promise to be a little, well, crazy. But the thing about crazy is that once you’ve been Sharknado crazy, you need to be even crazier to stay ahead of the curve — or else disappoint everyone.

Go read the whole thing over there; O’Brien deserves the traffic. And the image above (also stolen from the article) has an appropriate subtext: you can either keep riding the shark, or you can get off and have it eat you. Ben’s solution, I suspect, will be to retire from the Fed with QE in place and let the next person deal with the sharknado.  ..bruce..


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Category: Economics, Main, Obama Administration

About the Author ()

Webster is Principal and Founder at Bruce F. Webster & Associates, as well as an Adjunct Professor of Computer Science at Brigham Young University. He works with organizations to help them with troubled or failed information technology (IT) projects. He has also worked in several dozen legal cases as a consultant and as a testifying expert, both in the United States and Japan. He can be reached at, or you can follow him on Twitter as @bfwebster.

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