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  • Author: Harris Dellas, George S. Tavlas
  • Publication Date: 09-2011
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: In this article, we argue that the present constellation of exchange rate arrangements among the major currencies has led to the creation of excessive global liquidity, which has contributed to asset price bubbles. Although the exchange rates of many of the major currencies—including the U.S. dollar, the euro, the yen, and the pound sterling—float against each other, the currencies of many Asian emerging market economies and oil-exporting economies are pegged to the dollar. Dooley, Folkerts-Landau, and Garber (2004a) labeled this system “Bretton Woods II” (BWII). The original Bretton Woods regime (BWI) lasted for about a quarter of a century. Dooley, Folkerts-Landau, and Garber (DFG) argue that the present regime, despite its large global imbalances, will also be sustainable.
  • Topic: Oil
  • Political Geography: United States
  • Author: Kevin Dowd, Martin Hutchinson
  • Publication Date: 09-2011
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: In Matthew 25: 14–30, Jesus recounts the Parable of the Talents, the story of how the master goes away and leaves each of three servants with sums of money to look after in his absence. He then returns and holds them to account. The first two have invested wisely and give the master a good return, and he rewards them. The third, however, is a wicked servant who couldn't be bothered even to put the money in the bank where it could earn interest. Instead, he simply buried the money and gave his master a zero return. He is punished and thrown into the darkness where there is weeping and wailing and gnashing of teeth.
  • Political Geography: United States
  • Author: Mark A. Calabria
  • Publication Date: 09-2011
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: To the extent that monetary policy influences asset prices, it does so via the demand for assets, by changing the borrowing costs to purchase assets, or via supply, where movements in interest rates can make investment in assets look more or less attractive. Fiscal policy interventions can also contribute to bubbles by changing the cost of acquiring specific assets. Most discussions of asset bubbles, particularly those involving the role of monetary policy, focus on demandside factors. This article examines the role of supply-side factors in the recent booms in the U.S. housing market and dot-com stocks. The importance of supply constraints in each market is discussed. Policy implications are then presented.
  • Topic: Monetary Policy
  • Political Geography: United States
  • Author: Charles W. Calomiris
  • Publication Date: 09-2011
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Will Rogers, commenting on the Depression, famously quipped: “If stupidity got us into this mess, why can't it get us out?” Rogers's rhetorical question has an obvious answer: persistent stupidity fails to recognize prior errors and, therefore, does not correct them. For three decades, many financial economists have been arguing that there are deep flaws in the financial policies of the U.S. government that account for the systemic fragility of our financial system, especially the government's subsidization of risk in housing finance and its ineffective approach to prudential banking regulation. To avoid continuing to make the same mistakes, it would be helpful to reflect on the history of crises and government policy over the past three decades.
  • Political Geography: United States
  • Author: David Malpass
  • Publication Date: 09-2011
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Over the years, there has been a lot to consider in the Federal Reserve's choices of monetary policy and their relationship to bubbles. My conclusion is that mistaken U.S. monetary policy, usually related to the Fed's indifference to the value of the dollar, has repeatedly caused harmful asset bubbles in the United States and abroad. Policy is again at risk with the Fed's imposition of near-zero interest rates and its decision to conduct large-scale asset purchases (termed “quantitative easing”). Regulatory policy has often been ineffective at identifying or addressing asset bubbles, especially those caused by Fed policy. The solution is a parallel track to improve monetary policy so that it provides a more stable dollar and fewer asset bubbles; and to strengthen regulatory policy so that it provides a more reliable base for growth-creating free markets.
  • Topic: Monetary Policy
  • Political Geography: United States
  • Author: Daniel Griswold
  • Publication Date: 09-2011
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Let me preface this review with a confession: As an advocate of free trade, I love to link the 1930 Smoot-Hawley tariff bill with the Great Depression at every opportunity. More than 80 years after its passage, the bill still evokes negative feelings about protectionism. After reading Douglas Irwin's Peddling Protectionism: Smoot- Hawley and the Great Depression, I can see I need to curb my enthusiasm. Irwin does not defend the bill, far from it. He concludes that it failed to achieve its objectives and that it did, in an incremental way, make the Great Depression worse. But in the careful language of the professional economist and historian that he is, Irwin documents in rich and often colorful detail that the most infamous trade bill in American history had less impact than either its advocates or its opponents understood at the time or understand today. Even so, the story of Smoot-Hawley offers valuable lessons for today as our politicians seek to craft U.S. trade policy in the 21st century. Irwin is superbly qualified to write the definitive history of what was officially the Trade Act of 1930. A professor of economics at Dartmouth College, he has authored Against the Tide: An Intellectual History of Free Trade (1996), and Free Trade under Fire (3rd ed., 2009).
  • Topic: Economics
  • Political Geography: United States
  • Author: Richard L. Gordon
  • Publication Date: 09-2011
  • Content Type: Journal Article
  • Journal: The Cato Journal
  • Institution: The Cato Institute
  • Abstract: Pennington undertakes a needed effort to provide a systematic, analytic critique of recent efforts to discredit what he terms “classical liberal economics.” His is effectively the standard but hard-to-sell proposition that prescient impartial counselors—Plato's philosopher kings—have failed to emerge from the development of modern knowledge. In particular, Pennington makes good use of Hayek's radical contrast between the competitive testing of concepts in a spontaneous market order and the construction of solutions by government monopolies. As Pennington's conclusions nicely summarize, skepticism of limited government is high and fostered by those who are seeking rents from intervention. Thus, ideas that committed libertarians see as obviously absurd need systematic debunking for a broader audience. Pennington, therefore, pretends that he is treating serious arguments and confronts them respectfully.
  • Topic: Government, Political Economy
  • Political Geography: United States