Whenever rapid innovations in ways of buying money and in substitutes for bank financing take place, the articulation between Federal Reserve policy actions and the volume of financing available loosens. The greater the number of alternative position-making techniques available for banks and for other financial institutions, the slower the reaction of the supply of finance to monetary policy of the Federal Reserve. The lag between restrictive actions by the Federal Reserve and a supply response by banks and financial markets will take longer when evolution is occuring than when a tight and invariant relation exists. Policymakers' impatience to get results will tend to make for serious excesses and overshoots when relations have been loosened. The likelihood that policy action will result in the economy going to the threshold of a financial crisis increases with the number of markets used for position-making, and with the proportion of bank assets bought through the various markets. Thus, as the financial system evolved over the postwar period, the potential for instability of the economy increased.
Tuesday, 30 December 2008
My current bedtime reading is Hyman Minsky's Stablizing An Unstable Economy, which I've never read before. It probably would have made more sense to read it last year when everything was starting to kick off. I'm not finding it the easiest of reads either. But there's a lot of good stuff in there. Here's a brief snippet: