Letters to the Editor
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‘The Fed Can Fix This’
Lawrence Kudlow’s remedy for the economy and stock market is to have the Federal Reserve cut interest rates [Oped, “The Fed Can Fix This,”September10,2007]. This is like suggesting to someone whose house is on fire to douse it with kerosene.
The Fed tried this during the 1970s when Arthur Burns and William Miller ran the bank. Their easy money policies sent interest rates to 18% and the economy and stockmarket into the dumpster.
Once again the villain in the current liquidity debacle is the Federal Reserve, whose policy of easy money, from October 1997 through February 2005 the broad money supply, M2, increased at an average of 6.8% a month, year-over-year-has debased our currency, created an overheated housing market, $700 gold and $70 oil.
The remedy is tighter money. The chairman of the Federal Reserve, Ben Bernanke, should target a federal funds rate that would result in money supply growth in the 3% to 4%range.
This is precisely what predecessors Paul Volker and Alan Greenspan did during the late 1980s through the mid-1990s, setting the stage for both non-inflationary economic growth and rising equity prices.
Yes, tighter money will cause more short-term pain. But it would avoid the type of stagflation that wrecked our economy during the 1970s.
MICHAEL OZANIAN
National Editor
Forbes
New York, N.Y.
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