Student Blog: Law, Markets, & The Role Of The State
MATHEMATICAL ECONOMICS
As noted in the Special Report on Regulatory Reform by the Congressional Oversight Panel, “[f]inancial crises are not new.” Beginning as early as 1792 and continuing cyclically over the next 140 years, financial crises struck the nation in approximately 20-year increments.
If the American market economy is cyclical, then a depression/recession is merely reflective of the U-shaped path taken by the economy after coming down from its upside-down parabolic high. For cyclical-economists, the downward-pointing parabola does not shoot toward negative infinity as it appears to do in abstract mathematics; rather, while coming down from its vertex, the economy will slow its downfall, turn itself around at the bottom of the U and then make its way back to the peak of the curve. The whole point of this digression into geometry is that if the economy is cyclical, coming to a decline is inevitable. Conversely, ascension from a panic or crash is also inevitable. Thus, during a depression, radical change is not needed because the economy will eventually fix itself, and we will soon reap the benefits of the assent to the top of the curve.
While our economy was once mimicked a sine wave, fluctuating between peaks of prosperity and valleys of panics and crashes, in 1913 our government sought to establish a linear economy – one in which the extremes of variance were exchanged for slow and steady linear growth. Thus, the Federal Reserve was established to achieve that goal by exercising power over the banking industry.
The move from traditional sine wave economic patterns to a preference for positive-slope linearity largely has been accomplished with an independently functioning Federal Reserve System. However, with the recent economic crisis stirring up various political passions, the Fed’s ability to maintain linearity has come under attack. The Fed has been under closer scrutiny in part from the AIG bailout, the purchasing of mortgage securities, and support for other lending. The Federal Reserve views its independence from political pressure as “crucial,” however, a bill proposed by Rep. Ron Paul (R – Texas), would hamper the Fed’s independence by increasing oversight of the Fed’s management of the money supply. The Obama administration is decidedly in favor of the Fed believing the Fed to be “the agency best positioned to oversee major banks.”
With pressure from the news media, the populous, and Congress, the Fed may retract from its paternalistic position as the omnipotent federal banking agency and potentially may second-guess some of its decisions, thus detracting its independence. According to former director of monetary affairs at the Fed Vincent Reinhart, the Fed might rethink tough policy choices and ask itself the question “what would this do to public opinion of the Federal Reserve.” Regardless of whether or not any of bills pass through Congress, the political pressure is real and the fact remains that the independence of the Fed, by virtue of public and political pressure, at least slightly, has been eroded. Whether or not this has a substantial effect on the Fed’s ability to realign the economy in a linear fashion with a positive slope has yet to be seen; however, any damper on independence necessarily will alter the approach by which the Fed maintains economic linearity and threatens a return to the peaks and valleys of the past.
http://www.washingtonpost.com/wp-dyn/content/article/2009/11/11/AR2009111128108.html
COMMENTS
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Nicely written. There are very interesting issues here. Which is "better" a natural cyclical market where in the valleys the weaker business fall, OR a linear economy where intervention prevents or at the least lessens collapse? How much does it "cost" to maintain a linear economy?