21st Century Monetary Policy
21st century monetary policy – by ben Bernanke
I am reading a great book by Ben Bernanke on 21st century monetary policy. The book is better than its title implies . It’s a good recent history of the federal reserve, describing what it does, and describing what it’s like to run a central bank.
I liked that it was written by on of the main characters, rather than by a historian. Interest rates can be a dry subject, and there it’s nice to hear the first person perspective of a person who was there in the moment.
It’s fun to hear the history of the federal reserve, and how they learned to communicate with the public over the last 30 years. I didn’t realize that the fed’s practice of setting future expectations is a reasonably new development.
A new app I learned about is called FRED – it is from the federal reserve, and contains lots of statistics about the national economy. It’s worth downloading the app and browsing through the ‘most popular’ statistics.
The fed’s legal mandate is two fold: to keep unemployment down, and to keep prices stable. This is governed ( sometimes ) by something called the Phillips curve, which relates unemployment and inflation.
The fed lends money to banks at something called the discount window. This is run in practice by the federal reserve of New York. There are 12 national federal reserve banks, because this made sense 100 years ago. The fed governed by a mix of political appointees and private members. This insulates the fed from politics to some degree, according to Ben Bernanke.
There is also something called the intra-bank lending rate. Which is the rate at which banks can loan to each other.
6th grade math is really important to understanding this book. Compound interest is really powerful, and a 0.5% change in interest rates can have a really big impact over the long term. The fed is an extremely powerful institution because they can change interest rates that affect millions of people at will. It’s good that they are governed by technocrats, and have a structure that isolates them from politics.
If the colossal power of the federal reserve were ever owned by today’s American politicians, it would be a disaster.
I’ve learned that in other circumstances, Most exponential curves don’t last that long ( like Moore’s law ). They grow fast, and then fade out. Interest is an exponential curve, and it seems to have carried the nation’s economy for a long time. I suppose, that as long as there are boom and bust cycles, it can go on for a lot longer.