A couple of years ago, I wrote a brief review of a very good book, Econoclasts, by Brian Domitrovic, a professor of economics at Sam Houston State University. The book outlines the formulation, rationale, and history of the application of supply-side economic theory, with emphasis on the people who sparked the supply-side revolution beginning in the 1970s. Essentially, the story is about monetary policy at least as much as fiscal policy, because the policy mistakes there have been the primary culprit in most of the crises of the past century, including this one.
In a recent article in Forbes magazine entitled “The Weak Dollar Caused the Great Recession”, Domitrovic returns to this latter point, explaining very convincingly that the rush to invest oceans of capital in housing, energy, and commodities between 2003 and 2008 was sparked by one thing–people lost trust in the value of the dollar. And history tells us that when this happens, people rush to hedges against superfluous dollar production, which incidentally is still underway. Domitrovic describes it in cause/effect terms: Cause–comprehensive devaluation of the dollar on the part of its government masters (the Fed); effect–major investment shifting into hard assets corresponding to fear for the dollar’s soundness. And as the flight from the dollar proceeded, the financial sector whiz kids were prevailed upon to provide products to accomodate the new opportunities and niches.
I have been writing about this for several years, and adding that the real problem is that the Federal Reserve has long since abandoned its primary mission, which was the preservation of the value of the dollar as the world’s reserve currency.
So, what’s new? Finally, some members of Congress are responding in a realistic way to the underlying problem. Rep. Kevin Brady (R-TX) and Sen. Mike Lee (R-UT) have filed counterpart bills in each house that will simply give the Federal Reserve a single mandate: to maintain price stability. This would eliminate the dual mandate established by Congress during the Carter administration that included maintaining full employment, an unrealistic mission both now and then for an agency whose role was never contemplated to include micromanaging the economy as it has attempted to do in recent years.
More work will be needed, but this legislation will be a good start toward returning the Fed to its historical mission and possibly begin to restore the credibility of the dollar as the world’s reserve currency.