Brad Delong
is making sense: "What
I do know is that the way the issue is usually posed is wrong. People
claim that Greenspan's Fed "aggressively pushed interest rates below a
natural level." But what is the natural level? In the 1920's, Swedish
economist Knut Wicksell defined it as the interest rate at which,
economy-wide, desired investment equals desired savings, implying no
upward pressure on consumer prices, resource prices, or wages as
aggregate demand outruns supply, and no downward pressure on these
prices as supply exceeds demand.
On Wicksell's definition -- the
best, and, in fact, the only definition I know of -- the market
interest rate was, if anything, above the natural interest rate in the
early 2000's: the threat was deflation, not accelerating inflation. The
natural interest rate was low because, as the Fed's current chairman
Ben Bernanke explained at the time, the world had a global savings glut
(or, rather, a global investment deficiency).
This article available online at:
http://www.theatlantic.com/business/archive/2009/07/its-wasnt-the-feds-fault/20513/
