Importantly, in the 1930s, in the Great Depression, the Federal Reserve, despite its mandate, was quite passive and, as a result, financial crisis became very severe, lasted essentially from 1929 to 1933.
However, in spite of the general perception that monetary policy should be conducted so as to avert deflation, a central bank cannot lower interest rates below the zero lower bound.
The Fed's ability to raise and lower short-term interest rates is its primary control over the economy.
The modern banking system manufactures money out of nothing.
Monetary contractions are attractive as the key shocks in the 1929-1933 years, and in other severe depressions, because there do not seem to be any other candidates.
The essence of Keynesianism is its complete failure to conceive the role that saving and capital accumulation play in the improvement of economic conditions.
In the real world, illiquid assets carry a discount.
The world economy is in a nosedive, and understanding what I call "depression economics" - the weird world you get into when even a zero interest rate isn't low enough, and a messed-up financial system is dragging down the real economy - is essential if we're going to avoid the worst.
One of the ironies of the stock market is the emphasis on activity. Brokers, using terms such as 'marketability' and 'liquidity,' sing the praises of companies with high share turnover... but investors should understand that what is good for the croupier is not good for the customer. A hyperactive stock market is the pick pocket of enterprise.
Paying interest on reserve balances enables the Fed to break the strong link between the quantity of reserves and the level of the federal funds rate and, in turn, allows the Federal Reserve to control short-term interest rates when reserves are plentiful.
Although low inflation is generally good, inflation that is too low can pose risks to the economy - especially when the economy is struggling.
