VU prof: Philly Fed's Plosser policies would wreck U.S. finance

Writes Villanova University economist David Nawrocki re my Sunday Inquirer column on the split between prospective Federal Reserve chair Janet Yellen and conservative Philadelphia Fed president Charles Plosser:

Mr. Plosser does not speak for me. Following his [style of limited-government] policies allowed half of our banks to fail in the 1930s and for the Great Depression to [grow into] a double-dip recession. Inflation is currently declining and people are worried about deflation while unemployment remains stubbornly high.

Mr. Plosser and the conservatives must really love the 1800s because there was plenty of deflation for everybody... . Financial institutions [tend to be] unstable [when] they lend long and borrow short. Ask Penn Central and First Pennsylvania how that strategy worked for them.

The Fed's original mandate [from Congress] in 1913 was to be the lender of the last resort ...  Any reduction of those powers will increase financial market instability. The last four mandates [to reduce inflation and unemployment, stabilize prices] were not added until 1977 with the Humphrey-Hawkins bill.

I'm not a big fan of [quantitative easing, the Fed's strategy of buying mortgage bonds to keep interest rates low], but as long as Congress doesn't do its job on the fiscal policy side, it is required...

It is not a single bank that is too big to fail, it is the flow of funds system that is too big to fail. I don't mind financial bailouts as long as the top management and the stockholders pay the price. If the Fed has to bail them out they did something risky that they shouldn't.

I think the Swiss have the right idea: Bankrupting a Swiss bank will land you in jail.

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