The Cato Journal

The Cato Journal is a leading free-market public policy journal. The Cato Journal features articles discussing politics and the economy of interest to scholars and professionals but accessible to a general audience as well.

Articles from Vol. 31, No. 3, Fall

A Dangerous Brew for Monetary Policy
It is a pleasure to join you at Cato's 28th Annual Monetary Conference. In preparing today's remark, I noted that this year's topic of how monetary policy should deal with asset prices was also discussed here in 2008. The speakers at that time expressed...
A Gold Standard with Free Banking Would Have Restrained the Boom and Bust
President George W. Bush famously remarked in July 2008 that during the housing boom "Wall Street got drunk ... and now it has a hangover." It was the Federal Reserve that spiked the punchbowl. The Fed sowed the seeds for the bust of 2007-08 by overexpanding...
America Identified: Biometric Technology and Society
America Identified: Biometric Technology and Society Lisa S. Nelson Cambridge, Mass.: MIT Press, 2010, 266 pp. Lisa Nelson's America Identified: Biometric Technology and Society is a slow and careful examination of a formidably broad landscape---at...
Editor's Note
The articles in this issue of the Cato Journal addressing Asset Bubbles and Monetary Policy were first presented at the Cato Institute's 2Sth Annual Monetary Conference, November 18, 2010. I thank the authors for their cooperation in bringing this...
Financial Crises: Prevention, Correction, and Monetary Policy
The financial crisis that surfaced in 2007 has stressed the need to identify the ultimate sources of the incentives that were behind the preceding credit and housing bubbles. To lower the likelihood of future financial collapses, prudent economic policies...
Friedman and Samuelson on the Business Cycle
Chicago School economists have come in for criticism since the financial crisis and so-called Great Recession began in 2007. Commentators have blamed recent problems on a laissez-faire faith in the efficacy of markets and simple rules for business-cycle...
Honest Money
This article addresses some of the recent proposals for the conduct of monetary policies in the post-bubble environment. Advocacy of higher inflation targets is analyzed, and the challenge of maintaining monetary discipline in the face of massive fiscal...
Incentive-Robust Financial Reform
"Will Rogers, commenting on the Depression, famously quipped: "If stupidity got us into this mess, why can't it get us out?" Rogers's rhetorical question has an obvious answer: persistent stupidity fails to recognize prior errors and, therefore, does...
Legislating a Rule for Monetary Policy
In these remarks I discuss a proposal to legislate a rule for monetary policy. The proposal modernizes laws first passed in the late 1970s, but largely discarded in 2000. A number of years ago I proposed a simple rule as a guideline for monetary...
Limits of Monetary Policy in Theory and Practice
The Federal Reserve's conduct of monetary policy casts a spell over market participants, commentators, and academics. The pages of financial newspapers parse subtle differences among the comments of Fed officials and delve deeply into potentially multiple...
Milton Friedman's 1971 Feasibility Paper
The story is fairly well known. In 1971, as chairman of the Chicago Mercantile Exchange, I had an idea: a futures market in foreign currency, It may sound so obvious today, but at the time the idea was revolutionary. I was acutely aware that futures...
Monetary Misjudgments and Malfeasance
The Federal Reserve has a long history of creating aggregate demand bubbles in the United States (Niskanen 2003, 2006). In the ramp up to the Lehman Brothers" bankruptcy in September 2008, the Fed not only created a classic aggregate demand bubble,...
Monetary Policy, Bubbles, and the Knowledge Problem
The role of monetary policy in creating, not merely responding to, asset price bubbles is a provocative topic of relevance to central banking requiring empirical analysis. The tenor of the times following the global financial crisis is to take that...
Money, Prices, and Bubbles
Both monetary policy and real factors played crucial causal roles in the housing boom and bust. Monetary policy distorted relative prices, particularly intertemporal prices. Prices play a critical role in allocating resources by signaling the relative...
Peddling Protectionism: Smoot-Hawley and the Great Depression
Peddling Protectionism: Smoot-Hawley and the Great Depression Douglas A. Irwin Princeton, N.J.: Princeton University Press, 2011, 244 pp. Let me preface this review with a confession: As an advocate of free trade, I love to link the 1930 Smoot-Hawley...
Preventing Bubbles: Regulation versus Monetary Policy
Over the years, there has been a lot to consider in the Federal Reserve's choices of monetary policy and their relationship to bubbles. My conclusion is that mistaken U.S. monetary policy, usually related to the Fed's indifference to the value of the...
Preventing Bubbles: What Role for Financial Regulation?
It is now quite clear that the U.S. economy went through a massive housing bubble, starting in the late 1990s and lasting through mid 2006. The inflating of that bubble was encouraged, to a considerable extent, by the expansion and especially the securitization...
Robust Political Economy: Classical Liberalism and the Future of Public Policy
Robust Political Economy: Classical Liberalism and the Future of Public Policy Mark Pennington Cheltenham and Northampton, UK: Edward Elgar, 2010, 320 pp. Pennington undertakes a needed effort to provide a systematic, analytic critique of...
Supply: A Tale of Two Bubbles
To the extent that monetary policy influences asset prices, it does so via the demand for assets, by changing the borrowing costs to purchase assets, or via supply, where movements in interest rates can make investment in assets look more or less attractive....
The Need for Futures Markets in Currencies
Under the Bretton Woods system, the central banks of the world undertook to keep the exchange rates of their currencies in terms of the dollar within [+ or -] 1 percent of the par value as determined by the official values of gold registered with the...
The Revived Bretton Woods System, Liquidity Creation, and Asset Price Bubbles
In this article, we argue that the present constellation of exchange rate arrangements among the major currencies has led to the creation of excessive global liquidity, which has contributed to asset price bubbles. Although the exchange rates of many...
Three Narratives about the Financial Crisis
The most important lesson we can learn from the financial crisis is what caused it. Even though the Dodd-Frank Act (DFA) has been signed into law, this is still an important question. If we do not attribute the crisis to the right cause, we could well...
U.S. Decapitalization, Easy Money, and Asset Price Cycles
In Matthew 25: 14-30, Jesus recounts the Parable of the Talents, the story of how the master goes away and leaves each of three servants with sums of money to look after in his absence, He then returns and holds them to account. The first two have...