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Question

Alexander Hamilton’s National Bank proved to be the forerunner of today’s Federal Reserve Bank. With interest rates at 40-year lows, the only option remaining to the Federal Reserve Bank to stimulate the economy with is to print money. This however, risks sending the dollar sharply lower and raising the costs of imports and inflation. With America so dependent on imports, is this wise? Or should we just let the business cycle run its course, and quit trying to manage it?

Answer 1

Ask 5 different economists and you'll get 7 different answers.

Milton Friedman and the Chicago school has long argued that the Fed should do nothing about business cycles; that it should just keep the money supply growing at a steady rate:

http://en.wikipedia.org/wiki/Monetarism

http://en.wikipedia.org/wiki/Chicago_sch...

They reject the arguments of the Keynesians who argue that without government intervention, the economy will never achieve its full potential:

http://en.wikipedia.org/wiki/Keynesianis...

Consult your prejudices and make a choice. (BTW, just to make things more interesting, no one doubts that Keynes' theory, that on its own the economy will not always be at its optimum, is correct. The question is whether real governments can do any better when they intervene; who gets hurt and gets the benefits when they try or don't try; etc.

There is also the tension in that the Chicago School wants small governments that are out of the economy completely while the Keynesians recognize that governments are big, and have a big impact on the economy no matter what they do, so they might as well take action for the better.)

Answer 2

If the Fed or the Govt. Adminstration were so powerful in any country to arrest recession or control inflation in the face of any and all kind of economic scenarios and shocks, recession and inflation would not have occured in the first place. So, do not have an illusion of all might Fed or the Treasury. The people of erstwhile Soveit Russia and the people of India under Nehruvian Socialst State have already experienced how miserable is the economic performance of their all imposing all powerful goverments. These social institutions like Govts and central banks can do very little but have to show that they are very busy solving economic problems of recession, unemployment and inflation etc. so that the common people do not lose faith in these institutions and get depressed and panicked.

Yes, you have to tolerate the business cycles created by natural mismatch between the aggregate of individual actions on the demand side and the aggregate of individual actions on the supply side all over the country and all over the World. You can only hope that the recession part of the cycle is short duration and less acute. You can only hope that the Fed and the Treasury / Govt. does not aggravate the problems by their actions. But you be rest assured that inflation and recession and emloment gets corrected faster whebn the demand supply factor have a free interplay. In inflation is rising, sooner or later it will start peaking and then falling. If recession is intensifying, sooner or later recovery will start. and expansion will follow. Even the high and rising petroleum prices has to loose steam on its own in the face of falling value of the currencies against which ouil is sold or commercialisation of alternative energy and material sources and technologies. Food prices will also have to go down as the adjustments in resource allocation takes place and productivities increase again. The cumulative earnings from oil sales by oil producing countries will need to be spent and trigger a spurt in demand growth soon for the world economies to benefit from.

Yes, for a score of months or a couple of pairs of years, you and I will go through major pains.

Economic theories do provide for some relief. But the application of economics to solve Worldwide economic imbalances is not a mean task.