Mark Thoma makes some sense:
We don’t need a recession. If the Fed determines an interest rate cut is needed to keep the economy moving toward full employment, then it shouldn’t hesitate to implement the policy because it believes it would send the wrong signal to financial market participants. I hope we don’t get so caught up in our zeal to make sure people learn the right lessons from all of this that we allow “bad investments in the past” to bring about “the unemployment of good workers in the present.”
I encourage you to read the whole thing. There are two things to consider when arguing that the Fed can’t cut rates because of “moral hazard.” First, to what extent are market corrections (like the bubbles before them) driven by psychological cues? (i.e. Aren’t overly cautious investors likely to assume too much risk and over-correct on the way down as they did on the way up?). And second, haven’t the worst of the lenders been driven out of the financial market already? (Larry Summers made this last point on This Week while cautioning that the crisis isn’t over yet).
Via Andrew Sullivan, a roundup of a minor blogosphere debate about FDR and the more, uh, “creative” ways Roosevelt made economic policy. Pejman Yousefzadeh of Redstate asserts that the relevant lesson to be drawn from this is to beware of an unchecked Executive:
I don’t care how long ago this pathetic and frightening policymaking fiasco occurred. It is appalling that it ever happened and in order to make sure that no President ever again thinks of arrogating unto himself/herself the authority to engage in command-and-control decisions concerning issues best left to the market, it behooves those of us who actually are serious about policymaking and historical lessons attendant to policymaking to point out such travesties for the historical record . . . the better to avoid such trainwrecks in the future.
I’ll just point out that the sort of “policy making fiasco” Yousefzadeh is talking about is avoided by investing that power in the Federal Reserve. As Kevin Drum noted, the idea of messing with the price of gold was a way of controlling inflation, a task we now invest in the Fed Chairman. There really isn’t any danger of a president going around setting the price of milk and iPods (see: all of the 1990s). So it’s agreed: markets know more about the economy than the president, so “boo!” to price controls. Fiscal policy gets left up to an unelected, former Princeton econ professor. Deal.