Different Analysis from Chapman at AEI

John Chapman, a fellow at the American Enterprise Institute, has a letter to the editor of the Wall Street Journal Europe about a recent editorial from John Snow. The contrast with Desmond Lachman, also of the AEI, is stark.

Instead, what happened is the Greenspan Fed held U.S. interest rates too low for way too long earlier this decade. Inflationary increases in credit, channeled through the banking system into credit markets, fed the housing boom. But as this boom was not backed by an increase in real savings, it was by definition unsustainable.

Further, because the U.S. dollar is the world's de facto reserve currency, the Fed can "export" inflation for a time. But this too is unsustainable, as over time the dollar must fall, and U.S. inflation and real interest rates rise, to adjust to too-expansionary a monetary policy. More monetary easing is exactly what should not happen now. What we do need is less federal intervention, which breeds moral hazard in the U.S. financial system, and in turn the asset repricing, recapitalization and restructuring Mr. Snow applauds will quickly stabilize financial markets. Additionally, broader tax cuts and lower federal spending will help prevent a recession.