By Steven K. Beckner

JEKYL ISLAND, Ga. (MNI) – Philadelphia Federal Reserve Bank
President Charles Plosser said Friday that the Fed needs a dose of
“humility” as it assesses what kind of monetary policy the economy
needs.

Plosser, in impromptu remarks on the 100th anniversary of the
secret meetings on this island that led to the creation of the Federal
Reserve system three years later, said the Fed will probably “pat itself
on the back” following the financial crisis and recession — just as the
Fed did toward the end of the Great Depression in the 1930s.

Earlier, Columbia University President Charles Calomiris and
Carnegie Mellon University professor Allan Meltzer retraced the early
history of the Fed and the major mistakes it made.

Though created after the Panic of 1907 to prevent future crises,
they shared the now widespread view that the Fed caused the Great
Depression by first running an excessively easy and then an excessively
tight monetary policy.

Yet, as Calomiris noted, at the end of the 1930s, Fed officials
were taking a “self-congratulatory” attitude toward the job they had
done during the 1930s.

Plosser, who will be a voting member of the Fed’s policymaking
Federal Open Market Committee next year, said he has “no doubt that at
the end of the crisis of 2008-2009, the Fed will pat itself on the back
for a job well done” as in the 1930s.

And he predicted that the debate over the role monetary policy and
other factors played in the recent crisis will go on for years, as will
the debate over the Great Depression.

“There will be a debate for years about whether the Federal Reserve
undertook the right policies or the wrong policies,” said Plosser.

And so “humility is in order here,” Plosser said, adding that it
will take a long time to understand “whether we got it right or not.
There’s a lot of history left to be written.”

Calomiris argued that the new round of quantitative easing approved
by the FOMC on Wednesday is unwarranted.

Meltzer recalled that the Fed’s response to what it perceived as a
possibility of deflation in 2003 “led to zero real interest rates” and
the subsequent housing boom and bust. He suggested the Fed is now making
the same mistake again.

“The current attention to deflation increases the problem of
increasing excess reserves and avoiding inflation in the future,”
Meltzer warned.

** Market News International **

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