Lessons from the UK

Here is an entry from Martin Wolf's Financial Times blog that is relevant to the US (and all other countries):

The lesson of the past is that inflation targeting failed. This does not mean that it is impossible to target inflation successfully. The evidence is that it has worked, so far. But stabilising inflation has not, in practice, stabilised the economy. On the contrary, success with inflation helped destabilise inflation itself, as we now see, by boosting a credit explosion, foolish risk-taking and ultimately a financial meltdown.

Within its two-year policy horizon, the monetary policy committee had to ignore the risks of such long-term feedback effects, via credit, money and asset prices. They were unsustainable processes. But when they would break was unpredictable. Yet, in hindsight, policy should have taken them more into account. This could have been done by adjusting interest rates or by regulatory means.

This lesson of the past also relates to the challenges ahead. Again, will it be possible to manage the powerful destabilising processes we see? The economy, the public finances and indebted homebuyers have suffered large negative shocks. Deflation is the immediate fear. But one must also ask what role inflation might play in redistributing these losses in future.

A big part of the answer depends on whether the UK government remains a triple-A rated sovereign borrower.

In short, Milton Friedman's thesis that "monetarism" was the solution to financial control is wrong. Unfortunately we are all the sad guinea pigs who are struggling to survive this in vivo experiment. Please, please deliver us from the hands of ideologues and please, please let us be led by pragmatists!