For more on March Madness from a slightly different perspective, check out the articles here and here. Think about the following question: what set of policy choices make this time of year possible? What combination of private institutional choices, laws, regulations, subsidies, and tax incentives create the madness?
Update: some optional readings and more about our discussion last Wednesday.
I see that there's some interest in inflation, so I thought I'd post a few additional links for those who want to read up on the subject of monetary policy. First, a clarification: we do not necessarily want inflation, but inflation will probably occur as the level of spending in the economy increases (this is what the SRAS curve indicates). Spending is the fuel for a modern monetary economy like our own in the same way that food is fuel for people. If we feed a starving person, they may gain a little bit of fat, but they will mostly gain muscle. If we stimulate a depressed economy, a little bit of inflation might occur, but mostly this will produce real economic growth. Right now many people are saying that we need to keep spending low despite the depressed economy because of the risk of inflation. This is a bit like saying we should not feed a starving patient because it is always and everywhere bad to gain fat.
The infuriating irony is that the Fed helped to create a lot of the hysteria over inflation by mismanaging policy. They decided the problem was lack of liquidity in the financial markets, not a weak overall economy, and they then injected so much liquidity that it risked hyperinflation to let it circulate as money. Arguably, this tightened money for the economy as a whole as a result. This article from back during the heights of the crisis shows how the Fed had to sacrifice stimulating the economy and thus allowing a bit of inflation in order to pursue its policy of assisting financial markets (or "bank bailouts" if you will). This article shows that even a bit earlier people already realized that there were problems with the chosen policy. This article explains the progress of the various asset purchasing programs that came to be known as Quantitative Easing, round 1 (QE1), and it shows how once the Fed realized it needed to do more, it basically kept going with the same formula: inject huge sums of liquidity that won't actually circulate as money. Finally, for an article sympathetic to Bernanke, check out this piece.
Update update: This link provides a cool interactive graph that lets you see how the Fed's balance sheet (basically, a list of the assets it buys with the liquidity it creates) has evolved over time. It "pays" for these by issuing liabilities. Usually these liabilities consist of Federal Reserve Notes--hard currency--or reserves that can be easily converted into currency. This stimulates the economy when it is depressed by having more money circulate. However, they created so much liquidity that they couldn't "afford" to allow that money to stimulate the economy, so they had the Treasury borrow it back and also paid banks to keep much of the money on deposit at the Fed. The obvious question: why not just create less liquidity and pay for it by stimulating the economy, rather than creating a laughable amount of liquidity and paying for it by borrowing money?
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