Today’s WSJ lead editorial “False Savior” buttresses my contention that the Fed’s monetary approach to the “liquidity crisis” may be the wrong recipe.

In case you don’t subscribe, the editorial states:

Even if you expect a recession, relying on the Fed as savior is a mistake. Monetary policy is only one economic policy lever, and it has to be used with care. The other, better tool is fiscal policy — specifically a tax cut. On present Washington course, we are falling back into the 1970s’ policy mix of easy money amid tax increases. Whenever the economy slowed in the 1970s, everyone clamored for the Fed to ease. The result was ever shorter recoveries amid steadily rising prices.

The better policy mix is the one implemented by Ronald Reagan and Paul Volcker that broke stagflation in the 1980s. The Fed restored dollar credibility and avoided asset bubbles, while tax cuts spurred incentives to work and invest. Even on Keynesian grounds, a tax cut now makes sense if you’re worried that the housing recession will slow consumer spending. An across the board tax cut on marginal personal and corporate income tax rates would also attract capital from around the world, increase the demand for dollars, and thus make the Fed’s job easier.

The ball is lying on the ground. Which GOP candidate will pick it up and run?

Just because it’s usually liberal Democrats who demonstrate ignorance in basic economics, it doesn’t follow that Republicans are necessarily more enlightened.

Don’t forget, it was Richard Nixon who implemented wage and price controls in 1971.

Now another Republican president wants to implement interest rate controls. Go figure. If he actually goes through with it, the damage done to the lending market may far exceed that of the misguided Nixonian policy. 

Perversely, Fed Chariman Ben Bernanke seems to be considering making the whole thing irrelevant by cutting the prime rate even further. But in the face of a weakening dollar and higher inflation, this action would be just as damaging.

It all demonstrates the arrogance of Washington entities. They believe they can control market forces by fiat, when in fact this belief usually leads to unwanted consequences which are usually more severe then the political problem they’re trying to solve.

Why it doesn’t occur to them that the only real positive thing they can do is to cut taxes is a mystery. And no, I don’t mean a “temporary stimulus” that Martin Feldstein advocates (he drinks from the same Beltway water supply, even while at Harvard), but a real tax cut, preferably a corporate tax cut, but also income taxes.