Odd Lots How An Old Banking Regulation May Have Driven The 1970s Inflation
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Oct 16, 2023 Itamar Drechsler, a finance professor at Penn's Wharton School, dives into the complexities of inflation from the 1970s, linking it to Regulation Q—an old banking rule that skewed monetary policy. He explains how this regulation created a counterproductive cycle where rate hikes hurt the supply side rather than curbing demand. The conversation also highlights the evolution of banking practices, underscoring lessons from the past that remain crucial for addressing today’s inflation concerns.
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Standard 1970s Inflation Narrative
- The standard narrative blames the Fed's insufficient response to rising inflation in the 1970s.
- This narrative suggests the Fed's inaction led to a loss of credibility and a wage-price spiral.
Regulation Q and its Purpose
- Regulation Q (Reg Q), a banking regulation, capped interest rates on deposits.
- This regulation was initially intended to prevent excessive competition and bank failures.
Reg Q as Monetary Policy Tool
- Starting in 1965, Reg Q's cap became a tool for monetary policy.
- This was part of a broader trend of credit controls in developed countries.