Monetary policy became more difficult to characterize during and after the mortgage foreclose and financial crises because of a shift to a new credit policy focused on private sector credit and that relies on traditional commercial banking strategies. The new credit policy broke the tight link that had existed between Fed credit and its effective monetary base, the monetary base that affects monetary aggregates. The Fed has adopted an exit strategy, but the discretionary powers that it followed remain in place as does a mistaken policy on the payment of interest on excess reserves.

This paper examines the apparent contradiction of diminishing returns to labor due to procyclical real wages and labor productivity. The paper shows how this problem arises using Cobb-Douglas production function estimates for the private business sector in the United States during the period 1948-73. The difficulty with this evidence is that it ignores the cyclical pattern is taken into account, the resulting estimates indicate diminishing returns to labor. More important, the results show that procyclical real wage and productivity are consistent with the theory when the cyclical behavior of factor employment is taken into account.