In the 1970s, the Federal Reserve reacted to soaring oil prices by creating more money and spreading it around. When you have more money, it doesn't hurt so much to fill your tank. But when everyone suddenly finds themselves with more money, the consequence is inflation. In the 1970s, instead of seeing just the price of gas climb, we saw the price of everything climb.
Today's Fed faces the same temptation. It could ease today's discomfort by rapidly expanding the money supply, and some experts (including Meltzer) think it has already made that mistake. This course is particularly tempting because it could also keep home prices from falling further.
But the remedy is illusory. Homes are not worth what they used to be, and for the Fed to attempt to disguise the fact would create even more uncertainty in a turbulent market. That, in turn, would merely postpone the day when prices hit the inevitable bottom.
When you have a loss of wealth, the best way to cope is to accept it and adapt to a lower standard of living, sooner rather than later. Sending out rebates, eliminating gas taxes, bailing out homeowners and accelerating monetary growth, among the proposed remedies, do exactly the opposite. They spare us the obligation of dealing with reality by making us feel richer so we can keep on as we were before.
But they don't change the stark fact that we are poorer now and will remain that way for some time. And they ultimately backfire by wasting money, igniting inflation or both.
In the long run, we will adapt to the new realities, the economic impact will moderate, and the pain will fade. Till then, our least destructive option is to do something no politician would dare suggest: Suck it up.