The Only Winning Move is Not to Play
The 5-year old transcripts of Federal Reserve Board meetings . Bernanke & Geithner basically yawn at concerns raised about housing prices and mortgages.
Let's be clear. Unlike most of those who are likely commenting on this, I do NOT blame these folks for being wrong about the direction of the incredibly complex economy, and how one or two factors might influence the whole. My sense has always been that it is impossible to be consistently right.
What I do criticize is the hubris of making major top-down Federal policy decisions that require that these folks be consistently right. It's simply madness, and I am exhausted with the continuing reaction of both the media and most politicians that if we only had the right folks making these decisions, all would be well. The reality is that these decisions are impossible to make, and will virtually always lead to gross mis-allocations of capital and resources in the economy that lead to recessions.
Update: Here is one example
JUNE 28-29: In summarizing Fed officials’ views, Bernanke notes how it’s getting more and more difficult to make forecasts, describing the economic situation as “exceptionally complicated.†Since housing is particularly hard to project, Bernanke calls it “an important risk and one that should lead us to be cautious in our policy decisions.â€
So, this seems like an admirable statement of humility. Given these remarks, the group did nothing, right? Of course not ... they raised interest rates a quarter of a point.
Jim Clay:
So are you recommending abolishing the Fed then? It is far from clear to me that that would be better than having a flawed Fed.
January 12, 2012, 3:51 pmArgus:
Also, wouldn't raising interest rates have been the proper thing for them to do at that time, considering that it would presumably make easy money - at least a quarter of a point - harder to come by? Only a slight move, then, does seem reasonably prudent, as opposed to, say, raising interest rates by 5 points suddenly, no? Perhaps I am missing something obvious, as I freely confess that the Fed's actions and motives are a bit opaque to me.
January 12, 2012, 4:43 pmCraig:
So are you recommending abolishing the Fed then? It is far from clear to me that that would be better than having a flawed Fed.
It isn't immediately clear to me why we need a central bank when we seem to get along quite well without a central furniture store or even a central supermarket. Banks sell products to consumers -- they pay some to deposit their cash holdings and charge others to borrow those holdings.
If it's all honest, why would master control be necessary?
January 12, 2012, 5:46 pmtxjim:
The Fed can (and should) be replaced with a simple computer program that buys or sells bonds based on the price of gold, in order to maintain stability of USD with gold. That one little step would solve so many problems. But it removes power from the same assholes so it will not happen without a fight.
January 12, 2012, 5:51 pmPonzi Claus:
Very smart post, well said. END THE FED.
January 12, 2012, 6:04 pmMesa Econoguy:
This raises 2 different important issues:
“Bernanke notes how it’s getting more and more difficult to make forecasts, describing the economic situation as “exceptionally complicated.””
Let’s separate the 2 parts:
“Bernanke notes how it’s getting more and more difficult to make forecasts”
Ben is correct, not in the least part due to the fact that government agencies themselves have perverted and distorted economic measures under pressure from other government actors to sell their story, whatever that story is (see unemployment claims today, vs. last Dec. reading http://www.zerohedge.com/news/massive-beat-not-so-fast-morgan-stanley-warns-42000-jobs-due-seasonal-quirk )
and
“describing the economic situation as “exceptionally complicated”
This complication is due almost entirely to government interference in said economy, especially right now. How’s that 9% unemployment working out, Barry?
They have no one to blame but themselves. And other government agencies.
January 12, 2012, 6:16 pmTed Rado:
One wonders where we would be if the USG had not become involved in the housing and banking business in the first place. Banks make mortgage loans to people deemed credit worthy. A substantial down payment and a credit check are required. All of a sudden, the USG says everyone is entitled to a house whether they can afford it or not. Then they set up Fannie and Freddie, twist bankers' arms to make shakey loans, etc. With F & F buying up the shaky loans, plus the arm twisting, the banks say "what the hell, we'll play along". The end result: a royal f---up. The people the USG claimed to be helping are bankrupt and out in the street. Some idiots in DC should be in prison.
Bottom line: Let competitive free enterprise run the country rather than the morons in Washington. Even the Chinese have learned that free enterprise rather than government diktat leads to prosperity.
Now, to try to correct their own f---ups, the USG manipulates interest rates. The result? My investment income is now virtually nil. The USG prints money and ultimately we'll have inflation and wipe out my principal as well as my interest income.
Meanwhile, the USG spends money like a drunken sailor. They will no doubt print their way out of debt.
A question. If the USG prints money to get out of the hole of their own making, who will buy their bonds in the future?
Going back to the beginning, if the USG had stayed out of all this meddling in the economy, we wouldn't be in this mess. Where does anyone get the idea that a bunch of selfserving idiot politicians can run ANYTHING right?
January 12, 2012, 7:23 pmTed Rado:
One other point: I used to think that I was being too critical of the USG. Apparently I am not alone in my view. The Congress has an approval rating of 11%. My only comment is that that number is 12% too high.
January 12, 2012, 7:28 pmRob:
I don't blame him for being wrong (or right). I blame him, and other high level institutions, for thinking that they could.
January 12, 2012, 8:36 pmBenjamin Cole:
There is a rising school of monetarism, Market Monetarism, that promises a far more successful, rules-based monetary policy.
Genuflecting to gold , as Milton Friedman told us, is just for nuts. The world had even worse booms and busts in the gold days. and whole nations collapsed seeking and then spending gold. That is the most primitive type of Theo-Monetarism. Why not a silver standard? Why is there always braying for a gold standard but not a silver standard?
Having no Fed is also highly problematic. Before 1913 there were banks that issued their own currency, and there was also a lot of counterfeiting, and also a lot of booms and busts.
As for the Fed being a failure---well, it has been way too tight lately, yes, a policy error. I am dismayed also at the obvious policy errors of the Fed.
But every federal agency makes errors. Should we end the US Army as they cannot prevail in Afghanistan? Should we wipe out the US government as we have created the globe's foremost exporter of opium in Afghanistan, an Islamic state and not a democracy? Do the photos of Marines urinating on dead Afghans---sure to result in us exiting Afghanistan amid baleful stares---result in the ending of the US Marines?
I never saw Fed officials urinate on a bankrupt bankers, but maybe they should.
January 12, 2012, 9:25 pmArgus:
Ted,
"A question. If the USG prints money to get out of the hole of their own making, who will buy their bonds in the future?"
Presumably, if the USG's guns and bombs still hold sway to protect those printing presses, quite a good many people, I would think.
"Where does anyone get the idea that a bunch of selfserving idiot politicians can run ANYTHING right?"
Well, a lot of well-intentioned people thought it could work better than a few self-serving monarchs a few hundred years ago.
January 12, 2012, 9:52 pmNot Sure:
"But every federal agency makes errors."
How often do the people in the agnecies making the errors get fired? How often do the agencies' budgets get cut when the people taxed to fund them are getting pay cuts or layoff notices? How often do the agencies go out of business (read: get shut down) for lack of concrete results?
Rhetorical questions, I know.
January 12, 2012, 10:10 pmBP:
"[I]f we only had the right folks making these decisions, all would be well." (Dowdified quote)
Exactly right! Find John Galt, and make him lead us! Make him! By force if necessary!
January 12, 2012, 11:38 pmjj:
"Given these remarks, the group did nothing, right? Of course not … they raised interest rates a quarter of a point."
In that situation, there's really no such thing as 'doing nothing'. Leaving the interest rate fixed, when that's your tool, is just as much of a choice as changing it.
On the other hand, if the Fed had a different policy such as "fix the interest rate at x% and never touch it" -- well that would be good in the sense that it's a rule-based rather than judgement-based policy, but it's bad in the sense that a fixed interest rate is a terrible choice of rule-based policy.
I second the call for Market Monetarism. It's what "end the fed" people would choose if they understood monetary economics.
January 13, 2012, 6:32 amtxjim:
For another interesting peak inside the minds of the Fed, go to Jude Wanniski's web site polyconomics.com
Read the Correspondence section, particularly the emails between Jude and Ben Bernake.
January 13, 2012, 8:03 amJim Clay:
Benjamin Cole is exactly right- we had more and worse busts in the gold standard days.
While I do think that government intervention made things worse (e.g. Fanny and Freddie), I don't think the government caused the problem. The problem seems to be over-leveraging and making the same thing the collateral on many deals. When there's a dip and everyone tries to collect the collateral, the s#)* hits the fan.
Private businesses would, on their own, over-leverage, because the more they leverage the more money they make in the good times. The one thing that would help is the fear they would have of bankruptcy if they knew that there was no way that the government would bail them out if they failed. I don't think that would be enough to prevent most companies from over-leveraging, though. If I am right, a completely free market would not solve the problem.
January 13, 2012, 8:31 ammorganovich:
craig-
"It isn’t immediately clear to me why we need a central bank when we seem to get along quite well without a central furniture store or even a central supermarket. Banks sell products to consumers — they pay some to deposit their cash holdings and charge others to borrow those holdings.
If it’s all honest, why would master control be necessary?"
a quick lesson for you in fractional reserve banking.
you run craig's bank. you take in $100 in deposits. you make $95 in mortgage loans. their credit quality is flawless, everyone pays, you have no bad debt issues.
you are still highly vulnerable. you have what is called a timing mismatch. you lent money out for 30 years. you cannot call it back. but depositors can ask for their money any time. if i come in and demand my $10 back, you have a problem. you are not insolvent. you have plenty of assets to cover it. but you are illiquid: you do not have liquid assets to cover it.
so, you can sell a mortgage to another bank to raise cash or you can use it as collateral to borrow from another bank and cover you needs UNLESS they are having the same problems. sometimes, the whole system can become illiquid.
that is when you NEED a central bank. they act as a lender of last resort and guarantor of systemic liquidity.
absent that, you get massive cascading failures of otherwise solvent banks.
further, you need CB to control money supply. there really is no other way to do it. using a gold standard is disastrous. it led to repeated depressions as it contracts money supply right when you need it.
letting banks just create money as they like will lead to hyperinflation or fragmented currencies with huge costs.
there is no good option to a central bank. you pretty much need to have one.
the problem is not the existence of a CB, it's the mission creep they have taken on.
a CB should ensure price stability (or maybe very moderate inflation in the 1-2% range) and act as lender of last resort. that's it. they should be politically independent. nowhere in their mandate should the word "economic growth" or "manage the business cycle" appear.
there is no other alternative to a CB that does not have 5X the problems. we just need to pare back the CB's role. once you get them trying to drive growth, you are in deep trouble (as we are seeing now).
calls for market monetarism are disastrously misguided. that's been tried. take a look at weimar. targeting nominal income leads to hyperinflation. sometime (like now) you are pushing on a string. printing money for which there is no demand is no better than making 100 million 8 track players. it's not going to move the economic needle. it's also a horrendous tax on savers at the expense of borrowers which hamstrings investment, drives rates way up, and massively ups leverage in the economy while running down savings, all of which greatly increase volatility, risk, and the size of the ultimate crash.
it's that sort of fed driven growth thinking that got us into this mess.
we need the fed to act as it did under volcker, not try to control the business cycle.
January 13, 2012, 10:35 amTed Rado:
Argus:
I am certainly not advocating that we exhume George III and restore him to our throne. I simply find it unbelievable to suggest that we can't do a lot better in managing our affairs than we are currently doing. Some have suggested a balanced budget ammendment, for exmple. It seems to work well here in Oklahoma.
The present system rewards politicians who spend money that will not have to be repaid before they leave office. This encourages buy-the-vote spending.
The DOE support of all sorts of kooky schemes that anyengineer can show to be absurd is a fine example of USG incompetence and waste.
I don't believe people will continue to buy USG securities once is is apparent that they will be inflated away rather than repaid in good faith. Look at Italy et al.
January 13, 2012, 1:15 pmmorganovich:
benjamin-
we already had a CB strategy that worked: tageting price stability. the fed under volcker and the german bundesbank were VERY successful with this strategy. market monetarism is a disaster. it has already failed repeatedly as an ideology. that's how you wind up being zimbabwe or weimar. having a fed that targets growth ALWAYS ends badly. it was that sort of "mission creep" that got us into the current mess.
its' pretty much what greenspan did. he tried to control the business cycle. printing money to up incomes in recession just prevents the imbalances from getting dealt with. you need the bust phase. trying to avoid it is like curing a hangover with crystal meth. might work for a minute, but there will be hell to pay later.
look at what is happening now. money has been printed and injected into the economy is unheard of amounts. it's not doing boo. it's pushing on a string. you cannot create demand like that.
far from being a new idea, market monetarism is an old idea, and one that has caused some of the worst financial disasters in history. it makes keynsianism look sane in comparison.
January 13, 2012, 1:50 pmArgus:
Ted,
As per Mencius Moldbug, I would side with you against the exhumation of G III, the Stuarts would be preferred if we went that route. :)
I see no alternative to the system of perverse incentives you cite while our democratic republican electoral system remains paramount, with a citizenry largely ignorant and/or misinformed. If this is the best system of government we can do - and it may be the best the world has yet tried, as we Americans like to boast - we're screwed - eventually (but we're all dead in the end, as the saying goes). Sadly.
Agreed on the DOE.
Perhaps you are correct on the securities front, as I've said, I'm not too sophisticated on monetary policy, etc., but I tend to think that the promise of a strong America, at least in appearances, would make them viable much longer than you (and perhaps longer than most realists should), but that if nothing else would sustain the market then, wouldn't it?
January 13, 2012, 1:56 pmmorganovich:
benjamin-
also: market monetarism creates debt busts. think about it. if in recession, you know they will print money hand over fist and inflate massively to get incomes up, then any borrower knows he's getting bailed out. we used to call this "the greenspan put". why not lever up and take crazy risks if you know you get bailed out? the moral hazard in it is horrendous.
you get less savings and more leverage which ups risk massively on both an individual and systemic level and leads to long, hard to clean up busts (like this one).
i'm really surprised how many people seem to thing this is a) a new idea and b) a good idea.
it has always been and always will be a disaster.
January 13, 2012, 1:57 pmArgus:
"its’ pretty much what greenspan did. he tried to control the business cycle. printing money to up incomes in recession just prevents the imbalances from getting dealt with. you need the bust phase. trying to avoid it is like curing a hangover with crystal meth. might work for a minute, but there will be hell to pay later."
This "mission creep" as you describe it relates to the perverse incentives Ted and I were discussing. This type of policy seems to be a product of short-term political calculation, perhaps at the expense of the long-term. I see no viable way for the Fed to be "independent" as you prescribe, so long as it is a product of the Congress and the President - just take a glance at the "independent" Judiciary, which is also such a product.
January 13, 2012, 1:59 pmJ. W.:
morganovich: "i’m really surprised how many people seem to thing this is a) a new idea and b) a good idea. / it has always been and always will be a disaster."
Could you please recommend some books or articles about this? (that is, the history of market monetarism)
January 13, 2012, 5:50 pmtxjim:
Volcker is often credited as an inflation fighter but most people don't look at what he really wanted to do. He was an old school austerity guy, loved high taxes and tight money. For years he and the monetarist who were firmly in charge of the Treasury and Fed, strangled the economy of liquidity as they attempted to fight inflation. They overshot and led us into deflation. This changed in 1982 when a crisis forced the Fed to ignore the monetarists (led by Freidman). The price of oil dropped so low the Mexican govt did not have enough dollars to pay their creditors (US banks). Volcker had no choice but to buy Mexican bonds with fresh liquidity. Otherwise, several US banks would have went tits up.
The monetarists claimed the bond market would rebel and the liquidity injection would fail. It did not happen that way. The bond market strengthened and the Reagan boom was begun.
Before his death, Friedman admitted he could not explain why the monetarist policies had failed. I love the guy so I was glad to see he was big enough to admit his theories were wrong.
January 14, 2012, 7:27 amTed Rado:
I have a question for all of you. The laws of economics do not seem to be working. Is this due to repeated USG interventions which screw it up? As an engineer, I can't imagine doing calculations while someone (USG) keeps throwing new numbers into my equations.
I have repeatedly heard businessmen complain that they cannot plan anything because of the constant USG flood of new regs, rules, and laws.
Perhaps if we left things alone and let normal economic forces prevail, things would straighten out. Example: the USG f--ed up the housing market. If they then had kept out and let the situation play out, would we now have the problem behind us? The USG keeps promulgating new schemes to try to keep underwater homeowners and lenders afloat. Perhaps taking our lumps and moving on would be better. I am not aware of any experiment with government calling economic shots being a success. Does anyone feel that Soviet Russia or the Chinese great leap forward was a success? It seems as though USG efforts to moderate the economy only makes matters worse.
January 14, 2012, 6:35 pmI Got Bupkis, Fomenter of "small-l" libertarianism:
>>> Benjamin Cole is exactly right- we had more and worse busts in the gold standard days.
The first rule of Coyote Blog is...
Benjamin Cole is never right.
I'm not going to key in on the general issue he raises, but ... go ahead:
Tell me which "bust" any one of you imagines for a single freaking MOMENT was as bad as The Great Depression...?
Hmmm? Hmmmm?
You had more busts, true, but usually they were much smaller and, more critically, far shorter, because market corrections which the boom-bust cycle is performing weren't getting EPHED with by the freakin' Fed, which pretty much just pushes crap into the next election cycle at best, usually giving it time to build in a positive feedback loop rather than having the various waves hit and cancel each other somewhat.
The second rule of Coyote Blog is...
The government almost always screws things up.
Laissez-faire works far better for the most part.
January 15, 2012, 1:36 amtxjim:
Ted - "The laws of economics do not seem to be working" . The laws are still there it is just that we struggle under mismanagement of the most important unit of measurement in the world - the dollar. Trade between people or nations is screwed up because of this one simple little concept.
Imagine the difficulty of building anything when your unit of measurement fluctuated or "floated" each day. This is the problem we have with a floating dollar. Floating currencies make it extremely difficult to plan ahead, similar to the difficulty of building a bridge and you were forced to adapt to a foot being 12 inches one day and 11.5 inches the next day.
My Grandfather gave me a metal ruler stamped with a date of 1927. It is the same exact length as a ruler we can buy today. The money he bought it with has changed over the years. It buys less. He told me when he was a young man he paid about 10 dollars for a collection of machinist tools which in 1927 dollars equates to about half an once of gold. Guess how much it would cost to replace all of these tools today? I estimate 700 dollars. No need to buy new tools though because his 1920s & 1930s versions work just fine.
If my Grandfather had given me ten dollars of 1927 paper money, today I could buy a couple of cheap screwdrivers. A ten dollar gold piece from his pocket would buy the same set of tools as he purchased years ago. It is a crude but hopefully effective illustration of how a stable unit of account can maintain the purchasing power across time. We need to get back to a stable dollar.
IGB - right on brother!
January 15, 2012, 7:01 am