On that note, I think I’m going to enjoy a nice spring day since we finally have one.
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That’s a pretty broad term. I think it’s clear that the great majority of economic decisions in the US are made by private parties.
Do you think economic decisions made by private parties can be (heavily) influenced through policy decisions made by the Federal Reserve - like, say, when the Fed buys Treasuries to depress interest rates, which has the effect of pushing investors into riskier assets which then get bid up because there’s more cash in the system than there would be if the Fed was sitting on the sidelines and let the free market determine interest rates on its own?
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Definitely “influenced”. How heavily varies. I think the gov’t should influence private decisions in some cases.
I was objecting to the overly broad “controlling the economy”. I’m so old I can recall stories about the USSR 5-year plans that specified how many one-liter glass containers of a certain shape would be produced. That’s controlling the economy in my head.
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So long as the gov’t levies taxes on a corporation (and other business entities), the gov’t is going to have at minimum an indirect influence on the economy.
Do we have USSR-style economic control? Of course not.
Do individuals and businesses make the same economic decisions with interest rates crammed down through the Fed’s repeated rounds of QE as they would if short-term interest rates were say 5% and the 10-year note were at say 7.5%? Also, of course not - but that’s what we have right now because of Fed intervention and Congress handing it more power to buy assets in the name of “saving the economy from collapse.”
The government would still have an economic influence even if taxes on businesses were set to 0% (where they should be; ultimately, businesses don’t pay taxes). Legal and social decisions at the federal and state level would impact business decision-making.
Is it more pronounced due to taxation? Perhaps, but perhaps not. If the federal government and the state of Louisiana suddenly decided all petrochemical companies with plants in the state had to pay for environmental damage inflicted and health care costs for those sickened by pollution from those plants, … it’s not a tax as we all think about it, but it’s a massive cost that will impact the decision on when/where/how to operate.
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Shouldn’t be involved in the economy as in an Austrian Economics viewpoint? That has failed pretty spectacularly and is the reason we got in the business of government involvement in the first place.
I think most would agree with this, deflation is a really horrible thing. I think the trouble is we didn’t really get a choice. The type of recession tends to dictate the type of recovery and the recent recession typically has quick recoveries, while the type of recession we had in '08 tends to have slow recoveries.
So we’ve got something that is not USSR style, nor is it is lassez faire with a gold standard. Yes, I think fiat money is better than the alternative, and that inevitably means the gov’t is going to influence the economy.
I can agree with the concept of fiat money, say that still leaves most economic decisions in private hands, and agree/disagree with certain decisions.
Yep, I would have been better off with higher rates, my kids would have been worse off. So …
Why fiat money came up, I don’t know. Fiat money isn’t the problem, no matter what gold-standard backers say. The government intentionally picking winners and losers and refusing to clear losing companies from existence - something that happened in 2008 - is a problem, though. So is repeatedly choosing not to prosecute anyone for what happened, while issuing relatively token fines that let all those people keep the vast majority of the wealth they accumulated.
But … your kids and interest rates.
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Deflation is a boogeyman.
If you’re talking about the people who brought us the mortgage fiasco and the credit collapse, I agree with you. Somebody should have gone to jail. Others should have been fined into poverty. But, that’s not the first image that jumped into my mind when I saw
in the context of our current inflation.
I’m less clear about this one. Maybe you mean they should have let Bear Stearns go into bankruptcy? Or, you’re talking about auto companies? Or, …?
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The Fed’s role in 2008 should have been limited to ensuring the proper functioning of the financial system. [Well, taking it back before that: the Federal Reserve shouldn’t have been irresponsible suppressing interest rates, which enabled the 2008 crisis - but I only have 2 1/2 months before my next hip surgery, I’d like to spend it semi-productively on other stuff.] When companies failed, the Fed’s role should have been to ensure it didn’t cripple the financial system and to intervene only to the point that it ensured proper functioning while other companies stepped into the void. Once that happened, the Fed needed to butt out.
Instead, the Fed spent time picking and choosing who was going to benefit. Companies that engaged in irresponsible practices were rewarded with pieces of failed companies + an implicit guarantee of protection from the Fed. That increased concentration of assets in institutions deemed a systemic risk to the system (which was supposedly bad), which then made them even more of a systemic risk (TBTF).
I don’t care if the Fed made money on Maiden Lane I-III. It was beyond the scope of (what should be) the Fed’s authority. Its job is not to speculate in assets of other companies and ensure asset prices don’t fall below some level deemed acceptable. If a pile of assets is deemed trash by the market, it’s not the Fed’s job to sit on them until someone will pay a “more fair” price. When the Fed is intervening like that, it’s implicitly picking winners (we’ll pay you folks a price so you don’t lose money and you can retain your superior market position) and losers (the rest of you who’d take it for less with the chance for a future gain and might grow into a larger market share? Fuck you all).
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Especially if someone knows which way The Fed will be going before it’s announced.
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In what way? It’s a lot more straightforward how to get inflation from 8% to 2%. It’s a lot less so to get inflation from -2% to 2%.
Your post says the Fed had a role “to ensure it didn’t cripple the financial system”, but it went beyond that. You know where the line is. I read a bunch of articles and a couple books at the time. I’ll bet enough were written to fill a substantial bookshelf. I think to really get into this we need to name names and make credible arguments about alternate timelines. I gave you one name, you didn’t pick up on it.
The Fed is also supposed to regulate banks. Greenspan famously said that the market would punish bad lending and the Fed didn’t need to do anything about it. He later said his thinking had “a flaw”. He should have known that bankers weren’t keeping the risks, they were off-loading them on people who didn’t understand, but were lulled into confidence by salesmen and by rating agencies that didn’t understand what they were rating. So I see the regulator not using the powers he had.
And, we can talk about overnight repos that were used like checking accounts but didn’t have the protections that come with real checking accounts. How much of the credit crunch was the result of a modern bank run related to them? Maybe looking the other way while financial institutions did an end run around banking regs played a part.
But, I’ll stop there. The quote at the top is relevant. I think we’d need to revisit much of that bookshelf to get the pro and con arguments on lots of stuff. I don’t have the time to do all that reading.
My comment was about the current situation. I think complaining about the gov’t “controlling the economy” has two parts. The first is “Should it do anything at all to influence financial decisions?” and the second is “if it has a role, is it doing the right things today?”. I think it inevitably has a role. So I don’t complain about the fact it does stuff. I can think about what looks like better or worse decisions
Deflation is the price correction that takes place when asset prices become inflated above their normal value.
Think about it. If “broad deflation” is going on, how many people are putting off purchases of goods and services indefinitely because “it will be cheaper later?” They don’t. If you need a car, a refrigerator, a furnace, roofing work, a new machine to make widgets, etc. and it’s an immediate need, you’re not waiting months and months because well, it will be cheaper later. What you will hold out on buying is more Beanie Babies, more trading cards, and other (wildly) overpriced items for which you think the asking price is mismatched with their actual value.
Actually, I did but I thought you would have recognized the flaw with your point. You said you’ve read a whole lot of books on that time. Maybe go back and read some of them again and see if you recall the errors that led to future problems that need more “solutions” that created even more problems that still exist today.
To the point about the current situation: the Fed Funds rate is still pinned at 0.25 - 0.50% despite 8% inflation, because the Fed was so hell-bent on getting 2% inflation and not achieving it for years that it explicitly stated it was willing to let inflation run above that mark for a while to make sure it got it. Hey, they got it and a whole lot more - and it thinks it can now get it back under control and not shock the economy in a negative manner.
It can’t. Neither can it afford to let long-term bond rates run over 3% or more because a slew of companies can’t afford to borrow at that rate - meaning, the Fed can choose to let inflation blaze through the economy, or it can choose to get it under control and sacrifice some companies that otherwise wouldn’t be in business except for the Fed’s artificial suppression of interest rates. Both of those have significant negative consequences.
Feel free to opine on who’s getting sacrificed and why, and provide your own idea for a solution that wouldn’t cause problems if you have one.