Should the Fed have a consumer protection function?

by on December 16, 2007 at 7:34 am in Economics | Permalink

I’m starting to wonder if the answer should be "no."  Say you’re on the left and you think that banks have screwed over borrowers and that remedying or preventing this injustice should be a top priority.  The Fed is not the place to look to.  Barney Frank was exaggerating when he said: "If I was going to list the top 87 entities in Washington in order of
the history of their efforts on consumer protection, the Fed would not
make it," but he said that for a reason.  Most of all, the Fed looks after the stability of the banking system, and the macroeconomy, which in my view is how it should be.

From a market-oriented point of view, the case for a Fed role in consumer protection is simply that the agency is better informed and more competent than Congress or the executive branch, not to mention more insulated from political pressure.  But that means — as we are seeing today — that Congress will not think the Fed is doing a good job when it comes to consumer protection.  The Fed ends up politicized, and under fire, when it should instead be free to pursue its central mission of maintaining macro stability.  It might be better to let some other regulatory agency go ahead and make the politically-demanded mistakes here.  We don’t want Congress to get into the habit of thinking it can tell the Fed what to do.

How many Representatives are willing to stand up and say: "Voters, I feel your pain, but your behavior was stupid and possibly even fraudulent"?

Have you noticed that significant segments of the press seem to be turning against the Fed?  We live in dangerous times, and it is unfortunate that the subprime crisis exploded in an election year.

I was surprised by Daniel Gross’s piece comparing Bernanke’s Fed to FEMA during Katrina, linked to directly above.  Other than "report the problem earlier," the key question is what Bernanke’s Fed should have done differently.  It would be better to focus on that, but of course that’s a much harder question to answer.  A replacement for Michael Brown — even drawn randomly from a pool of CEOs or regulators — would likely be far higher in quality, a replacement for Bernanke would likely be far lower in quality, and that’s more important than any of the supposed parallels.

Gary Bridgewater December 16, 2007 at 10:09 am

The Constitution guarantees ‘Life, Liberty and the Pursuit of Happiness’. From this wording, the government derives vast powers of protection. They should be the last line of knowledge against well funded external forces that prey on us. If you compare the role of monetary institutions to the Soviet union during the sold war you can see that, in fact, the slow creep of interest rates and unfavorable loan terms has harmed out Constitutionally protected values more than a Bear bomber wing of a troop of Soviet soldiers.
Whose side should the Feds be on? We do not have an anarchy nor should we expect a neutral government – that is not in the Constitution!
This is by no means a new argument or tension but it has slipped a long way. Ignoring some problems can be the same as endorsing them. Lead in children;s toys is the simplest example of that philosophy. Free market versus cheap goods versus balance of payments versus seller restraint versus buyer knowledge versus Government intervention — where is the leverage point and why. Whose “side” is lead paint on?

michael webster December 16, 2007 at 10:49 am

If you look at the FTC’s role in protecting consumers from business opportunity and franchise fraud – a role arguably similar to protection from predatory lending-, you would learn two lessons.

1. It is easy to shut a fraud for failure to comply with regulatory filings.
2. But, the frauds morph into a new but similar scheme.

Since there is no reason to believe that that the Federal Reserve has any more sophisticated understanding of the psychology of fraud than any other regulator, it should be burdened with this responsibility.

Mike Sproul December 16, 2007 at 11:33 am

The Fed’s over-riding function is to put paper dollars into circulation. Period. Do you want consumer protection? Why not try allowing private banks to issue paper dollars, thus removing the monopoly power of the central bank. That would do more for “consumer protection” than any Rube Goldberg schemes concocted by the Fed.

David Johnston December 16, 2007 at 11:44 am

“How was the voter fraudulent?” – assuming that the bank did NOT actually endorse the documents for the borrower or alter them after the fact (a clear case of fraud covered under current statutes) either that signature constitutes fraud (even if by ignorance) or NO FRAUD TOOK PLACE. That fact that the economic conditions changed so that half of the parties that perpetrated the fraud no longer benefit (what if home prices HAD gone up and the homeowner MADE $20,000…?) doesn’t make the original actions any more (or less) fraudulent.

Gary: Beside the fact that the Constitution and Bill of Rights are generally considered to define the role of OUR government vis-a-vis ourselves those rights you mentioned restrict the ability of our government to restrict our ability to pursue life, liberty and happiness (as opposed to ensuring the same for every person). That said, I would be MUCH more comfortable if the government was treated as a “FIRST” line of defense. WE are our own last line of defense. Empirically, government cannot protect us from all known and unknown forces; but if we as individuals take more responsibility to understand the consequences of our actions and accept that bad things DO get past the layer of government regulation, then we will be less likely to avoid pain and loss when that happens.

If in making a large and life changing decision as buying a house I cannot reasonably protect myself I should HIRE (with my money) someone with fiduciary responsibility and unaffiliated with the selling parties to advise and/or represent me. I must also understand that if that person says I cannot buy a home with my income/assets that I pay them, say “Thank You” and move on with my life, saving more money and working on getting a raise so that later I can buy that home I wanted.

Given the proportion of home sales transactions to the general population and the fact that the current mess is only present because of a widespread failure on the part of individuals to look our for themselves as described above, how is more regulation better (cost/benefit) or effective than what I describe above? Given that governments “authorize/process” titles why not require a certified and verified “buyer’s fudiciary agent” signature on a purchase agreement before transferring title?

David Johnston December 16, 2007 at 12:07 pm

Daniel: The issue of information is not necessarily one of access but one of funding (both monetary and non-monetary). I would much prefer the government to tackle lead-paint issues where many of the products come from foreign countries since they can leverage non-financial aspects in getting foreign manufacturers and governments to comply with US law. As your entire point resolves around relatives can you say that government regulation ALWAYS results in weaker assurances? The government is one possible source of assurance for buyers; there are others. The problem with government is that because government regulation is funded indirectly there is less feedback as to the desire/ability of government to regulate a specific area and change is generally slower compared to alternative sources.

There is no silver bullet and ultimately consumer protection comes down to protecting oneself since NO ONE ELSE (government, corporations, even non-profits) really care about you SPECIFICALLY (they care about groups of people and what works for the group may not work for you).

R. Richard Schweitzer December 16, 2007 at 12:47 pm

Reply to the first comment quoted as follows [replies in brackets]:

The Constitution guarantees ‘Life, Liberty and the Pursuit of Happiness’. [The Constitution does NOT “guarantee” anything] From this wording,[taken from the Declaration of Independence – not the Constitution]the government derives vast powers of protection [As drafted and adopted, it created LIMITED powers in the government so defined]. They should be the last line of knowledge against well funded external forces that prey on us. [The Federal Government we have was not “instituted among men” to provide “consumer protection,” which is solely a device to create political constituencies for political ends] If you compare the role of monetary institutions to the Soviet union during the sold war you can see that, in fact, the slow creep [in which direction in which periods?]of interest rates and unfavorable [sic – ??] loan terms has harmed out [sic – our] Constitutionally protected values [the Constitution only limits the use of the mechanisms of the Federal Government – or at least used to; presumably leaving “values” to individual determinations] more than a Bear bomber wing of [sic – or] a troop of Soviet soldiers.
Whose side should the Feds be on? [Try reading the legislation which established and as now modified now defines its functions. The answer lies there.] We do not have an anarchy nor should we expect a neutral [as between what forces] government – that is not in the Constitution! [Au Contraire – that is precisely the point of the structure of the Constitution, as a body of “General Rules.]
This is by no means a new argument or tension but it has slipped a long way. [No, not far away, as the Political Class grows here as it has in France] Ignoring some problems can be the same as endorsing them. [Hardly!] Lead in children;s toys is the simplest example of that philosophy. Free market versus cheap goods versus balance of payments versus seller restraint versus buyer knowledge versus Government intervention [intervention based on what knowledge?]– where is the leverage point and why. Whose “side” is lead paint on? [Reflection after a small sherry and a warm bath will likely lead to the conclusion that physical facts and circumstances in human interactions can not all be reduced to simplistics of “sides” in arguments about dealing with conflicting interests.]

R. Richard Schweitzer
s24rrs@aol.com

mike December 16, 2007 at 2:19 pm

To Daniel Klein:

I’m sympathetic to your arguments about the government not being privy to more information than either side in an argument, but I think you can make a market failure argument still. If coercion can be used to force transparency at lower cost, we may be able to get to a better outcome with government than otherwise. In particular, if the borrower takes costly actions to hide the truth from the lender and the lender takes costly actions to find the truth about the borrower, or vice versa, then the threat of enforcement might be enough to induce the borrower to tell the truth in the first place. If the costs of the level of enforcement required to induce truth are less than the costs incurred first in hiding the truth and second in seeking it, then government intervention improves efficiency.

Note that this doesn’t depend on the government having better information, just using its threat of coercion as a way to induce people to reveal it.

Also my personal sense is that the costs of truth-hiding and truth-seeking are relatively low in the mortgage industry–credit scoring seems to work pretty well–and the costs of enforcement are likely to be high. In other words, I don’t think the logic applies here, but I don’t think the reason you outline is correct.

Daniel Klein December 16, 2007 at 6:05 pm

Mike:

Government enforcement isn’t the issue, it is the rules being enforced. If people want and voluntarily agree to some contextually defined “transparency”, then we may hope government enforces the terms of contract. That’s not “consumer protection” rules. It’s just ordinary contract enforcement. “Consumer protection” rules are ones that restrict the agreements that would-be traders can or cannot make. If the government requires something that its operatives call “transparency”, that would be a “consumer protection” law. Can anyone give an example of where it is good that the government impose such restrictions? The powerful response is, even if the “transparency” is a good thing, why impose it? Where is the argument for government heroics in forcing people to do something that some happen to think would be good for them. All of the virtues and advantages of voluntary processes win this race.

Kolohe December 16, 2007 at 6:55 pm

I may be misunderstanding the argument here but:

Of course the Fed should not have a consumer protection function anymore than the United States Marine Corps should have a consumer protection function; it’s not their friggin’ job. Now there are a whole bunch of people at, for instance, HUD and the FTC whose job *is* to provide a consumer protection function and whom have been absolutely negligent in their jobs for the last few years.

Now to be fair, I still am not sure how much a vigorous enforcement mechanism may have helped, when going against the twin forces of
1) the blind mathematical ignorance of most American consumers these days
2) the dumb lazy greed of the purchasers of these mortgages.

David Johnston December 16, 2007 at 7:01 pm

Daniel: I am not attempting to speak to any particular department or regulatory body but addressing your general point regarding the desirability of government to act as a regulatory and advisory body.

David S. December 16, 2007 at 10:57 pm

Competitive currencies are essentially what we had prior to the Constitution, in the form of colonial scripts. By most accounts, including Franklin’s, it worked magnificently. The problems with it were, 1.) it was expensive and complicated to manage exchange, 2.) it was harder for the rich to exploit the money supply through marginal reserve banking when they actually had to compete. Thus, Hamilton, and his wealthy cronies (who had already run one attempt at a central bank into the ground) managed to get the Constitution adopted (barely) with the express purpose of instituting a central bank. Today, computers and electronic banking would make exchange a simple and inexpensive matter. Competition could solve the rest. The Fed is an anachronistic institution from a mercantilist age. It is time to move on.

Ludwig von Mises December 17, 2007 at 12:15 am

The business cycle is not a feature of free markets. It’s caused when banks create multiple property titles (deposits) to the same property (reserves) for which they have been granted a legal privilege to do so by their largest customer: the government. Crises under such a system are inevitable, providing the impetus for a central bank and a fiat currency with no bounds to the inflation. These are not features of a free society and the rule of law. Abolish the Fed, legalize contracts in gold, eliminate taxation on gold “capital gains” when the paper depreciates, and elect Ron Paul for presidency.

Ludwig von Mises December 17, 2007 at 12:22 am

Raul, there are such economists such as Keynes, and the politicians love and exalt them for justifying their misdeeds. Only Austrian Economics provides the basis for understanding the deleterious effects of the “partial reserve” system on society.

anon December 17, 2007 at 3:18 am

Maybe Tyler’s next post should be: “Should the Fed have ANY function at all?!!” lol

Tim December 17, 2007 at 7:41 am

Many would say that pointing out the Fed is better informed and more competent than Congress or the executive branch is damning with faint praise. When it comes to economic understanding, it doesn’t take much to be better informed or more competent than either one of those institutions. But that does bring us to the point that the Fed is better insulated from the political process. Since the Fed is not chosen by popular election, it does not have to bow to every popular (and frequently uninformed) whim. Congress and the executive branch do not have this luxury. And as we learn in basic economics, people respond predictably to incentives.

Bud Hovell December 17, 2007 at 10:00 am

“[…] one of the problems with the Gold Standard (besides preventing a country from smoothing out the business cycle) is that it is basically deflationary.”

One of the problems with statements like this is that they are decidedly lacking in any factual support.

During the century of trade under the Gold Standard, inflation/deflation were basically zero. The idea that central banking with funny munny “smooths” the business cycle should evoke laughter from any reasonably well-informed observer.

The “business cycle” is a credit cycle which has nothing to do with capitalism, since the only “capital” that exists is in the form of accumulated savings — which is to say a surplus made available only when the rate of consumption is less than the rate of productive (which is to say wealth-creating) activity.

Credit, on the other hand, is issued on the basis of an expectation to repay PRESENT lent funds from FUTURE capital surpluses. If those future surpluses don’t materialize (always a risk in lending) and the borrower cannot pay, the result is a condition called “default”. That is, the borrower becomes insolvent and the lender looses money owing to lack of prudent lending policies — a bad bet made without sufficient collateral and risk premium. Moral hazard inviting borrowers to commit fraud.

The parties to the contract pay the price of this failure under the Gold Standard, but no one else.

Under “modern” central banking, however, this failure is “socialized” — meaning the entire public bears the cost of failure of such contracts (no matter how absurdly agreed) by simply issuing more munny to literally paper over the losses and preserve bankers’ balance sheets. In other words, it’s fraud and it’s theft. Paul nailed that one, and nobody is going to stand up and deny that conclusion. Weasel words justifying the fraud are all we will hear from the usual suspects.

The result is that the munny in general circulations is steadily devalued as lenders habitually borrow short and lend long on blatant speculation.

Voltaire said: “Paper money eventually reaches its intrinsic value: zero.” Less than a century after the initiation of this latest experiment in paper money issued by the state, the currency has lost 95% of its original value. That would seem to be fairly substantial empirical evidence that Voltaire (like the Austrians) was dead right.

Given the FED is charged to provide price stability, one really has to ask what evidence can be offered that it has ever succeeded in that effort. The myth persists that it is “successful” only because Berniers’ principles of propaganda may be relied upon to perpetuate even the most obviously outrageous lies by the State, even though they may fly directly in the face of widely observed and contrary fact.

Like funny numbers produced by the Bureau of Labored Statistics, there is some point at which the charade of perpetual fraud required to issue worthless funny munny in excess of economic expansion becomes ludicrous.

Credit expansion by banks (including central banks) using fractional reserves is no more than an ever-increasing mortgage weighing on future economic activity.

There is only one recognizable aim of central banking, and that is to actively collude with the PRIVATE banking industry to immunize it against its own excesses by passing any significant economic losses onto everyone else.

It is entirely likely that Citibank is now entirely underwater owing to its Tier-3 liabilities which alone exceed its stockholder equity. Having to borrow money from an Arab sheik at junk-bond rates of 11% is conclusive evidence this outfit is fundamentally bankrupt — ah, but don’t expect the FED to let onto that inconvenient truth.

After all, its role is to inspire “confidence” in the distorted financial system. “Con” — as in “con-game”.

Since the FED presided over the longest and deepest American depression — one of its own creation during the immediately preceding “Roaring 20’s” of massive credit expansion — it persists as a mystery how anyone could possible fail to understand that busts follow booms, and no boom is possible unless excessive cash is put into circulation in the form of credit — the mortgage on an unknown and unknowable future. Transferring that risk away from the banksters (good call on that one, Cramer) is the name of the game. The only beneficiaries are the government and the banks. Everyone else is the patsy.

The public is steadily bilked by the current financial “system” (one is inclined to say “scheme”), and it is solely by that measure that the Federal Reserve System may be declared “successful”. Indeed it is, and the cure is far worse than the alleged disease.

Since “money” is — by definition — the highest order good in any economy, the necessity of legal tender laws to make some far lesser good the only means to legally transact business is irrefutable proof positive of fraud, and requires no other.

One truly wonders when a Nobel prize will be awarded for other phony “sciences” than economics — certainly phrenology and astrology seem no less deserving of such honors.

Matthew Butler December 17, 2007 at 11:31 am

The specter of deflation. We’re so accustomed to thinking its terrible and awful and we don’t think about what it actually means. Micro-economics teaches us the best entrepreneurs can sell better products at lower prices. So why wouldn’t we expect prices to fall over time?

Some say its because we have more people alive, but that can’t be the answer, for just as soon as they say demand has increased they must admit that the labor supply has increased, (and thus the cost of labor has decreased,) all else being equal. Some say its because there are less natural resources over time, and while that may be true, there are also far more resources available to us today than ever before. Some say its the mutlitude of competing products. We did not have hundreds of cars, tennis shoes, and computers to choose from in 1913, and thus the sheer number of different products has driven prices up. Yet new products can only compete to the extent they are competitive with existing products; this means competitive pricing.

Those who say deflation is bad need to clarify their meaning. Deflation is good for savers, for as prices fall one’s savings becomes more valuable. In a deflationary environment equity available for investment will far exceed bank credit. On the other hand, inflation is good for borrrowers, and in an inflationary environment bank credit for investment will exceed that from equity. Perhaps that is the reason why the Federal Reserve and its member banks are dedicated to a policy of permanent inflation…it ensures their market is always growing and supreme.

anon December 17, 2007 at 1:38 pm

Doesn’t the Fed go against everything Libertarian?

Dilan Esper December 17, 2007 at 5:44 pm

Response to various anti-Fed posts above:

1. Anyone who thinks the business cycle does not exist is crazy. Every single large economy in human history– no matter what its monetary policy, has had booms and busts.

2. There are only two mechanisms for regulating the business cycle that regularly work. First, Congress can act countercyclically by running deficits or surpluses. This can work, but faces immense political difficulties; Congress will always want to run deficits and stimulate, and they will never time the policy correctly even if they are inclined to do the right thing.

The only other mechanism is controlling the money supply. But to do that, you need an independent agency, or else the political actors will do the same thing to the money supply that they do to the budget deficit, i.e., control it for political reasons rather than take the right measures to manage the business cycle. Hence, we have to have an independent Fed.

If we abandon monetary policy, the business cycle will get more pronounced, which is why 45 percent of the pre-Fed time, the economy was in recession. Indeed, the evidence is so far against the goldbugs on this it is amazing they still make the argument: has anyone noticed how we have now had 3 of the LONGEST expansions in history in the last 27 years– the Reagan boom, the Clinton boom, and the Bush boom? The gold standard never did and could never produced such sustained booms, because it does nothing to boost the money supply when there is a threat of recesssion.

3. Fractional reserve banking, with government mandated reserve ratios and federal deposit insurance, is completely sensible. At any point in time there is far less demand for money than by depositors than there is money on deposit. So, it makes sense to allow banks to lend this out, but to keep a percentage that is likely to meet the demands of depositors. Eliminate this and you may have a very slightly lower risk of your bank losing your money, but you will also cause a huge contraction to the economy because the money supply would contract and interest rates (the price of loaned funds) would skyrocket.

4. One person mentioned “funny money” and a couple of other people alluded to it. Despite all the economic arguments– which are all wrong– this seems to be what really drives the goldbugs. It bothers them that our money isn’t “worth” anything. (Of course, other than in its minor role as a useful industrial and medical metal, gold isn’t “worth” anything either. In both cases, the value is only what people place on it.)

But there’s no reason for money to be worth anything. All money is, after all, is a medium of exchange. Anyone who lacks confidence in the currency is perfectly permitted to exchange that money for anything else that they believe is more likely to hold its value. You can buy all the gold you want, or any other foreign currency, or anything else you feel will hold its value better.

But for those of us who don’t care that our money’s value is determined solely by what others are willing to exchange for it, the imposition of a gold standard or the elimination of the Fed’s alleged “monopoly” on legal tender (actually, it is only a monopoly on the production of fiat money; you are entitled to exchange in any medium you want and to keep your wealth in any medium you wish to) is a drastic infringement on OUR individual liberties. In other words, you can already maintain any currency you wish to. But it is profoundly anti-libertarian to attempt to interfere with someone ELSE’s right to use the dollar as a medium of exchange.

Ludwig von Mises December 17, 2007 at 6:53 pm

Of course the business cycle *exists*. The question is, “what is the cause of the business cycle?” The cause is a violation of basic principles of property ownership that you and I must obey, but for which the banks have been granted a legal privilege to violate. Namely, banks create multiple property titles (deposits) to the same property (reserves). The economic ramifications of this massive violation of the principle of property, when applied to the most important commodity in an economy (the money commodity), are the massive disturbances we know as the business cycle. A free society and a free market is one in which no group is given permission to violate property rights at the expense of others. Remove fractional reserve banking, and the business cycle vanishes. Add a central bank to fractional reserve banking, and the business cycle expands tremendously. Read “What Has Government Done To Our Money?” by Rothbard to get you started.

Ludwig von Mises December 17, 2007 at 7:26 pm

“A deposit is a claim against the bank’s assets, not just its reserves. It is money loaned by the depositor to the bank.”

What exactly is a deposit? A simple question with a legally-obscure answer. A deposit is a claim to a precise amount of money, payable “on demand” at all times. Depositors do not “loan” money to a bank. A “loan” involves giving up usage of money for a particular period of time and a particular interest rate until it is returned to them. Bank depositors have no intention of giving up usage of their money at anytime. They consider that money as available funds. Deposits are not loans. Deposits are “bailments”, or warehouse receipts, as the money must be available “at all times”. As such this requirement cannot be logically satisfied by anything less than 100% reserves. Any usage of the reserves constitutes embezzlement, even if the bank “gets away with it” most of the time. Read “What Has Government Done To Our Money?” by Rothbard to get you started.

Bernard Yomtov December 17, 2007 at 9:04 pm

I find it exceedingly naive to accept your argument that runs to the effect of.

We had large recessions. -> Then we made the Fed. -> Now we have recessions under control.

Would it help you to know that there is a very large body of research that suggests a well-run central bank can help reduce the severity of recessions? The argument is not a simple post hoc claim.

mickslam December 18, 2007 at 10:23 am

I can’t believe we are debating the gold standard in 2007 at MR. We’ve looked at the post Keynes era and decided that it is better, with less recessions, less deep recessions and more growth. Look up the term “risk adjusted returns” and apply them to economic growth. Discussions about who has a better argument are silly in the face of overwhelming empirical evidence.

We have to remember that people aren’t turning against the fed, but rather against the policies of Alan Greenspan. It is impossible to sepereate the two, given the recent history of the fed. That the press is turning against the fed is simply a reflection that it has become evident that the fed policy as controllled by Alan Greenspan has been an abject failure.

For a guy raised at the foot of Ayn Rand, he spent the last 8 years of his career ignoring the basics of monetary policy, specificall that rate changes take 9-18 months to be fully felt in the economy. His response to the Asian crisis was reprehensible. His response to the stock market bubble was reprehensible. His response to the 2001 recession was immoral. His response to the real estate bubble borders on evil. At any of these junctures he could have and should have righted the ship, but instead kept oversteering.

We didn’t need the extended period of low rates following the Asian crisis. We didn’t need his ham handed pricking of the stock market bubble (that was caused by the extended period of low rates – his response to the asian crisis) – where he raised rates until the US felt pain and helped throw the election to the republicans. Then, he should have lowered rates to maybe 2% during the recession, and not to real rates below zero, so a third huge mistake. Then, I can understand and even applaud creating a small real estate bubble to counter act recession, and at the beginning I thought he had regained his old mojo – what market can absorb all this excess liquidity, except for real estate? A good idea, spoiled by too much of that good idea. That he left rates so low for so long was immoral.

But it is his response to the growing real estate bubble and the way he pricked it that is actively evil. He didnt’ need to raise rates to 5.5%, no. Simply raising them to 4.5% – 4.24% would have been fine. Leaving them there probably would have put off the pain the real estate market is feeling now to 5 years in the future WHILE putting the brakes on real estate price appreciation. This would have given the inflation a chance to catch up with real estate values. Instead of this, he ignored rampant fraud, and EVEN ACTIVELY ENCOURAGED IT through his comments about ARMs, when the fed should have been “taking away the punch bowl”.

While it is difficult for politicians to talk about “How many Representatives are willing to stand up and say: “Voters, I feel your pain, but your behavior was stupid and possibly even fraudulent”, it is the feds job to stand up and say, the behavior now is stupid and even fraudulent at the time the stupidity and fraud is happening. That Alan Greenspan did the exact opposite is evil.

The guys reputation will be lower than Herbert Hoover in 50 years. He is a moron with a mean streak, and the fact that his actions and his actions alone have discredited the federal reserve makes him even a more odious character. Actively evil, yes actively evil.

sorry this post was so tangential to the topic, but it is impossible for me to discuss any reaction to fed policy by the press without discussion how the focus on the fed might have root causes.

mickslam December 18, 2007 at 10:26 am

We didn’t need the extended period of low rates following the Asian crisis. We didn’t need his ham handed pricking of the stock market bubble (that was caused by the extended period of low rates – his response to the asian crisis) – where he raised rates until the US felt pain and helped throw the election to the republicans. Then, he should have lowered rates to maybe 2% during the recession, and not to real rates below zero, so a third huge mistake. Then, I can understand and even applaud creating a small real estate bubble to counter act recession, and at the beginning I thought he had regained his old mojo – what market can absorb all this excess liquidity, except for real estate? A good idea, spoiled by too much of that good idea. That he left rates so low for so long was immoral.

But it is his response to the growing real estate bubble and the way he pricked it that is actively evil. He didnt’ need to raise rates to 5.5%, no. Simply raising them to 4.5% – 4.24% would have been fine. Leaving them there probably would have put off the pain the real estate market is feeling now to 5 years in the future WHILE putting the brakes on real estate price appreciation. This would have given the inflation a chance to catch up with real estate values. Instead of this, he ignored rampant fraud, and even actively encouraged it through his comments about ARMs, when the fed should have been “taking away the punch bowl”.

While it is difficult for politicians to talk about “How many Representatives are willing to stand up and say: “Voters, I feel your pain, but your behavior was stupid and possibly even fraudulent”, it is the feds job to stand up and say, the behavior now is stupid and even fraudulent at the time the stupidity and fraud is happening. That Alan Greenspan did the exact opposite is evil.

The guys reputation will be lower than Herbert Hoover in 50 years. He is a moron with a mean streak, and the fact that his actions and his actions alone have discredited the federal reserve makes him even a more odious character. Actively evil, yes actively evil.

sorry this post was so tangential to the topic, but it is impossible for me to discuss any reaction to fed policy by the press without discussion how the focus on the fed might have root causes.

mickslam December 18, 2007 at 10:28 am

While it is difficult for politicians to talk about “How many Representatives are willing to stand up and say: “Voters, I feel your pain, but your behavior was stupid and possibly even fraudulent”, it is the feds job to stand up and say, the behavior now is stupid and even fraudulent at the time the stupidity and fraud is happening. That Alan Greenspan did the exact opposite is evil.

The guys reputation will be lower than Herbert Hoover in 50 years. He is a moron with a mean streak, and the fact that his actions and his actions alone have discredited the federal reserve makes him even a more odious character. Actively evil, yes actively evil.

sorry this post was so tangential to the topic, but it is impossible for me to discuss any reaction to fed policy by the press without discussion how the focus on the fed might have root causes.

nobody December 18, 2007 at 3:45 pm

There is no justification for a government agency fixing prices. Interest is the price that balances the supply of loanable funds with the demand for loans. By manipulating this price, the Fed will either create a surplus or a shortage. Right now we have a shortage of cash – a surplus of demand for cash- and the only thing that the government can think to do is to lower the cost of borrowing, which will lead to further shortages of supply and surpluses of demand. Are they idiots? Do they not see all the hallmarks of the failure of socialist economic intervention?

The gold standard is the best way to bring free market solutions to this area of society.

Anybody else find it ironic that someone would argue that “there is no justification for a government agency fixing prices”, then in the very next paragraph argue that the government should fix the dollar price of gold?

I think it is also time to lay to rest the myth that there was no inflation in the pre-WW2 era. Average inflation was lower than it is today, but the swings from year to year were enormous. Agents in the economy value predictability of prices, hence it is superior to have a low but positive inflation rate that doesn’t vary much from year to year over inflation that averages out to 0% in the long run but may come in +15% or -15% in any given year.

Ludwig Von Mises December 18, 2007 at 5:47 pm

“Anybody else find it ironic that someone would argue that “there is no justification for a government agency fixing prices”, then in the very next paragraph argue that the government should fix the dollar price of gold?”

You have exposed a fundamental flaw in your understanding! The “price of gold” is not “fixed”. In a gold standard, gold is the money. Dollars are receipts for specific quantities of money. The constitution defines the dollar as 1/20 an ounce of gold. It is a unit of measure, like gallons and pounds… ah, so that’s why it’s called the British pound. It’s a pound of silver.

aggdslj December 19, 2007 at 6:34 am

I wrote: “Anybody else find it ironic that someone would argue
that “there is no justification for a government agency fixing
prices”, then in the very next paragraph argue that the government
should fix the dollar price of gold?”

Then Ludwig Von Mises wrote: You have exposed a fundamental flaw
in your understanding! The “price of gold” is not “fixed”. In a gold
standard, gold is the money. Dollars are receipts for specific
quantities of money. The constitution defines the dollar as 1/20 an
ounce of gold. It is a unit of measure, like gallons and pounds…
ah, so that’s why it’s called the British pound. It’s a pound of silver.

Let’s stick to the Constitution example and think this through. If
the government defines the dollar as 1/20 an ounce of gold, it’s
tautologically true that an ounce of gold costs $20. Let’s assume
this is the initial equilibrium.

Now, what happens when (ceteris paribus) demand for gold suddenly
exceeds the supply in the market? The price of gold in dollars will
go up, or the government will have to sell gold from its reserves to
bring the dollar price of gold back to $20 per ounce (or if you
prefer, to bring back the value of the dollar to 1/20 an ounce of
gold). Conversely, when the supply of gold suddenly drops below the
demand, the price of gold in dollars will go down and the government
will have to buy gold in order to bring the dollar price of gold back
to $20 per ounce.

Now substitute “bananas” for “gold”. Doesn’t the previous example
sound a lot like the government fixing banana prices to you?

Ludwig von Mises December 19, 2007 at 7:41 pm

The problem is that you are accustomed to thinking of the paper receipts as the money. In a gold standard, gold is the money, not the paper receipts for it. So much confusion would have been eliminated if prices were just listed in terms of the more common units of weight. “The car costs 32 ounces of gold, or paper receipts redeemable for 32 ounces of gold.” You really need to start at the beginning to understand what the free market phenomenon of money is. Read “What Has Government Done To Our Money?” by Rothbard to get you started. Google it. It’s available free online.

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