5 Responses to “An Informed Analysis from Two Serious Economists”
David
I don’t really understand how any loan contract can be conscionable when it is tied to paper money based on collective debt in a monetary game of musical chairs in which it is impossible for all borrowers to repay. It’s like original sin. It’s a fool’s game.
The analysis by Hummel & Henderson is *not* well-informed, and frankly doesn’t make sense.
1. They claim that interest rates are low because of tight monetary policy. Yet the Fed has *not* pursued tight monetary policy. MZM has grown *faster* since Bush took office than before.
The Fed stopped tracking (or at least informing us)of M3 a couple years back, but I believe the growth rate was up, not down.
The housing bubble would either not have occurred, or would have been much smaller, with a tight policy. Would anyone seriously claim low rates weren’t crucial for the housing boom?
2. True enough, the Fed did start to tighten policy. And then when it looked like the housing bubble might burst, turned up the taps again. The St. Louis Fed chart (above) shows this.
3. The “global savings glut” is hooey used to “excuse” America’s perpetual government deficits. The federal govt deficit is financed by borrowing from abroad. This is a policy chosen by the federal government, not some market phenomenon of eager foreigners wishing to invest here. (Asian and Middle Eastern central banks are the big players.)
It’s true that interest rates would have been much higher, or the Fed forced to inflate much more to keep them low, had foreign central banks not been willing to lend to the federal govt at low rates. But this doesn’t get the Fed off the hook for its loose money policies.
4. Moral Hazard: H&H are right about the nature of the problem, but the Fed is lender of last resort to the banks it regulates. So how is it that the Fed gets no blame from H&H? And since apparently Dr. Bernanke’s Fed is also lender of last resort to entities it doesn’t regulate, isn’t Bernanke creating far worse moral hazard problems? (answer: yes).
The Fed controls the money supply, and what we are experiencing is an almost classic example of the Austrian business cycle.
What’s happening now is an accelerating destruction of the dollar’s value, i.e. inflation and falling exchange rate.
H&H have done really dreadful analysis — shocking to me, as Henderson has always seemed to be pretty sensible to me.
I’m aghast at how many leftists are blaming the free market for what is happening, and how many pseudo-free marketers respond by defending the Fed.
The Fed is at the heart of this mess, and if we had free banking, or even a gold standard — a true free market, this wouldn’t have happened. Among all the remedies promoted by left and right, a free market in money is conspicuously absent, unfortunately.
I’ve posted on my blog evidence that Hummel and Henderson are quite wrong: the Fed has pursued expansionary monetary policy. The evidence is from the St. Louis Fed.
I don’t really understand how any loan contract can be conscionable when it is tied to paper money based on collective debt in a monetary game of musical chairs in which it is impossible for all borrowers to repay. It’s like original sin. It’s a fool’s game.
The analysis by Hummel & Henderson is *not* well-informed, and frankly doesn’t make sense.
1. They claim that interest rates are low because of tight monetary policy. Yet the Fed has *not* pursued tight monetary policy. MZM has grown *faster* since Bush took office than before.
http://research.stlouisfed.org/fred2/series/MZMNS
The Fed stopped tracking (or at least informing us)of M3 a couple years back, but I believe the growth rate was up, not down.
The housing bubble would either not have occurred, or would have been much smaller, with a tight policy. Would anyone seriously claim low rates weren’t crucial for the housing boom?
2. True enough, the Fed did start to tighten policy. And then when it looked like the housing bubble might burst, turned up the taps again. The St. Louis Fed chart (above) shows this.
3. The “global savings glut” is hooey used to “excuse” America’s perpetual government deficits. The federal govt deficit is financed by borrowing from abroad. This is a policy chosen by the federal government, not some market phenomenon of eager foreigners wishing to invest here. (Asian and Middle Eastern central banks are the big players.)
It’s true that interest rates would have been much higher, or the Fed forced to inflate much more to keep them low, had foreign central banks not been willing to lend to the federal govt at low rates. But this doesn’t get the Fed off the hook for its loose money policies.
4. Moral Hazard: H&H are right about the nature of the problem, but the Fed is lender of last resort to the banks it regulates. So how is it that the Fed gets no blame from H&H? And since apparently Dr. Bernanke’s Fed is also lender of last resort to entities it doesn’t regulate, isn’t Bernanke creating far worse moral hazard problems? (answer: yes).
5. Re the federal government promoting risky lending: Hummel & Henderson cite Liebowitz favorably, but Liebowitz himself directly blames the Fed for promoting shoddy lending standards: http://www.nypost.com/seven/02052008/postopinion/opedcolumnists/the_real_scandal_243911.htm?page=0
The Fed controls the money supply, and what we are experiencing is an almost classic example of the Austrian business cycle.
What’s happening now is an accelerating destruction of the dollar’s value, i.e. inflation and falling exchange rate.
H&H have done really dreadful analysis — shocking to me, as Henderson has always seemed to be pretty sensible to me.
I’m aghast at how many leftists are blaming the free market for what is happening, and how many pseudo-free marketers respond by defending the Fed.
The Fed is at the heart of this mess, and if we had free banking, or even a gold standard — a true free market, this wouldn’t have happened. Among all the remedies promoted by left and right, a free market in money is conspicuously absent, unfortunately.
I’ve posted on my blog evidence that Hummel and Henderson are quite wrong: the Fed has pursued expansionary monetary policy. The evidence is from the St. Louis Fed.
Edmund Phelps, hardly a rabid Austrian, has also argued that we are at the end of a classic Hayekian boom and experiencing the consequences thereof: http://www.fordham.edu/Campus_Resources/Public_Affairs/topstories_1173.asp
Thanks for this, Allen!