SecondThoughts

It's Time to Focus on the Value of the Dollar

Mr. Mason argues that the dual policy objectives of low inflation/high employment should favor the former for the foreseeable future. What amazes me is how the commentators haven't grasped this simple observation. And, OMG, the things these people have said amaze me further. I can only surmise that, having read Mr. Mason's lengthy post (or maybe skimmed it), that they look for something that the feel they have knowledge about and, whammo, they write it down even if it is only loosely associated with the original post. Please, please, commentators, read the post before you comment; make sure that you are on topic. Doing so will make blogging a lot more meaningful for everyone. Thank you.

Has the Federal Reserve Become Too Powerful?

To Mr. Mason's first point, I'm not convinced that any of the "new" objectives actually conflict in the ordinary course of conducting policy. I have to add that caveat because, clearly, what has been happening is not "ordinary". For example, saving Bear Stearns (a joint action with the Treasury that simple had to be done) was extraordinary and required actions that the Fed would not have had to pursue under "normal" circumstances. It could be argued that having broader and multiple policy directives, ala the Treasurer's proposal for example, under "one roof" could have improved the government's policy action to the growing crisis. I'm suggesting that having disparate agencies (Treasury, Fed, SEC, Comptroller, etc.) responsible for the various aspects of monetary policy more broadly characterized has been a source of delay and inadequacy.

To be clear, I don't see how the accepted inflation priority conflicts with sound management oversight of the actions and activities of any intermediary that handles the nation's credit.

Finally, I don't see how adding to the "power" of the Fed (see Mr. Mason's last paragraph) necessarily has to dilute its ability to carry out any of its responsibilities. There has been a tremendous evolution in world finance since 1913, which is the year the Fed was created (if I remember correctly). In the interim, politicians have responded to various crises with legislation to handle each of those crises. The time is ripe to reconsider the structure of all these multiple agencies, with their different agendas, constituencies and leaders, to assure ourselves that our governmental infrastructure is in some sense "optimally" configured to address the world of finance we live in now.

I have been a respondent to several SA articles but have never had a response from the original author. I ask Mr. Mason to respond; I value his insights.

Why Financial Crises Are Inevitable

Bookstaber's "A Demon of Our Own Design" is an excellent book. Its dense reading but well worth the effort. It is a 2007 publication, but does not treat the current real estate bubble. But, it is extremely relevant much more so than I can say for Marx. Why do people insist on referencing meaningless generalities such as "capitalism...will produce tensions which will lead to its destruction"? First, to be useful, please cite which specific "tensions" Marx is referencing (if any) and second, please provide some argumentation demonstrating any validity to the "destruction" part of this quote.

While I don't think Buffett would support such gibberish, I do agree with Mr. Soprano on the point regarding the excessive amount of wealth that the financial sector has generated, and like Buffett and Mr. Soprano support a fiscal policy that would tax the rich to the tax benefit of the middle and lower classes.

Are Central Banks Out of Their Minds?

This is really silly. "...ignorant Alan Greenspan before and Ben Bernanke now"; "...edge of collapse"; "socialism"; the Fed as the sole cause of the business cycle; "we are better off without a federal reserve"; "real capitalists"; "pure capitalism"; "unfettered capitalism". These are some of the words and phrases that have been used in this thread that have very little usefulness in a fruitful discussion of what the Fed has been doing.

But, my major issues lie with "icandoitdon". He replied by saying that there is no "norm" to expansions and contractions indicating that "some are short..some are long" not realizing that he had just defined a "norm". What I said earlier, though, about cycles (recessions) being shorter was only partly due to improved macro management with the other "cause" related to the tremendous contribution of information technology during the late 80s and throughout the 90s. In addition, if icandoitdon had taken the time to read my comment, he would have seen that I carefully excluded the current Bush era from any association with sound fiscal management. And, I don't hold Greenspan's Fed blameless either--I believe he held rates too low for an excess period of time.

There is much that is being said about the Fed today. I do know this: the Fed and, specifically, the FOMC, has very knowledgeable and dedicated people who are very cognizant of their reputations. They are not out of control and not, as seemingly most writers in this thread seem to believe, "stupid". A little control on the use of language would be in order, gang.

Regarding the dynamics of what has become a very dominant financial sector (FIRE), clearly, greed in a viral form has infected motivations. Its not without parallel with the tulip-mania where you could buy tulip "options." Leverage has been used excessively; new complex derivative instruments invented seemingly on the fly; all this at a much faster rate than regulators have been able to keep up with much less act in the capacity of regulators. The finance sector has created a "parallel" non-banking credit creating business model that has heretofore escaped any serious regulation. And, it is this toward which Paulson has directed his attention in making recommendations for increased regulation. I think he's right.

Let's step back a little and look at "academic capitalism" compared to reality. Let's look at Adam Smith and all the classical and neoclassical followers. Basically, they created a theoretical construct that rests on, among others, the twin assumptions that people (consumers and businesses) are fully rational AND have complete information upon which to make decisions. In such a world, no mistakes are possible. But, we know that neither of these assumptions is true and, I argue, that their inadequacy is the portal through which informed government regulation must necessarily pass. Such "regulations" should restrict certain behaviors (zoning laws, building codes, fraud, etc.) and promote others (tax incentives, etc.).

I've run out of time. Sorry.

Are Central Banks Out of Their Minds?

I say "yikes" when I read the writings of "icandoitdon". Its almost a waste of time to respond; he is so "out there" that he may be out of reach. But, I have a moment so I'll try to help him. First and most significantly, starting with the 1980s, "business cycles", also known as recessions, have been generally shorter in duration and, shallower. Maybe an exception is the prolonged slowdown of 2001 through 2003. But, even though that episode was longer, it was still billed by the NBER as comparatively short compared to recessions of the pre-1980s variety. Accepting, as he must, this thesis, one then asks why? Why have recessions become shorter/shallower? I think economic historians will look back on 1982 - 2000 as having been "good years" for two reasons: (1) significant technological advancement and (2) sounder monetary and fiscal policy. (Unfortunately, the second doesn't apply well to the current Bush administration.) To say that Greenspan and Bernanke have tried to "repeal" the business cycle is ridiculous; tame it yes. But, let's be clear what "icandoitdon" said at the outset: He doesn't "think central banks are out of their mind." But, then, he goes on to explain a point of view that is exactly the opposite??!!

Paulson's Injustice to the Trial and Error Economy

Seems naive. It seems that Conerly describes a three-step "trial and error" free-market "solution" that dramatically failed. Yet, he seems to think this is OK policy because "it will be years before those investors touch that hot stove again." Yeah, that's naive. Adam Smith's theoretic construct of competitions rests on, among others, the twin assumptions of perfectly rational households and businesses relying on a constant stream of perfect information. It is through these twin portals that effective government rules and regulations pass. Households and businesses need to be protected from their own foolishness (lack of rationality--ability to be tricked) and from the fact that they don't know everything there is to know pertaining to the economic/financial decisions they make on a daily basis. Government regulation sets parameters within which these economic agents operate. This doesn't in any sense prevent Conerly's entrepreneurial experimentation.

"Stated income loans", Conerly admits, are "pretty stupid" retrospectively; I think that they were pretty stupid prospectively and a good "regulation" would have precluded their implementation, through experimentation or otherwise. Relatedly, people who fail to report cash income to the IRS face the consequence of not being able to prove their income.