Monday, November 23, 2009

Barney Frank and Christopher Dodd are idiots

That is the only thing I can think of. We have 0% effective interest rates right now yet Barney Frank says this:

“I doubt very much that by a year from now Fed presidents are going to have as big a role as they now have,” Financial Services Committee Chairman Barney Frank told reporters… He has said the presidents too often vote in favor of higher interest rates.
The only time I can think of where that has happened in historic times is when Paul Volcker drove rates up to 20% in order to get Ronald Reagan elected (and incidentally tame inflation). The reality is that excess inflation is as bad for an economy as deflation -- both drive money out of the capitalist system into non-productive places like mattress stuffing or wheelbarrow sales that do not significantly contribute to the economy (there are far better things to fill wheelbarrows with than money), both are inherently corrosive to an economy. Mild inflation (2-4%) is good for capitalism because it drives money out from under mattresses and into the banking system where it can be leveraged into future economic output. More than that is toxic to the system of contractual agreements necessary for capitalism to work, which assumes a stable or slightly declining value for money, not one that suddenly dramatically drops in value because of inflation. The 30 day net system which is common for commercial transactions simply quits working entirely if the value of a dollar drops by 5% a day!

So controlling inflation, of which manipulating interest rates is one way of doing so, is in everybody's interest, even Barney Frank's. Yet Barney and Dodd have a proposal on the board that would put low interest rates ahead of maintaining a stable money supply on the Fed's plate. I cannot see any conceivable way in which that would be a Good Thing.

Look, I can understand that some people are upset with bankers. But the Federal Reserve is the only -- the *ONLY* -- government body which has performed exactly the way it is supposed to perform during this current economic crisis. The Fed swiftly dropped interest rates to effectively 0% in order to head off deflation, then when that did not suffice, effectively started printing money via "quantitative easing" (a power which they did not have in 1932, BTW -- that was one lesson learned during the Great Depression, that the Fed had to be able to print money in a deflationary environment). This is exactly the textbook thing to do, and it worked -- while we've had some (mild) income deflation due to job losses, we've had nowhere near the plummet which drove money out of the banking system and under mattresses and thus plunged the U.S. into the Great Depression. So we've had a Great Recession, but nowhere near the economic collapse of 1932.

Unfortunately consumption has remained low and thus the Fed's monetary policy has been ineffective on the employment front, but that's where fiscal policy -- stimulus packages, social insurance, etc. -- has to come into play in order to have the U.S. government as consumer of last resort to temporarily increase consumption until consumer spending returns to normal. The Fed has nothing to do with that. Rather, Congress -- uhm, Barney, Chris, that's *YOU* -- has failed there, bank bailouts do nothing to increase consumption, tax cuts do nothing to increase consumption in a deflationary environment (they just allow mattresses to become plumper with mattress stuffing), the only thing that works is if the government spends money on actual *stuff* like bridges, roads, food for the unemployed, and so forth, and the amount spent on that has been smaller than even Herbert Hoover's stimulus.

Yes, you read that right. Herbert fucking Hoover and his Republican Congress spent more on actual stimulus than the current Democratic Congress has spent. Congress has utterly failed in its principal task -- to protect the general welfare of the American people -- and instead is engaged in attempting to destroy the one and only institution that has worked exactly as designed during this crisis. That's just plain fucked up.

-- Badtux the Economics Penguin


  1. No one dissects the economic facts like you, BT.

    But how to disseminate them to the rest of the world?

    That's the task we have to try to save the world.



    The only time I can think of where that has happened in historic times is when Paul Volcker drove rates up to 20% in order to get Ronald Reagan elected

  2. Yea you are for the most part preaching to the choir, except for an ocassional troll. You need a national soapbox, not that you have the time or anything like that.
    I read about a suggestion for an Urban Solar/Wind Power installation project. The hills I live in are perfect for such a thing, I have electrical training and need a job. So many reasons it would be good, but it'll never happen. Banks don't loan, Power Companies are in it for profit, and the Gov, well it just dithers along. So sad , so sad.
    a still broke w3ski

  3. I think the best way to look at inflation-deflation is as expansion-contraction of the money supply.

    Price inflation/deflation is effect, not cause.

    Money supply is cash plus credit. We are in the midst of the biggest credit contraction since the 30's. (A point that our friend Nathan didn't seem to grasp.)

    Hence deflation, at some level, is the current reality.

    Yes - Govt spending is a big part of the answer. But B Hussain O, et. al. are more interested in balancing the budget. Krugman comes at it today from a slightly different angle.

    The point on Hoover spending is fascinating. Where can I find the numbers?

    So, in reference to our earlier conversation, BHO has not learned the lesson of 1929!

    I want to tell you, BTW, I'm doing my part. We spend every penny of my paltry pension + SS that trickles in each month.

    JzB the spending trombonist

  4. Here is some more insight into the nature of the problem.

    JzB the base line trombonist

  5. This comment has been removed by a blog administrator.


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