A Sad, Sorry Song

by Thomas McQuade

In looking back over the many excellent posts and comments that have graced ThinkMarkets in its first year, I was struck by the fact that, while many of the literary virtues have been displayed, there has been – surprisingly – nothing that could pass as poetry.  I hope to be forgiven the presumption of attempting to rectify that omission with the following submission, vile doggerel though it may be.

I have a tale to tell, O!  (A sad, sorry tale, O!) …
It is told in the hope there’s no slipp’ry slope
And that prudence can prevail, O!
Tells the cause of a crisis, cruelly cast
Hitting hard-won savings, thought amassed.
It involves good intentions gone astray,
And the misplaced myth that some experts may
By their brains and their brilliance brave the way
To ensure economic ease, O!

Retrospect Is Prospect?

by Mario Rizzo  

In the course of doing some research about the late economist Charles Kindelberger I came across an obituary article in The Economist dated July 17, 2003. The article made reference to the question whether the Fed’s policies after the then-recent dot com bubble simply saved us from recession or laid the ground for worse to come. It is interesting to read something like this when the current news looks like a replay.  

Economists are split over the recent performance of America’s lender of last resort, the Federal Reserve. Some argue that its policy of easy credit inflated the bubble, although nobody can be certain what effect tighter money would have had once the bubble began to expand. Some economists believe that the Fed’s interest-rate cuts since the bubble burst have been a triumph, preventing a severe recession. Others think that the Fed has merely postponed the day of reckoning.

I am sure there are many other articles out there from this period asking the same question. Have any readers found them?

Seizing the Commanding Heights

by Jerry O’Driscoll  On the Opinion page of yesterday’s Wall Street Journal, George Melloan spells out how government stimulus is stifling lending, crowding out private investment and impeding economic recovery.  He writes that “the credit market has been tilted to favor a single borrower with a huge appetite for money, Washington.” It has done so in a number of ways.   First, the Fed announced that it will evaluate bankers’ pay on the basis of how well they manage risk.  How better to be a good risk manger in a bureaucrat’s eyes than to take no risk?  Purchasing Treasury obligations and federal agency paper is the sure way to avoid risk.  The Fed has a second policy to make that strategy profitable: zero interest-rate borrowing to finance Treasury and agency debt yielding 3%.or more.  The Fed continues to signal it will keep rates low, diminishing interest-rate risk.   These policies are choking off the supply of credit to the private sector, espcially small business.

Dallas Fed President Calls for the End of Too Big to Fail

 by Jerry O’Driscoll  

Thursday at the Cato Monetary Conference, Dallas Fed President Richard Fisher called for the end of of the too-big-to-fail doctirine.  He identiifed the largest financial institutions as the source of excessive risk taking.  He also repeated his claim that these institutions interefere with the conduct of monetary policy. 

Fisher offered a middle ground between two strategies discussed on ThinkMarkets: steeper capital requirements or beaking them up.  He advocated forcing the largest banks to give up some of their riskiest operations.   In effect, that is forcible downsizing. 

This is a noteworthy call coming from within the Fed itself.

What About The Fed?

by Jerry O’Driscoll

I have been active in criticizing recent Fed policy, but avoided the controversy over Fed governance (“Audit the Fed”).  I worked for the Dallas Fed for 12 years and believed then, and continue to believe, that there is a legitimate private banking function that the Fed performs.  It was born as a bankers’ bank, a successor to the private clearinghouses.  As explained by Richard Timberlake, legal ambiguity surrounded some of the activities of the private clearinghouses (e.g., provision of reserves in times of distress). The Fed was the compromise.

Four Reasons Why The EXIT Will Fail

by Andreas Hoffmann and Gunther Schnabl*

With central bank balance sheets and government debt levels exploding, discomfort about future inflation arises. A discussion about the appropriate exit strategy from low-interest rate policies has started. The standpoints of central banks are different. The ECB seems more decisively in favour of an early exit. The Federal Reserve discusses the technical aspects rather than an early timing (see Mario’s earlier blog entry). The Bank of Japan is said not to exit earlier than in five years. What situation are we facing? A return to monetary policies that are neutral to inflation and bubbles is unlikely for four reasons:

Regulatory War of Choice

by Chidem Kurdas

“A just war” is how Treasury Secretary Timothy Geithner describes the movement to expand financial regulation.  “It’s a war of necessity, not a war of choice,” he  is reported as saying about  the battle to impose greater government control on the financial sector.

This is the man who presided over the New York Federal Reserve Bank as the Fed assiduously provided the monetary fuel for the over-expansion of credit and the associated property bubble. The eventual implosion  of the twin bubbles caused the financial crisis of 2008.

For sure, markets are prone to ups and downs, because people are prone to behaviors like herding. And yes, bankers drank the spiked punch, as did myriad others from mortgage originators and real estate developers to over-extended households. But the Fed provided the heady stuff, thereby creating a boom-and-bust cycle of extraordinary magnitude.

Now, does Mr. Geithner’s proposed regulations seek to prevent similar nefarious policies in the future by limiting the Fed’s discretionary powers? Of course not. Silly even to ask. His quest is to expand the authority of government agencies, not to regulate them.

The one attempt to get a sense of what the Fed is up to, a bill by Congressman Ron Paul, has been destroyed at a Congressional sub-committee—even though it had 308 co-sponsors.

Reflating the Bubble?

by Mario Rizzo  

The Fed has decided to extend, at least through early next year, its program of purchasing mortgage-backed securities. The Wall Street Journal reports:  

“The Fed’s action signals its belief that the economy, while in recovery, remains fragile and that housing, which has seen some improvement in recent months, has only started to pull out of its slump.”  

What is the objective of their action? When will they know they have succeeded?

The Great Moderation In Macroeconomics

by Mario Rizzo  

I have now read both Paul Krugman’s New York Times essay on the state of macroeconomics and John Cochrane’s reply. They are each, in very different ways, quite disappointing. The level of argument is poor, the prejudices are simplistic, and the tones are annoying.  

Horwitz Says: Let There Be Light. And There Is Light.

by Mario Rizzo  

In a series of persuasive posts, Steve Horwitz at The Austrian Economists blog (here, here, and here) shows that Ludwig von Mises’s views on monetary economics were more or less the same as the Selgin-White-Horwitz (and I would argue the Garrison) free-banking, monetary-equilibrium view, rather than the Rothbardian one. This is not surprising given Murray Rothbard’s deviation from Mises on questions of monopoly, the minimal state, utilitarianism and other matters. While these posts will no doubt be resisted by some, they should move the discussion out of what Mises meant and into the analytical merits of arguments – and, I hope, into empirical work. (After all, Mises didn’t spend a lot of time on what his forebears really meant!)