Quote :

"It is not the job of the fed to manage where the money is spent, only to set interest rates to best facilitate the spread of that money. Whether or not the government spends it on wars or parks or internet is between the government and the people, not the fed. Interest rates will still interact with the spread of that money no matter what it was used for."

I feel like, if we're having this discussion, I haven't done a good enough job of explaining the importance of interest rates.

Interest rates are a price. Setting interest rates, then, is price fixing. Price fixing, in 99.9% of cases, creates either a surplus or a shortage, depending on whether the price is set too high or too low.

There should not be a single interest rate that all banks are allowed to borrow at. That makes absolutely no sense. The banks should be setting their interest rates, and adjusting based on how much capital they have available and how much risk they are taking by loaning out money. Banks always want cheaper money from the Fed. If the banks had their way, interest rates would only ever be 0%, and would never be allowed to rise. You can see why the banks are having a field day right now.

Quote :

"It seems like GDP targeting would alleviate most of that pressure and would create a more predictable monetary system. "

GDP targeting is what China does, and they've created a number of bubbles that are blowing up in spectacular fashion. When the goal is to hit a certain GDP, the government will do what's necessary to make it seem like they haven't failed. That means going to war. That means destroying perfectly good capital. That means creating more useless bureaucracy for the sake of hitting an arbitrary quota.

I'm not afraid to separate the good from the bad. If I blew up your house and killed you, would that be good or bad economic growth?

It is actually conceivable that we could have negative nominal GDP, and the average person would still see an increase in the standard of living.

11/23/2011 12:14:54 PM

Quote :

"Interest rates are a price. Setting interest rates, then, is price fixing. Price fixing, in 99.9% of cases, creates either a surplus or a shortage, depending on whether the price is set too high or too low"

Thats why the interest rates would be revised every quarter or maybe even more often. When we overshoot our GDP target (It wouldn't matter if it was due to inflation or actual productivity gains) then the next quarter interest rates would be raised to put the brakes on and contract us back to the target.

Quote :

"There should not be a single interest rate that all banks are allowed to borrow at. That makes absolutely no sense. The banks should be setting their interest rates, and adjusting based on how much capital they have available and how much risk they are taking by loaning out money."

In a normally functioning economy that is how it works. The FED sets a range that it wants interbank lending to occur at, then uses open market operations to get as close as it can. The banks negotiate among themselves though what they are going to charge and at times its higher than the targeted range depending on the institution.

Quote :

"Banks always want cheaper money from the Fed. If the banks had their way, interest rates would only ever be 0%, and would never be allowed to rise. You can see why the banks are having a field day right now. "

Its only been in recent history that the discount window rate has been so close to the interbank rate and no I don't really agree with the FED being allowed to do that, but thats what happens when banks stop lending to each other.

If we were trying to target GDP right now we would be quantitative easing as well as setting an interest rate of 0% in order to meet our GDP goal. That in effect would create a negative interest rate which would encourage both companies and banks to start investing instead of just sitting on cash reserves like they are now, because cash reserves would only lose money in that environment.

I know that QE creates a kneejerk response in a lot of people but our history would have been a little different if we had used targeted GDP instead of our current system (in theory). In the late 90s and early 2000s we saw some pretty good growth in GDP (like 6% nominally) but we kept interest rates relatively low, if we targeted GDP growth to say 3 or 4% we would have been continually raising interest rates during that period so that we could hit the target. This would have helped deflate the housing bubble to some degree (and would have made it more difficult for our government to borrow!)

Quote :

"GDP targeting is what China does, and they've created a number of bubbles that are blowing up in spectacular fashion. When the goal is to hit a certain GDP, the government will do what's necessary to make it seem like they haven't failed."

China is sorta a special case. Not only are they trying to hit GDP targets but they are also pegging their currency to keep it artificially low and using direct subsidies to industries they want to take off. The other problem here is that I think the Chinese government has direct control over their central bank. The bubbles aren't only due to just GDP targeting but also their other government programs they've been using. The other thing to note is that China is targetting nominal GDP growth of like 15%. Thats just not believable, the trick is to pick a target that is actually sustainable and believable.

Quote :

"I'm not afraid to separate the good from the bad. If I blew up your house and killed you, would that be good or bad economic growth?"

Seems arbitrary, are you the only one that gets to decide whats good and bad? If you blew up my house then my family might get my life insurance (and hopefully buy themselves a yacht if I'm so lucky), the firemen that came to put the fire out and police detectives employed to find who did it would get paid (I realize they get paid anyway but if houses were blowing up all over town we might consider employing more cops and firemen), you would have to pay someone to build a bomb for you, and an undertaker would get paid to bury whats left of me. Then all these people that profited from my death would turn around and buy something else, and then the people that profited from that transaction would buy or invest it somewhere else, etc etc etc. That means GDP would grow. I really don't think there is good or bad economic growth, only economic growth. There is, however, bad investing. Blowing me up would be a bad investment for you since you are likely to go to prison and lose all of your assets.

Quote :

"It is actually conceivable that we could have negative nominal GDP, and the average person would still see an increase in the standard of living. "

Its absolutely conceivable, depending on how you measure standard of living. I've already said GDP growth doesn't show how the money is distributed etc so its not like its a perfect measurement of SOL or happiness or anything like that. However when we look around the world at the lives of people in countries with shrinking GDPs we tend to see things getting worse for them while the opposite is true in countries with growing GDPs. We use GDP for this reason and because its a hard metric to manipulate.

[Edited on November 23, 2011 at 4:02 PM. Reason : .]

11/23/2011 3:57:35 PM

Quote :

"it is relevant as to whether GDP targeting will produce a better outcomes for the populace"

No, for that we would compare the outcome of GDP targeting versus inflation targeting, not squabble over what GDP is comprised of. It doesn't matter if we're spending it on war or food, both take money, thus both are impacted by interest rates.

Quote :

"so what are your thoughts?"

I would most definitely agree with some quantifiable goals for the Fed, this would reduce the uncertainty for businesses as well as reducing the politicization of the Fed. At this point that seems like what the debate is. Beyond that, I could see it being based on GDP, NNP, net consumption, savings rate, or even something else.

Quote :

"I feel like, if we're having this discussion, I haven't done a good enough job of explaining the importance of interest rates. Interest rates are a price. Setting interest rates, then, is price fixing. Price fixing, in 99.9% of cases, creates either a surplus or a shortage, depending on whether the price is set too high or too low."

You're changing the debate. This was about targeting GDP versus targeting interest, within the context of this debate, setting interest rates is a forgone conclusion.

If this were simply another "THE FED SHOULD SET INTEREST RATES"/"THE FED SHOULDNT EXIST" debates, I wouldn't have gotten involved.

Quote :

"GDP targeting is what China does"

No it is not, and it's certainly not in the way that is being suggested here. The PBC tends to respond to CPI rather than other factors, and it would be a terrible stance for them to base their interest rates on anything else. But either way, what we are talking about is a fixed calculation that could be done by anyone to establish interest rate changes.

11/23/2011 5:03:19 PM

http://krugman.blogs.nytimes.com/2011/12/12/debasing-the-dollar-not/

Quote :

"And I found myself thinking about the hearing last February in which Paul Ryan accused Ben Bernanke of debasing the currency, using rising commodity prices to argue that dangerous inflation lurked just around the corner. So, will Ryan demand more expansionary policies from the Fed given the sharp fall in commodity prices this year?"

12/13/2011 5:23:41 PM

^ I guess you and Krugman have not been up on current events. It has been in all the news. The Federal Reserve conjured $7.8 trillion out of thin air and questionably loaned it to institutions that didn't need it. As classical a definition of debasing as I've ever heard. That such behavior has so far not resulted in hyper-inflation does not negate the behavior, as neither Ryan nor the Federal Reserve could have know at the time that Obama would purposefully drag on the depression for this long.

12/13/2011 6:36:06 PM

Quote :

"The Federal Reserve conjured $7.8 trillion out of thin air"

Yeeaah. If I loan you $10 on January and you pay it back in June, then I loan you $10 in July and you pay it back in Decemeber, did I loan you $10 or $20 this year? The $7.8 trillion figure follows the $20 method of accounting.

I mean seriously-- half of our GDP? Outstanding? And "from thin air?" The Fed doesn't have assets? It literally waved a magic wand and loaned out 50% of our GDP? Come on.

Regardless-- this story is out in the open, aaaaaaand... still no hyperinflation. Shucks

12/13/2011 9:09:03 PM

The U.S. banking system as a whole has loaned out something like ten times GDP. So, yes, if the Fed wanted to loan out a measily 50% of GDP it would not be difficult.

The Fed's assets were not large enough to cover all its lending. Here is a graph of the Fed's balance sheet:


So, yes, reading the graph it seems the Fed only created around $1.3 trillion in new currency from thin air which it proceeded to loan in and out of various institutions. Of course, this data is old, only containing information from the public record of the time. We really have no idea how much they printed in total, as until Ron Paul manages to arrange an audit, there are several massive programs we know existed but are not reported.

12/14/2011 12:43:00 AM

Krugman is a stooge. At the time Ryan made those comments the CRB index was up like 20 or 30% thanks to QE2. It continued to go up and since they never unleashed QE3 the effects of 2 wore off and now we're getting deflation again. I'd expect this to run until sometime next year when the depression talk will get cranked up again and they'll fire QE3 in re-igniting commodity prices and kicking off new inflation.

12/14/2011 6:56:17 AM

Lol.

12/15/2011 11:06:03 AM

Quote :

"The Federal Reserve conjured $7.8 trillion out of thin air"

Lol Boone pointed out exactly what was going on here, loan extensions being tallied as additional loans, but you don't give a fuck you will literally believe any absurdly large number somebody presents you with as long as they're presenting it in the context of "Fed did a thang"


Here you go, http://www.newsmax.com/StreetTalk/Economist-Fed-Exposure-Trillion/2011/12/13/id/420763

29 trillion! Bonus points for a flawed drunken sailor analogy.

[Edited on December 15, 2011 at 11:10 AM. Reason : .]

12/15/2011 11:08:00 AM

^ Terminology. The Fed created $7 Trillion electronic dollars over time and destroyed it whenever it got paid back. The Fed doesn't create money, lend it out, then put it back in the electronic vault to lend out again later. It presses delete and conjures it up again later when it wants to.

But you failed even on this, as just three posts above you I said that at any one time it was as low as $1.3 Trillion given old disclosed information.

What I want to know is why you have chosen this as your position. There is no question this behavior is debasing the currency. That it has not debased it a whole lot is a defensible position. That debasing the currency at a time like this is a good idea is a position I'd agree with. That they should have lent that currency to this group of crony capitalists is highly questionable. That you are better than us because we repeated numbers which are arguably true is not reasonable.

12/15/2011 11:41:50 AM

I'm completely fine loaning it out to banks if it keeps the economy afloat rather than fuck over the millions who would suffer as collateral damage, but not as a matter of ongoing policy. As with TARP, such actions should be followed by breaking up those banks, and putting limits in place to stop the growth of any single finance institution to the point where it can have such profound effects on the economy as a whole without some sort of democratic oversight (Such as the appointed chairmen of the Fed board).

[Edited on December 15, 2011 at 11:50 AM. Reason : .]

12/15/2011 11:47:44 AM

Boone's analogy isn't even fully correct. It's more like I give you a $10 loan for one day, then extend that loan tomorrow, and the day after, and the day after. How much did I loan you after a year? $10, or $3650?

12/15/2011 11:49:57 AM

^ Bernanke's own position is $1.2 Trillion, which is not 1/365 of the other figure. That the borrowers managed to profit $13 billion off the spread strongly implies the loans were for way more than 24 hours. Which is an estimate, I guess. But the graph I posted takes that into account and shows a daily balance sheet about $1.3 Trillion which clearly came from the presses.

^^ Hence the disagreement. I don't believe the institutions are large enough to "have such profound effects on the economy". We bailed them out because they wanted to be bailed out. You and Congress drank the Koolaid and they profited billions off the millions of people you were so eager to protect.

[Edited on December 15, 2011 at 12:09 PM. Reason : ,.,]

12/15/2011 12:08:17 PM

Quote :

" I don't believe the institutions are large enough to "have such profound effects on the economy". "

Then please tell me, how large would be large enough for you to believe that? I'm just trying to make sure you have an objective criteria for this and aren't just saying it's untrue because it would compromise your political narrative to admit there were legitimate concerns behind the bailouts.

[Edited on December 15, 2011 at 12:49 PM. Reason : .]

12/15/2011 12:46:44 PM

Quote :

"how large would be large enough for you to believe that?"

Roll up every bank into a couple/few?

It isn't as if all the deposits and assets of these banks would have vanished, this is something your kind simply hasn't grasped, They were carrying assets at a value greater than the market price and were levered based on those assets. It always was a solvency problem not a liquidity problem and the FDIC process already existed to fix those problems. Whats that you'll argue, there wasn't enough in the FDIC funds to cover the holes? Ok, all the loan programs and extraordinary measures taken to keep failed business models in business could have just been given to business models that didn't fail so they could purchase the carcass of the ones that did.

Your kind has yet to show how Armageddon would have happened other than citing liquidity trap theories that we don't observe in practice.

[Edited on December 15, 2011 at 5:11 PM. Reason : k]

12/15/2011 5:10:44 PM

Quote :

"Then please tell me, how large would be large enough for you to believe that?"

Large enough that no other institution with discount window access could afford to buy its assets at firesale prices. This would only limit the size of the failing firm to however much the federal reserve was willing to lend. Which isn't true either, because as firms find it difficult to justify borrowing so much to buy the assets in question, the price will fall until someone is willing to borrow from the fed to buy it.

So, I seems I don't believe there could ever be an institution large enough to need bailing out. We clearly need to reform bankruptcy proceedings to facilitate this process, and open federal reserve lending to all applicants with collateral, all manageable.

12/15/2011 5:19:18 PM