Cafe Hayek - Latest Comments in Greenspan vs. Taylor

Re: Greenspan vs. Taylor

Crusader — Thu, 12 Mar 2009 13:37:24 -0000

And supposedly I am the King of Strawman....and a Parody of Myself.

Posted by: murigeo | Mar 12, 2009 4:22:06 PM

All true.

Re: Greenspan vs. Taylor

Martin Brock — Thu, 12 Mar 2009 13:25:59 -0000

I don't follow. The editor said that the issue covered the monetarist (read: economic) as well as the politics and finance.

Gaming the money supply is not what I call "economic fundamentals". I mean things like the supply of labor or some critical raw material or miles of paved roads or the demand for particular goods, like gasoline or housing. I'm talking about the real economic actors in the real economy, not monetary authorities.

Re: Greenspan vs. Taylor

murigeo — Thu, 12 Mar 2009 12:22:06 -0000

Preface to the German-language edition of

The General Theory of Employment, Interest and Money (1936)

Those who quote Keynes should, you know, actually read Keynes.

Posted by: maximus

Doesn't say that in the English version. You sure Mises and some other Germans aren't foisting an urban ledgend upon the guillable? You really believe keynes advocated a totalitarian state?

And supposedly I am the King of Strawman....and a Parody of Myself.

Re: Greenspan vs. Taylor

Guest — Thu, 12 Mar 2009 12:21:49 -0000

Muirgeo,

You seem to acknowledge that order emerges biologically.

Elsewhere you've noted that man is social by nature, yet you deny that order emerges socially.

Amazing that you don't see the inconsistency.

Re: Greenspan vs. Taylor

murigeo — Thu, 12 Mar 2009 11:55:47 -0000

Quoting Keynes here is like throwing two cats into bunch of pigeons, muirgeo. :\

Posted by: Gil

Well or like quoting Darwin to a bunch of creationist. They need to hear it.

Re: Greenspan vs. Taylor

Guest — Thu, 12 Mar 2009 10:27:45 -0000

I give up. I guess it is all about politics and finance. Economic fundamentals don't really affect anything.

I don't follow. The editor said that the issue covered the monetarist (read: economic) as well as the politics and finance.

Re: Greenspan vs. Taylor

Martin Brock — Thu, 12 Mar 2009 10:22:02 -0000

... other authors treat the contributions of the Basel rules, mark to market, Fannie, Freddie, the CRA, and the legal cartel of rating agencies.

I give up. I guess it is all about politics and finance. Economic fundamentals don't really affect anything.

Re: Greenspan vs. Taylor

Oil Shock — Thu, 12 Mar 2009 10:01:30 -0000

link to the Barrons article cited above.

Re: Greenspan vs. Taylor

Sam Grove — Thu, 12 Mar 2009 09:42:10 -0000

Who is ultimately responsible?

If it's a systemic issue, then we all are to the extent that we support the system as it is.

Re: Greenspan vs. Taylor

maximus — Thu, 12 Mar 2009 08:52:48 -0000

The theory of aggregate production that is the goal of the following book can be much more easily applied to the conditions of a totalitarian state than [it can] under the conditions of free competition and a considerable degree of laissez-faire.

John Maynard Keynes

Preface to the German-language edition of

The General Theory of Employment, Interest and Money (1936)

Those who quote Keynes should, you know, actually read Keynes.

Re: Greenspan vs. Taylor

Oil Shock — Thu, 12 Mar 2009 08:10:23 -0000

From Barrons....

The standard construct of the economy used by virtually all forecasters, from the Federal Reserve on down, is basically Keynesian, with varying opinions about how the model works. That none of them predicted the current crisis is telling, and indeed damning of the approach.

What definitely is ignored in academe is the Austrian school of economics, especially for baby boomers brought up on Samuelson's economics text, which was pure Keynesian orthodoxy. I did not learn the names von Mises and Hayek or their ideas until a decade or more after graduation (with a degree in economics, by the way.)

The Austrian view is a mirror image on the right to Minsky's from the left. The economy, if left alone, is self-correcting, say the Austrians. But central banks' inflationary expansion of credit produces booms and malinvestments, which inevitably lead to a crashes and depressions.

The only prevention for boom and busts are sound money, which is impossible with government-controlled central banks. Once the bust comes, the only cure is to let it run its course; allow the malinvestments go bankrupt and let the market reallocate the capital to productive uses....

The Austrian prescription, of course, was rejected first by the New Deal of Franklin D. Roosevelt, and now by massive response by both the purportedly conservative Bush administration and now the Obama administration. First came the $700 billion TARP last year to stabilize the financial system, followed by the $787 billion fiscal stimulus enacted last month. Across party lines, it's accepted that government's role is to prevent the economic pain that would come of "liquidate, liquidate, liquidate."

But the Austrians were the ones who could see the seeds of collapse in the successive credit booms, aided and abetted by Fed policies, especially under former chairman Alan Greenspan. While he disavows (again) the responsibility for the boom and bust, most recently on Wednesday's Wall Street Journal Op-Ed page ("Fed Policy Didn't Cause the Housing Bubble," March 11), monetary policy played a key role in creating successive bubbles and busts during his tenure from 1987 to 2006...

Austrian economists assert the current crisis is the inevitable result of the Fed's successive efforts to counter each previous bust. As the credit expansion pumped up asset values to unsustainable levels, the eventual collapse would result in a contraction of credit as losses decimate banks' balance sheets and render them unable to lend. That sounds like an accurate diagnosis of the current problems.

In the meantime, both Western democracies and autocratic governments such as China are actively utilizing the ideas of both Keynes and Friedman alike in enacting massively expansionary fiscal and monetary policies to counter the crisis resulting from the severe contraction in credit.

If these policies are successful, perhaps governments will adhere to Austrian principles to prevent a new boom and bust. That is for the next cycle, however. To paraphrase St. Augustine, governments may be saying, "Make us non-interventionist, but not yet.

Re: Greenspan vs. Taylor

Oil Shock — Thu, 12 Mar 2009 07:42:31 -0000

Fabian Socialism is an astounding belief that the wickedest of men will do the most generous of things for the greatest good of everyone. - Oil Shock

No libertarian believes that wicked men will do good things purely for the benefit of others. WHich is the reasons why all Keynesians starting from Keynes himself has always been trying to destroy strawmen. Isn't funny that Keynes, like many of the liberals of today was born with silver spoon in his mouth, went to the equivalent of liberal breeding grounds like Harvard, where as many prominent libertarian contemporaries came from a more real world humble backgrounds, went to more schools and had more humble educational backgrounds?

Re: Greenspan vs. Taylor

Gil — Thu, 12 Mar 2009 06:36:52 -0000

Quoting Keynes here is like throwing two cats into bunch of pigeons, muirgeo. :\

Re: Greenspan vs. Taylor

John Dewey — Thu, 12 Mar 2009 06:17:19 -0000

sam grove: "We are malinvested in many areas:

... Well, maybe highways do, but I have my

doubts."

sam grove : "Maintenance is one of the negative factors not properly accounted for when road construction is planned."

Haven't toll roads demonstrated that highways can have positive financial values? I think most toll authorities take maintenance into account during construction planning. I have no doubt that private ownership or private management of toll roads will ensure that maintenance costs are included in planning.

Highway funds cannot achieve a positive return on investment as long as urban commuters subsidize rural voters.

Re: Greenspan vs. Taylor

muirgeo — Thu, 12 Mar 2009 06:08:58 -0000

Sold Out; How Wall Street and Washington Betrayed America

This American Life; The Giant Pool of Money

Greenspan lowering interest rates to the desires of Wall Street and Multinational corporate interest is just one small piece of this puzzle. In fact it's no puzzle. The whole state of the world and our economy is simply the result of bending government policy to the desires of the super wealthy. Wall Street cares nothing about productivity, they care nothing about free markets, they care nothing about market competition nor the invisible hand of the market... they ultimately are looking for fast easy money anyway they can get it. This usually is best accomplished by switching money from production to speculation. It's the best and fastest way to earn lots of money without having to do any real work or produce any real value or real product. Simply give Wall Street everything it wants and this is the end result. Simply look at the major legislation passed over the last 30 years and you will see the building blocks which resulted in this fiasco. Piece after piece of legislation was put together to this specific end ultimately resulting in the CDO. ll just one big coordinated plan to squeeze the last bit of equity out of the lower classes especially when it became clear they could not get their hands onto social security for now. It's proof positive of the dangers of allowing the wealthy elite to circumvent democracy and promote the interest of an elite few over the interest of the many. Its the rock solid evidence for why unregulated free market capitalism does not work and is an idea that is an abject failure when attempted to be put into place in the real world.

The two best resources to understanding this situation in its entirety are HERE and HERE.

"My first instinct was to let the market work, until I realized ... how significant this problem became."_GW Bush

"Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone."

John Maynard Keynes

Re: Greenspan vs. Taylor

Thu, 12 Mar 2009 05:30:35 -0000

John Allison isnt BBT's CEO anymore. Kelly King is...Allison is still chairman, though.

Re: Greenspan vs. Taylor

Martin Brock — Thu, 12 Mar 2009 05:21:55 -0000

Mike: I wonder if those Chinese know what they have done to us.

They probably imagined that we'd raise more of our children here to plow more of our land to grow more food for them to eat in their old age, but we raised fewer children to build ourselves bigger castles instead. Now, we'll print money to buy back their Treasury notes, and they'll buy whatever we're selling with the money we're printing, because that's all they can do.

They fucked up. They trusted us.

Re: Greenspan vs. Taylor

michaelsmith — Thu, 12 Mar 2009 05:13:16 -0000

John Allison is the CEO of BB&T -- in fact, he is the longest tenured CEO of all the major financial institutions. Here is a link to a presentation wherein he shows precisely how the government caused this crises:

Allison on the Crises

Re: Greenspan vs. Taylor

Martin Brock — Thu, 12 Mar 2009 04:54:43 -0000

By lowering interest rates and creating new money in the economy, the Fed alters which investors (both banks and borrowers) have access to capital.

The Fed only lowered short-term rates on T-bills to lower, in turn, the rate on overnight interbank lending. The same two words ("interest rate") label all interest rates, but all interest rates are not identical for this reason.

When the Fed raises the price of T-bills through open market operations, it can create cash reserves in banks, but it doesn't create opportunities to lend the cash profitably for 15-30 years. The banks are not compelled to lend this cash, overnight or otherwise. If banks lend the cash, they accept the risk of loss (we hope). If they borrow at low overnight rates to lend long, they accept a greater risk. This risk of loss is what Greenspan could not and did not change when he lowered the Fed's target for overnight lending between banks.

Prudent borrowers with rational economic outlooks and expectations of interest rates will not invest in projects which will fail if interest rates increase.

Right. An expectation of the interest rate on T-bills over the next quarter is not the only thing prudent creditors expect.

However, by lowering interest rates too far, the funds available for investment can exceed the number of investments which are long-term viable, leaving investments which only work as long as rates are low.

Funds available for investment are not automatically invested. Profitable investment requires more than cash reserves on creditors' books. If a creditor doesn't perceive these opportunities, he leaves the reserves on his books. Simply entitling creditors to extend more credit does not magically create the creditors' incentive to lend. That's why all the cash the Fed has created lately hasn't stimulated a lot of lending lately.

Because many banks and investors have incorrect expectations of future interest rates and economic climate, ...

The Fed does not create banks' expectation of the future economic climate. Interest rates on T-bills are not the economic climate. They're more like tomorrow's temperature, accompanied by no hint of the humidity or the wind speed or direction or anything else about the weather, including the temperature the day after tomorrow.

In fact, cash reserves are only devices for measuring tomorrow's temperature. Generating the heat is not something that banks alone can do.

... some of these people and firms will be inclined to make use of these excess funds and invest in projects only viable in the short-term.

If the projects are really viable in the short-term, that's fine.

The result is profits while rates are depressed, ...

Profits on short-term investments, while short-term rates are low, are fine. If you borrow short-term to produce lots of flags for the Bicentennial celebration, that's fine. Expecting to sell so many flags after the celebration is tragically short-sighted.

If rates are held too low for too long, I can imagine entire firms and industries being created which are simply not viable under ordinary economic conditions.

But the Fed only held short rates on T-bills low for a few years, and it didn't hold long rates low at all. Long rates were low for other reasons. They were low worldwide, not only in the U.S. How did the Fed manage that?

What you're saying about low long-term interest rates could be true, but simply blaming the Fed for the low long rates is a mistake. Long rates have been low for other reasons. Rates on ten year Treasury notes boggle the mind right now. It's like "safe" entitlement to tax revenue is all anyone wants to buy.

Why is that? Just look at the population profile. It's not rocket science. We've never had such a large proportion of the population expecting to consume for decades without producing anything in all of human history, and this proportion is so large because we've just experienced a period of historically low investment in the world's most valuable capital, human labor.

We didn't really invest to meet all of these retirement expectations. That's the problem. It's a big part of the problem anyway, but it's not the part we're discussing, because we're neck deep in denial right now.

Or in other words, ABCT + heterogeneous expectations explains why the Fed dunnit.

Your analysis of the effect of low long-term interest rates could be spot on, but the Fed didn't do it. That's Greenspan's point and the point you're missing.

But another part of the problem is that we have not made the real long term investments needed to realize the historically unprecedented retirement expectations of the "baby boom" (which is really a baby bust). To make these real investments, we must now go back in time a few decades and have more children.

Its also worth noting that the Fed is always depressing interest rates, so the notion that short-term rates can't affect long-term rates is only true in the short-term.

Even if short rates are always low, lending long to someone who ultimately doesn't repay the loan is still a loss.

Banks do not lend at the Fed funds rate. They borrow at this rate. Lowering the Fed funds rate can lower the rate at which banks borrow, but it doesn't lower their spread. The spread depends upon the banks' perception of the risk of lending.

A "long-term" loan is a loan for which this risk is long-term, not simply a loan for which the cost of funds is fixed over a long term. The cost of funds is only one factor in the long-term risk assessment.

Another factor is the number of home buyers in the future able to afford the houses we build presently, and countless other factors exist, like the possible death of a borrower before he repays the debt. Politics and finance are not everything.

Re: Greenspan vs. Taylor

Grant — Thu, 12 Mar 2009 00:55:35 -0000

While I don't want to lay all the blame on the Fed, I think it may have more blame than most people believe.

Martin said:

Greenspan has a point. The Fed is not faultless, but anyone who wants to lay all of the blame for the "crisis" at Greenspan's feet must explain how low interest rates on T-bills and overnight lending between banks can translate into low rates on 15-30 year loans secured by home mortgages.

By lowering interest rates and creating new money in the economy, the Fed alters which investors (both banks and borrowers) have access to capital. Prudent borrowers with rational economic outlooks and expectations of interest rates will not invest in projects which will fail if interest rates increase. However, by lowering interest rates too far, the funds available for investment can exceed the number of investments which are long-term viable, leaving investments which only work as long as rates are low.

Because many banks and investors have incorrect expectations of future interest rates and economic climate, some of these people and firms will be inclined to make use of these excess funds and invest in projects only viable in the short-term. The result is profits while rates are depressed, and insolvency when they return to normal (or above-normal) levels. If rates are held too low for too long, I can imagine entire firms and industries being created which are simply not viable under ordinary economic conditions.

Note that the people who have incorrect expectations aren't necessarily investors themselves. They may be depositors, lenders, borrowers (e.g., homeowners), or anyone who makes a financial decision based on future expectations of low interest rates. They may also be assisted by people who do know what is going on, and want to make a quick buck before the bubble bursts.

Or in other words, ABCT + heterogeneous expectations explains why the Fed dunnit. Its also worth noting that the Fed is always depressing interest rates, so the notion that short-term rates can't affect long-term rates is only true in the short-term.

Re: Greenspan vs. Taylor

JW — Wed, 11 Mar 2009 23:55:27 -0000

Sure there were other culprits (imbalances, incentive structure, Fannie etc) but the Fed is squarely in there.

And here's another reason the unprincipled obfuscating whore should not be taken seriously, correlations and all:

Greenspan before Congress

The former Fed chief also said he was often following the "will of Congress" during his long tenure and did "what I am supposed to do, not what I'd like to do." WSJ here

Re: Greenspan vs. Taylor

Russell Nelson — Wed, 11 Mar 2009 22:54:38 -0000

Martin: of course we aren't ... that's why we're doomed.

Re: Greenspan vs. Taylor

Sam Grove — Wed, 11 Mar 2009 21:22:46 -0000

with the possible exception of road maintenance.

Maintenance is one of the negative factors not properly accounted for when road construction is planned.

I forgot to put prohibition on the list, it has cost a lot and has had absolutely no fiscal return.

Re: Greenspan vs. Taylor

Andrew_M_Garland — Wed, 11 Mar 2009 21:01:14 -0000

Mike: They are saving a lot in China and interest rates are dropping.

Jim : (fear) We are all going to die! How will we stop ourselves from selling houses at low interest rates to people who can't pay back the loans?

Mike: We can't stop ourselves! When I plug the numbers into the Standard Equation it says the no money down, interest-only, floating-rate payment on a $400,000 home is only $1,250 per month. Plus insurance and taxes, but we can ignore those. We can sell every house that we can borrow or build. Who is going to save us from ourselves?

Jim: (thinking) Well, the interest rate is low, but we only have enough money to float two houses. Also, have you seen the loan applications? The dregs. I wouldn't loan to them. So, we are saved.

Mike: Not so fast. The government FanFred Store is buying anything with the title LOAN stamped on the top. Something about making housing affordable on an equal basis, to both the good and bad credit risks. We can build the houses, make the loans, and sell them to FanFred. We'll make a nice profit on every loan, as long as we turn it over while the ink is wet.

Jim: Why would they buy such bad loans?

Mike: What do we care? We would be supporting public policy. We aren't going to lie or anything. They say we would be doing a good thing for the country.

Jim: (blood rising) Feel that energy! What a great public policy. Why, there is almost no limit to the people who can take out a loan now. We don't have to be saved, we are going to be rich, as long as we don't hang on to any loan overnight.

Mike: I wonder if those Chinese know what they have done to us.

Re: Greenspan vs. Taylor

Martin Brock — Wed, 11 Mar 2009 17:55:01 -0000

These things have no positive financial returns.

Absolutely. Given the needs we face in the immediate future, we should be slashing expenditures on all of the stuff you listed, with the possible exception of road maintenance. I suppose I'm still a road socialist.

But of course, we aren't.