Cato: Fed Inflation "Needed" to Counter "Irrational Exuberance"
In To Prevent Bubbles, Restrain the Fed, Cato's Gerald P. O'Driscoll Jr. writes, in an article otherwise opposed to policies that cause "the boom and bust cycle":
"At first Fed easing was in order. The central bank needed to counter the "irrational exuberance" of the dot-com bubble. And by May of 2000 the Fed had done that by raising the fed-funds target to 6.5%. That needed to come down when the bubble burst. Aggressive cutting brought it to 2% in November 2001. The problem is the rate remained at 2% or less for three years (for a year it was at 1%)."
So, it's okay to have artificially low interest rates when it's "needed"--but not for too long! Ah, there's the rub--finding just the right length of time to "ease"... we'll get it right someday, I'm sure.
Comments (13)
Mick
lol, poor Cato, such a pathetic far cry from its namesake...
Published: November 17, 2008 10:52 AM
John
You might be nitpicking a little. I would applaud anyone putting commodity standards up front in the WSJ editorial page.
You wouldn't be nitpicking by saying the first sentence should read, "At first Fed tightening was in order." The problem is that the sentence doesn't make sense with what follows.
Published: November 17, 2008 11:18 AM
Jeff
FYI:
I am wishing we had a "Depositors Bill of Rights Act of 2008" come out of this lame duck congress that:
-Required 100% reserves on demand deposits.
-Have the market (depositors) set "reserve requirements" for banks (to redefine the word a little bit) by the ratio of Demand Deposits vs. Loans to the Bank.
I wonder how many people would take a loan from a bank if the terms consisted of a clause stating - "the outstanding principal on said loan is redeemable by the bank 'on demand'".
Published: November 17, 2008 11:44 AM
Richard
Presumably Cato are Chicagoites rather than Austrians?
Published: November 17, 2008 12:08 PM
Alex
Presumably CATO is full of hypocrites, rather than moral people?
Published: November 17, 2008 12:47 PM
Bill
They are not hypocrites. They are just plain wrong. You can not have a commodity money standard while having a central bank. Bretton Woods showed that. Eventually the central bank either starts creating currency beyond its storage of the commodity or it does nothing. What government program does nothing with the power of inflation at their disposal?
Published: November 17, 2008 4:05 PM
Bruce Koerber
Gerald P. O'Driscoll Jr. of Cato does not know the difference between the cause and the effect. Consequently he starts at the point of 'effect' and decides that it is OK to re-initiate the 'cause.'
And that is the pure economic science of it in a ceteris paribus world where ethics are not allowed into his imaginary model.
Is the Cato Institute proud of such quackery?
Published: November 17, 2008 4:45 PM
Oil Shock
Stephen Kinsella needs to be more discrete in picking the battles. This guy doesn't seem nearly as bad as some of the others writing for WSJ or CATO. At least he admits that a commodity standard would be better. That is a move in the right direction.
Published: November 17, 2008 7:15 PM
Jeff K
For all you 100% reserve banking people out there: What would happen if banks were required to hold 100% of deposits? They obviously couldn't lend the money. But eventually someone with excess funds would want to. Eventually lending/credit would happen. You've just taken banks out of the finanical intermediation picture and forced either ma and pa to make their own lending decisions or would cause new "non-banks" to spring up and offer to take ma and pa's money and lend it, for a rate of return, to others. Eventually a form of credit-extending banking would re-emerge.
Published: November 18, 2008 12:11 AM
Alexanka
Jeff K:
"What would happen if banks were required to hold 100% of deposits? They obviously couldn't lend the money."
Oh horror... if you have 100 bucks you " obviously couldn't lend a penny" until you print 1000000.....
Do you really understand what are you talking about?
Published: November 18, 2008 1:03 AM
Liberty
"What would happen if banks were required to hold 100% of deposits? They obviously couldn't lend the money."
There is a difference between lending money, and pyramiding money.
For example, let's say I own a gold vault and I wrote notes that are redeemable in gold that I have stored.
1 note = 1 gold bar. And I have 100 bars, so I write 100 notes. That is 100% reserve. I can payback all of my liabilities.
But let's assume that I write 1,000 notes while still having only 100 gold bars. People use these notes thinking that they are fully payable in gold, but they aren't. I don't have that many gold bars. Their notes are worth nothing.
This is exactly what banks do. They write notes for assets that they do not have. When you go to an ATM, it states that you have $70,000, but in reality, the bank does not have the majority of that money.
The banking system is, therefore, always insolvent. Should a bank run happen where people declare payment of their notes all at once, the banks would have to declare bankruptcy. This happened in the 1920s.
FDIC "insurance" is a fraud because you can't insure something that is always fraudulent. FDIC doesn't even have the funds to cover every bank's assets. They have just a tiny fraction. FDIC's only purpose is to give people the feeling of safety when using an unsafe and unstable system.
Published: November 18, 2008 2:01 AM
Stanley Pinchak
Liberty,
only 900 of those notes are worth nothing, as to which ones those are, that can only be determined in a bank run. A pretty crappy way to determine the value of a particular piece of paper in my own opinion. 900 notes worth of fraudulent bank demands on debtors, 900 notes of unbacked demand in consumer and capital goods markets. What is the difference between a fractional reserve bank and a counterfeiter? Legal precedent. What about a frb and an embezzler? The same.
Published: November 18, 2008 10:15 AM
Deefburger
Thank You Liberty.
I have given this some thought lately myself. If the 100% deposit exacts a fee from the bank for storage of the specie, then over time, with accumulating deposits, the bank will have a reserve above and beyond the deposit reserves. This money could be loaned safely without loss to the depositors.
It would be in the best interest of the bank to make those loans to individuals that would pay it back because it is the bank's money. The bank should be free to set it's own standards for determining the risk of such loans. The higher the risk, the shorter the term of the loan and the higher the interest.
In addition, the same banks could have interest earning accounts, not 100% reserve, that individuals could use for checking or small savings. This would make more money available to the bank for lending purposes and the incentive to their depositors is the lack of a fee and the payment of interest to the depositor.
A typical bank may waive the the fees on 100% reserve deposits if the client also maintains a minimum balance in loanable funds fractional reserve accounts. Sort of a "free checking" incentive in reverse.
A credit union could operate the same way, with the added duty of the depositors to elect the credit union executives. Just a thought.
Banks could, for the purpose of supporting larger investments and short term commercial loans, pool resources in a sort of inter-bank credit union, using only loanable funds. Thus, the larger capitol needed for such loans could be made available and still maintain the independence of the member banks, and spreading the risk accross the banks, and not the depositors.
I could go on. But banking would be better off with commodity money. If there is transparency in the bank, then commodity money is visible. The biggest problem in tallying all the debt generated in the fiat money system today is because when the system is transparent, the money can't be seen because the money itself is not real. Fiat money is backed by assumptions.
The difference fundamentally is in the valuation of Time and Control. Commodity money is valued "after the fact". In other words, something happened already that made it available to the holder. The Holder actually has it. No assuptions. The holder's time and effort were already spent to get it. The commodity is now a symbol of the holder's History and Control.
Fiat money is based on assumptions. The assumption that something will happen that hasn't happened yet, and the assumption of ownership and control of the future of those who will make it happen. I don't know about you, but my future is livable only by me, and so any assumption of ownership or control over it is ludicrous. It is physically impossible for any one else to experience and control the future of free individuals. So, the creation of Fiat money nessesitates the creation of controls and constraints in order to effect payback on the assumptions. There goes your freedom.
I'd take real money and freedom over imprisonment and restriction backed fiat money any day.
Published: November 18, 2008 10:23 AM