20080123

Bernanke is no Greenspan

For at least a decade, I have been following the Federal Reserve's actions with respect to 3-month T-bill rates. I noticed that Alan Greenspan was a faithful follower of the 3-month T-bill rate, increasing or decreasing the federal funds rate (and the prime rate via proxy) each time the 3-month T-bill rate changed by at least 0.25%.* The T-bill rate is a market rate determined by auction. It reflects the short-term value of finance capital under no-risk conditions. Greenspan became famous for his mumbo-jumbo, all the while quietly following this key statistic, just like anyone of us could have done. Ben Bernanke, on the other hand, has dared to defy the market gods, delaying the inevitable rate decrease so long that, in one fell swoop, he has had to drop the rate by three times as much as the 0.25% increment Greenspan was noted for. Bernanke’s “too slow Joe” approach has not prevented the slide into recession that normally is accompanied by a drop in the 3-month T-bill rate. Instead, it has thrown the financial markets into a tizzy worldwide. Surplus capital is now jumping in and out of the shaky stock market on a daily basis, while the still-artificially high interest rates continue to contribute to real estate foreclosures. The prime rate generally is about 3% more than the 3-month T-bill rate. With the 3-month T-bill rate heading below 3%, Bernanke’s 6.5% prime rate is still at least 0.5% too high.


What does this have to do with univironmental determinism, the scientific worldview? The example above demonstrates the univironmental interaction of one microcosm (the Fed) with its macrocosm (the global economy). No matter how much it wishes, the Fed can no more stop a recession than it can stop capitalism itself. The surplus capital accumulated during an economic expansion must be invested somewhere. Like any supply/demand situation, the more the supply, the less the demand. Interest rates reflect that demand. Thus each economic expansion produces greater and greater amounts of capital as well as surplus goods. Interest rates decline, cheap goods flood the stores, and factories lay off workers. When the Fed does not immediately puppet the 3-month T-bill rate it produces aberrations. The macrocosm slaps it back down, forcing it to follow the demands of the market. It would be more efficient to tie the prime rate directly to the 3-month T-bill rate and dispense with the Fed altogether.


*With data from as far back as 1946, Tim Wood, one of the sharpest economists around, clearly shows that the popular belief regarding the influence of the Fed is wrong. Interest rates control the Fed; the Fed does not control interest rates. In every case, changes in the 3-month T-bill rate precede changes in the Discount Rate (http://www.safehaven.com/article-8375.htm).

3 comments:

Glenn Borchardt said...

From Steve:

"The rate of 3 percent (I am assuming this is annualized rate) is exactly right for 1 percent growth in population and 2 percent growth of economy. But this is exactly the point about peak oil: the 2 or 3 percent growth cannot continue because it is exactly tied to the amount of cheap plentiful oil that we have always had while "normal" conditions have prevailed over the last several decades. I wonder who will prop up the faith in the US Govt to keep the T bill rate at 3 percent when there is no longer justification for it? Will the market do it for us? Great."

Steve

Glenn Borchardt said...

Steve:

The market always does its job. The US Gov has nothing to do with the 3-month T-bill rate, since it is set via auction among capitalists. No amount of "propping up" will make any difference, as seen in Bernanke's recent failure. Both the rate of population growth and the associated economic growth will slowly decrease during the next century per the global demographic transition shown on page 290 in TSW. "Carrying capacity" means just that, the number of individuals that can exist under the environmental conditions. Cheap oil happened to be coincidental with the Industrial Revolution and the capitalist phase of our development, but it could have been any other source of energy. Even if oil had never existed, the growth still would have occurred exponentially with an inflection point suited to the univironment (maybe in 1989 or maybe not). Oil will never run out, it simply will become more expensive to obtain. Other fuels will replace it, with biofuels and nuclear sources having a head start for mobile uses.

Glenn

Glenn Borchardt said...

Comment on an article by French on the Fed: http://mises.org/story/3247


Since I wrote the above blog, the dreaded surpluses have materialized once again. It makes no sense to increase the production of SUVs and of oil when their prices have fallen in response. Once again, the public sector needs to be expanded to do what the private sector cannot do without bubbles and crashes. The only way out of the depression that began in December 2007 is to repair infrastructure, raise salaries (by lowering taxes, providing publicly funded jobs, subsidizing mass transit, increasing unemployment benefits, Medicare, social security, and anything else that gets cash into the hands of those who will buy those surplus SUVs and surplus oil). This will require massive increases in federal and state spending, along with massive increases in the national (and state debt). French and his cohorts can whine about this all they want, joining Hoover in the dustbin of history. Any hesitation in prolonging the socialization of the economy simply will prolong the depression.

Hayek's motto: "collectivism is slavery" is true all right. Corporate capital has merged so many times and has gotten so hugh that it now is "too big to fail." Looks like we are the slaves.

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