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).