The Progressive Peacenik Myth
I am in almost total agreement with this article. The distinction between liberals and neocons is apt: "Left is indeed willing to use military force after all, just so long as no discernible American interest is at stake." This might be OK, if the record of liberal wars (Vietnam, Korea, Somalia, ...) were not so apalling.
The article points out that the neocons can cleverly use the leftist (Wilsonian) position as a fall back: "We did it for democracy, freedom, and the children." How closing down dissenting publications and replacing one vicious pawn of the US within another brings democracy and freedom and how killing the children supports them requires some twisted logic. Obviously, there is a non-intervenionist (peace-loving) left, just as there is a non-intervenionist conservative tradition.
It is interesting that the majority of Americans now oppose the Iraq war (and would have always opposed the war had they not been lied to about the threat that Iraq posed), but the mainstream of both political parties continue to support the intervention.
Possible silver lining: Will Edwards make some tepid criticism of this latest foreign-policy fiasco?
26.7.04
22.7.04
Hussman Funds - Why the Federal Reserve is Irrelevant
The Federal Reserve is irrelevant. We don't just mean ineffective, though that is certainly likely to be true here. Rather, because of a change in the application of reserve requirements over the past decade, Fed actions have virtually zero impact on lending activity in the U.S. banking system.
Who controls the reserve requirements? The Fed. Yes, this is the primary mechanism of growing the money supply. I would hardly say that the power to dictate reserve requirements is "irrelevant".
The main job of the Federal Reserve is to determine the mix of government liabilities held by the public. When the Fed "eases monetary policy" or "cuts interest rates", it accomplishes this as follows. The Fed goes into the open market, buys a bunch of Treasury securities from banks (who have drawers full of them), and pays for them by creating new bank reserves.
The "public" does not hold government liabilities. Only misguided investors who have been told that they are "safe" (as in a safe way to lose money by having it appreciate slower than inflation) and banks (which are a part of the Fed) hold government securities. In days of yore, the banks would have held something of intrinsic value to more people, gold.
Pull a dollar bill out of your wallet. Look at the very top line on the front. It says "Federal Reserve Note." That dollar bill is essentially a liability of the Federal Reserve. The Fed also has a corresponding asset - the Treasury securities it buys.
Treasury securities are far from universally viewed as "assets". Indeed, in a free market would any rational person purchase an asset from an entity with massive debts and no credible plan of repaying the debts. If the banks were not part of the federal government - federal reserve -banking complex, why would they not purchase a mix of other assets?
When the Fed "cuts interest rates", what it is really doing is replacing one government liability held by the public - Treasury securities - with another government liability: currency and bank reserves (monetary base). That's all the Fed does. It determines the mix - but not the total amount – of government liabilities held by the public. Since the operations of the Fed are executed by buying or selling securities on the open market, the group at the Fed responsible for these decisions is called the Federal Open Market Committee, or FOMC.
Virtually all of us use dollars (for their virtues as a medium of exchange and store of value (albeit somewhat depreciating)), few of us are interested in investing in federal government. Thanks to the Fed we have no choice.
Banks are required to hold reserves as a percentage of all checking accounts outstanding. These reserves prevent overdrafts, and provide for day-to-day withdrawals of currency and the like. On any given day, some banks will have a reserve shortfall, while others will have excess reserves. These excess bank reserves are lent back and forth between banks on an overnight basis, at an interest rate known as the Federal Funds Rate.
Yes, the Federal Funds Rate is free market rate.
Essentially, the Fed lowers the Federal Funds rate by purchasing Treasuries from banks and increasing the "monetary base" - bank reserves plus currency in circulation. The only thing that the Fed can control with certainty is the monetary base.
That is a lot! The print up money (federal reserve notes) out of thin air to "buy" worthless Treasuries. This is just a subsidy to the Federal Government because no rational person would buy Treasuries that were not bolstered by the Federal Reserve.
Alternately, it can try to control the Federal Funds rate (and passively adjust the monetary base by whatever amount is required to keep Fed Funds on target).
Who makes the "target"? The Federal Reserve Board!
However, the Fed cannot control the Federal Funds rate with certainty. For example, if inflationary pressures were high and interest rates were moving up, the Fed could not predictably lower the Fed Funds rate by easing monetary policy.
Why not?? As evidenced by Japan's FR, interest rates can be driven to zero.
Not surprisingly, central banks always target money growth, not interest rates, when inflation is high. That's why Volcker targeted money supply, while Greenspan targets interest rates. But ultimately, the only thing that the Fed can directly control is the monetary base.
The two are related.
The "money multiplier" loses its magic.
Alright. So when the Fed is easing, it increases the monetary base by purchasing Treasuries on the open market. When the Fed is tightening, it reduces the monetary base by selling Treasuries on the open market. Now that we're clear on what the Fed does, let's take a look at why it is irrelevant.
Activist monetary policy is based on the assumption that there is a predictable relationship between bank reserves and bank lending. The operative notion of easy money is that the Fed creates new bank reserves, and banks lend them out. These loans get spent, and the proceeds get deposited at other banks as new checking accounts. Whatever is not required to be held as reserves is then lent out again, and through the magic of the "money multiplier", loans and bank deposits go up by many times the initial injection of reserves.
That's the theory. But a change came in the 1970s with the emergence of money market funds, which require no reserve requirements. Then in the early 1990s, reserve requirements were dropped to zero on savings deposits, CDs, and Eurocurrency deposits. At present, reserve requirements apply only to "transactions deposits" - essentially checking accounts. The vast majority of funding sources used by banks to create loans have nothing - nothing - to do with bank reserves.
These days, commercial and industrial loans are financed by issuing large denomination CDs. Money market deposits are largely used to lend to corporations who issue short term commercial paper. Consumer loans are also made using savings deposits which are not subject to reserve requirements. These loans can bunched into securities and sold to somebody else, taking them off of the bank's books.
Once again, the Fed is responsible for reserve requirements. There is no reason why they could not require 100% reserve requirements for all deposits.
The point is simple. Commercial, industrial and consumer loans no longer have any link to bank reserves. Since 1995, the volume of such loans has exploded, while bank reserves have actually declined . Look at the one monetary aggregate that the Fed can directly control - the monetary base. Every bit of increase since January 1994 is accounted for by currency in circulation, not bank reserves.
Over the past year, the Fed has eased very aggressively, buying about $32 billion in Treasuries, with a corresponding $32 billion increase in the monetary base. Now look closer. Total bank reserves actually declined by $1 billion while currency in circulation has increased by $33 billion.
So they should tighten reserve requirements.
Alan Greenspan isn't the "Maestro". He's Oz - working behind the curtains, leaning into the microphone, pressing buttons that blow smoke and fire, but not really having much power at all. Scarecrow already has a brain. For the past several years, commercial and industrial loans and consumer credit exploded quite simply because rabidly eager borrowers were able to find rabidly eager lenders.
Greenspan is more like the a bumbling giant. You make a good point that reserve requirements are much more important than money supply; however, the FRB controls both! Due to these controls Greenspan has complete control of the banks to lend money.
And now, both forms of credit (as well as commercial paper issuance) are declining because borrowers are saturated with debt and lenders are increasingly skittish of credit risk.
This is unsurprising because the FRB is threatening to increase interest rates.
The Fed certainly played an important psychological role in recent years, and certainly has a role to play during bank runs and other crises where the demand for monetary base soars. But the rest of the time, open market operations are almost completely sterile.
So the 20% annual increase in housing prices is "sterile"?
In recent years, the irrelevance of open market operations has also been argued (for slightly different reasons) by academic economists renown for their work in the theory of “rational expectations”, including Thomas Sargent and John Muth.
Inflation follows unproductive government spending.
One might respond that even if the Fed doesn't affect credit, surely changes in the monetary base affect inflation. But if you look at the statistical evidence, the relationship between monetary growth and inflation is very weak.
Monetary growth = inflation. Your research must be based on a thoroughly debunked CPI.
Instead, our research indicates that inflation is primarily the result of growth in unproductive forms of government spending (basically entitlements and other expenditures that fail to stimulate the supply side). The evidence both from the U.S. and other countries clearly demonstrates this relationship.
All forms of government spending are unproductive relative to business spending in competitive markets. Growth in government spending which does not cost citizens as overt taxation results in hidden taxation in terms of inflation.
As Milton Friedman has noted, the burden of government is not measured by how much it taxes, but by how much it spends . The impact is particularly severe when growth in entitlements is high and growth in productivity is low. This is why inflation exploded after the late 60's, and why it came down after the early 1980's. This is why the Germans suffered hyperinflation after World War I when its government decided to keep paying workers who had gone on strike.
True enough.
Always and everywhere, rapid inflation is produced by excessive creation of government liabilities without a corresponding increase in the amount of goods produced by the economy. The Fed doesn't control this.
No, the fed does not control the amount of government liabilities offered for sale, but they do not have to buy those liabilities, which bolsters the federal government by making federal securities appear to be attractive investments. In other words, they do not have to create inflation by monetizing the debt.
Except for the Federal Funds rate, the Fed does not determine short-term interest rates. Most of the time, it simply follows them. Statistically, the Federal Funds rate consistently lags market interest rates such as Treasury bill yields. Indeed, changes in market rates have far more predictive power to forecast the Federal Funds rate than vice versa.
Ahh, but does it lag Greenspans hints of the direction that interest rates will go? Furthermore, why should Greenspan bother to track rates that he does not control?
So don't place too much faith in the Federal Reserve. Again, in a banking panic, where the demand for the monetary base soars, the Fed is essential . But here and now, the Fed is, and probably will be, hopelessly ineffective.
It is not that I have faith in the Federal Reserve. It is that I correctly recognize that the FED has almost complete control over interest rates.
In his recent testimony to Congress, Alan Greenspan described his job as difficult. In our view, he might as well have quoted Prime Minister Giovanni Giolitti. When asked in the early 1900's whether it was difficult to govern Italy, Giolitti replied, “Not at all, but it's useless.”
I wish that were true.
The Federal Reserve is irrelevant. We don't just mean ineffective, though that is certainly likely to be true here. Rather, because of a change in the application of reserve requirements over the past decade, Fed actions have virtually zero impact on lending activity in the U.S. banking system.
Who controls the reserve requirements? The Fed. Yes, this is the primary mechanism of growing the money supply. I would hardly say that the power to dictate reserve requirements is "irrelevant".
The main job of the Federal Reserve is to determine the mix of government liabilities held by the public. When the Fed "eases monetary policy" or "cuts interest rates", it accomplishes this as follows. The Fed goes into the open market, buys a bunch of Treasury securities from banks (who have drawers full of them), and pays for them by creating new bank reserves.
The "public" does not hold government liabilities. Only misguided investors who have been told that they are "safe" (as in a safe way to lose money by having it appreciate slower than inflation) and banks (which are a part of the Fed) hold government securities. In days of yore, the banks would have held something of intrinsic value to more people, gold.
Pull a dollar bill out of your wallet. Look at the very top line on the front. It says "Federal Reserve Note." That dollar bill is essentially a liability of the Federal Reserve. The Fed also has a corresponding asset - the Treasury securities it buys.
Treasury securities are far from universally viewed as "assets". Indeed, in a free market would any rational person purchase an asset from an entity with massive debts and no credible plan of repaying the debts. If the banks were not part of the federal government - federal reserve -banking complex, why would they not purchase a mix of other assets?
When the Fed "cuts interest rates", what it is really doing is replacing one government liability held by the public - Treasury securities - with another government liability: currency and bank reserves (monetary base). That's all the Fed does. It determines the mix - but not the total amount – of government liabilities held by the public. Since the operations of the Fed are executed by buying or selling securities on the open market, the group at the Fed responsible for these decisions is called the Federal Open Market Committee, or FOMC.
Virtually all of us use dollars (for their virtues as a medium of exchange and store of value (albeit somewhat depreciating)), few of us are interested in investing in federal government. Thanks to the Fed we have no choice.
Banks are required to hold reserves as a percentage of all checking accounts outstanding. These reserves prevent overdrafts, and provide for day-to-day withdrawals of currency and the like. On any given day, some banks will have a reserve shortfall, while others will have excess reserves. These excess bank reserves are lent back and forth between banks on an overnight basis, at an interest rate known as the Federal Funds Rate.
Yes, the Federal Funds Rate is free market rate.
Essentially, the Fed lowers the Federal Funds rate by purchasing Treasuries from banks and increasing the "monetary base" - bank reserves plus currency in circulation. The only thing that the Fed can control with certainty is the monetary base.
That is a lot! The print up money (federal reserve notes) out of thin air to "buy" worthless Treasuries. This is just a subsidy to the Federal Government because no rational person would buy Treasuries that were not bolstered by the Federal Reserve.
Alternately, it can try to control the Federal Funds rate (and passively adjust the monetary base by whatever amount is required to keep Fed Funds on target).
Who makes the "target"? The Federal Reserve Board!
However, the Fed cannot control the Federal Funds rate with certainty. For example, if inflationary pressures were high and interest rates were moving up, the Fed could not predictably lower the Fed Funds rate by easing monetary policy.
Why not?? As evidenced by Japan's FR, interest rates can be driven to zero.
Not surprisingly, central banks always target money growth, not interest rates, when inflation is high. That's why Volcker targeted money supply, while Greenspan targets interest rates. But ultimately, the only thing that the Fed can directly control is the monetary base.
The two are related.
The "money multiplier" loses its magic.
Alright. So when the Fed is easing, it increases the monetary base by purchasing Treasuries on the open market. When the Fed is tightening, it reduces the monetary base by selling Treasuries on the open market. Now that we're clear on what the Fed does, let's take a look at why it is irrelevant.
Activist monetary policy is based on the assumption that there is a predictable relationship between bank reserves and bank lending. The operative notion of easy money is that the Fed creates new bank reserves, and banks lend them out. These loans get spent, and the proceeds get deposited at other banks as new checking accounts. Whatever is not required to be held as reserves is then lent out again, and through the magic of the "money multiplier", loans and bank deposits go up by many times the initial injection of reserves.
That's the theory. But a change came in the 1970s with the emergence of money market funds, which require no reserve requirements. Then in the early 1990s, reserve requirements were dropped to zero on savings deposits, CDs, and Eurocurrency deposits. At present, reserve requirements apply only to "transactions deposits" - essentially checking accounts. The vast majority of funding sources used by banks to create loans have nothing - nothing - to do with bank reserves.
These days, commercial and industrial loans are financed by issuing large denomination CDs. Money market deposits are largely used to lend to corporations who issue short term commercial paper. Consumer loans are also made using savings deposits which are not subject to reserve requirements. These loans can bunched into securities and sold to somebody else, taking them off of the bank's books.
Once again, the Fed is responsible for reserve requirements. There is no reason why they could not require 100% reserve requirements for all deposits.
The point is simple. Commercial, industrial and consumer loans no longer have any link to bank reserves. Since 1995, the volume of such loans has exploded, while bank reserves have actually declined . Look at the one monetary aggregate that the Fed can directly control - the monetary base. Every bit of increase since January 1994 is accounted for by currency in circulation, not bank reserves.
Over the past year, the Fed has eased very aggressively, buying about $32 billion in Treasuries, with a corresponding $32 billion increase in the monetary base. Now look closer. Total bank reserves actually declined by $1 billion while currency in circulation has increased by $33 billion.
So they should tighten reserve requirements.
Alan Greenspan isn't the "Maestro". He's Oz - working behind the curtains, leaning into the microphone, pressing buttons that blow smoke and fire, but not really having much power at all. Scarecrow already has a brain. For the past several years, commercial and industrial loans and consumer credit exploded quite simply because rabidly eager borrowers were able to find rabidly eager lenders.
Greenspan is more like the a bumbling giant. You make a good point that reserve requirements are much more important than money supply; however, the FRB controls both! Due to these controls Greenspan has complete control of the banks to lend money.
And now, both forms of credit (as well as commercial paper issuance) are declining because borrowers are saturated with debt and lenders are increasingly skittish of credit risk.
This is unsurprising because the FRB is threatening to increase interest rates.
The Fed certainly played an important psychological role in recent years, and certainly has a role to play during bank runs and other crises where the demand for monetary base soars. But the rest of the time, open market operations are almost completely sterile.
So the 20% annual increase in housing prices is "sterile"?
In recent years, the irrelevance of open market operations has also been argued (for slightly different reasons) by academic economists renown for their work in the theory of “rational expectations”, including Thomas Sargent and John Muth.
Inflation follows unproductive government spending.
One might respond that even if the Fed doesn't affect credit, surely changes in the monetary base affect inflation. But if you look at the statistical evidence, the relationship between monetary growth and inflation is very weak.
Monetary growth = inflation. Your research must be based on a thoroughly debunked CPI.
Instead, our research indicates that inflation is primarily the result of growth in unproductive forms of government spending (basically entitlements and other expenditures that fail to stimulate the supply side). The evidence both from the U.S. and other countries clearly demonstrates this relationship.
All forms of government spending are unproductive relative to business spending in competitive markets. Growth in government spending which does not cost citizens as overt taxation results in hidden taxation in terms of inflation.
As Milton Friedman has noted, the burden of government is not measured by how much it taxes, but by how much it spends . The impact is particularly severe when growth in entitlements is high and growth in productivity is low. This is why inflation exploded after the late 60's, and why it came down after the early 1980's. This is why the Germans suffered hyperinflation after World War I when its government decided to keep paying workers who had gone on strike.
True enough.
Always and everywhere, rapid inflation is produced by excessive creation of government liabilities without a corresponding increase in the amount of goods produced by the economy. The Fed doesn't control this.
No, the fed does not control the amount of government liabilities offered for sale, but they do not have to buy those liabilities, which bolsters the federal government by making federal securities appear to be attractive investments. In other words, they do not have to create inflation by monetizing the debt.
Except for the Federal Funds rate, the Fed does not determine short-term interest rates. Most of the time, it simply follows them. Statistically, the Federal Funds rate consistently lags market interest rates such as Treasury bill yields. Indeed, changes in market rates have far more predictive power to forecast the Federal Funds rate than vice versa.
Ahh, but does it lag Greenspans hints of the direction that interest rates will go? Furthermore, why should Greenspan bother to track rates that he does not control?
So don't place too much faith in the Federal Reserve. Again, in a banking panic, where the demand for the monetary base soars, the Fed is essential . But here and now, the Fed is, and probably will be, hopelessly ineffective.
It is not that I have faith in the Federal Reserve. It is that I correctly recognize that the FED has almost complete control over interest rates.
In his recent testimony to Congress, Alan Greenspan described his job as difficult. In our view, he might as well have quoted Prime Minister Giovanni Giolitti. When asked in the early 1900's whether it was difficult to govern Italy, Giolitti replied, “Not at all, but it's useless.”
I wish that were true.
16.7.04
Morality is Subjective
True morality (as opposed to authority-coerced "morality"), like economic values or taste, must be subjective (or must have subjective premises). Because if it is not subjective, one cannot truly believe it. Instead one's expressed morality is no more than lip service. One believes assertions, when one either senses it directly, or has a model of how the world works in which that assertion is a part. (A trivial model would be a mental universe in which the messenger of the assertion would not have a motive to lie about the assertion.) Moral premises, on the other hand, are not based on sensory input, but are extrapolated from innate disinclinations, culture, etc.
Stalin may have done what he did because he was sadistic, nihilistic, fatalistic, idealistic, power hungry, or many of other reasons. That someone finds what he did wrong, is a conclusion based on the individual's indisputable ethical premises, which may or may not involve an assessment of the mental state of Stalin when he ordered millions to their death. To be able to convince you that something is wrong, I must know your premises (such as, "Humans have an ethical obligation to refrain from behaviors which inflict suffering upon other sentient beings." or "Guide your life by compassion." (buddhism) or "If it feels good, do it."(hedonistic) or "Treat others as you would have them treat you."(Christian) or "Maximize the social good." (socialistic, Dr. Spock) "Don't coerce others." (libertarian)), but I cannot argue with your premises because they are subjective. To put forth an argument that resonates with me; however, you would need to know or presume my premises.
Just as there is no objective economic value of a particular thing (only objective selling prices), there is no objective morality (only objective expressed laws and customs (analogous to selling prices)). If you have no moral first principals (premises) or at least an innate set of vague disinclinations from which to posit moral premises, then any moral argument is pointless.
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