2007-10-04 - 9:28 a.m.
this was stolen from a blog somewhere deep in space
Here�s Al being interviewed by Comedy Central�s John Stewart. Stewart asks some tough questions about the economy, free markets, and how the Fed�s actions push activity some ways and away from others.
Greenspan glosses over Stewart�s questions by defending the Fed in near classic Keynesian terms: (I paraphrase) The animal spirits of the fallible population need to be regulated and managed by the Fed, and without such regulation, the economies of the world would have serious problems. When things go well, they get out of control, and when things slow down, left to their own devices, they�ll overreact as well. Greenspan also reiterates the fallacy that is Keynes� paradox of thrift, that when people become fearful they back off spending activity and the economy is sent into a downward spiral. Hence the Fed must save the people from themselves � a reality that vigilant investors might want to plan around.
On that point, this site spends substantial effort discussing the Fed�s own contribution in enabling exuberant behavior during good times so that they are able to become way out of control (ala low interest rates fueling the now imploding housing and mortgage bubbles). What is actually happening is that the Fed enables booms to far exceed their free market constraints and potential by setting the price of borrowing money far below the natural market rate and by printing money out of nothing in order to assure the supply of cash is always available at those rates.
Absent Fed intervention, market-orchestrated rates would naturally rise on their own as the supply of available funds for lending dwindled, forcing rates (the supply and demand determined price of money) higher. In the most simple explanation, those rates would stay there until existing debts were paid down, thus progressively increasing funds into the lending markets again. In other words, the free market has a natural braking effect on economic activity, just the same way the natural supply and consequent price limitations of any good or service govern the behavior of entrepreneurs in the decisions they make.
This basic natural business cycle is quite rational in its behavior and its self governing nature means bubbles are virtually impossible to achieve on any economy-wide scale. Instead, the very policies approved by Greenspan himself bypassed the natural limits and encouraged borrowers and investors alike to overextend themselves to the point where they now are threatened by the collapse of those very excesses Greenspan enabled. Whereas the market would have driven rates up as housing started to heat, instead Greenspan�s policy quite obviously kept the gates open to easy borrowing, thus driving prices higher and higher, and thus engendering through the economy the irrational get rich euphoria that is common to all parties participating in any such bubble. And then, poof � suddenly the bubble pops and everyone partying along is blindsided by the ensuing carnage. This is what you�ve been reading hearing unfold over the last few months.
So, when Greenspan and his contemporaries defend price fixing with money and credit with the excuse that humans act irrationally and therefore they must be managed, don�t buy it. The Fed is the one encouraging the worst out of human nature by enabling players to climb too far out on a limb. That is why so many folk currently are falling off the tree, so to speak, as limbs break one after the other amid the present bursting credit bubble.
Let�s also remember that folks hunkering down and backing off activity in the midst of this crisis is now belatedly doing what the Fed refused to do and what the free market would have naturally done: it is applying the brakes and taking away the proverbial car keys from drivers who�ve clearly imbibed to excess from the easy credit punch bowl, as indicated by the fact that the car is currently swerving through a ditch on two wheels. The market is saying �give me the keys and sober up and let�s check out to what the damage is!�, while the Fed has been pumping new credit into the system and has just lowered the Fed Fund rates � the equivalent of sending the drunk driver on his way based on the justification that if we don�t, he won�t get to his his next destination on time.
Mind you, the market will itself allow for savings to reenter the system through lending and other activity as soon as it is pretty clear the dust has settled. But until then, it requires the economy to sober up. And that�s a painful hangover problem for everyone from the Fed and Congress on down. But rather than blame the hangover on the fact that the Fed wasn�t able to booze-up the economy further, we should blame it on the fact that Fed was in a position to gin up the economy to the death defying stratosphere in the first place.
But by listening to Greenspan�s quasi Keynesian explanation, you�d never know that the same problems he claims is the Fed�s job to prevent, are in fact created by prior Fed policy! Poorly understood as it is, Fed policy is quite the perpetual motion machine: It is always generating plenty of problems it must then race to clean up, much like any centrally planned government solution to one mess or the other.
Greenspan also tells a doozie by blaming gold on the Great Depression, but fails to point out that a Fed enabled credit bubble in the 1920s (in many ways similar to what we have now) generated lots of unsustainable activity and then burst. But back then, the players were all held accountable by the fact that so many banks had issued banknotes for which they had no gold reserves to back. Fraud is fraud, but not when it comes to banking, so gold was blamed for causing the crisis and made illegal when all it did was point out that lenders were lending money that many expected to be accessible on demand as was the contract. (Today such exposed frauds are merely covered by more central bank money printing, as is the case with Northern Rock in the U.K.)
Furthermore, contrary to Greenspan�s assertion, the decision to end to end Gold backing the dollar was hardly done with a consensus. It was an issue that seriously divided economists, politicians, historians, and liberty minded folks all over, many of whom pointed out that absent the honesty gold required, inflation would run rampant and government spending would run to reckless levels.
Banks, which can earn much more interest by loaning out more than they actually have in reserve hardly protested the Fed removing shackles on how they might earn profits. Furthermore, the ability to inflate is also coveted by every government because it enables politicians and kings alike to fund spending more surreptitiously than can be accomplished through outright taxation. Hence, it is no coincidence that the most politically convenient economic theory of the age � attributed largely to Keynes �, and also the one most beneficial to mega banking interests (and profits), was also the one that was elevated to prominence and now serves as a fundamental underpinning for popular economic theory. Today, offshoots of those theories are espoused by economists who are well paid through the modern day court partnership between Washington and Wall Street and serve as conventional wisdom. But one need only study basic CPI charts and government spending patterns to see that ignored warnings were correct. Moreover, the currently unfolding crisis ought to further impugn whatever credibility these court economists have.
Finally, Greenspan closes his interview with Stewart by essentially reiterating the ultimate argument espoused by most free market proponents by pointing out that he and all central bankers have no way of figuring out what really is working or what the economy is going to do. �I�ve been in the forecasting business for 50 years�, and I�m no better than i ever was� Human nature hasn�t changed. We can�t improve ourselves.�
So then, what is the point of having a handful of imperfect humans steering the economy in all their fallibility by messing with the price of money? Seems to me that one of the more sober schools of economics that was shunned in favor of Keynes has been pointing this out for some time. In fact, Ludiwig Von Mises � one of the patriarchs of the Austrian School of Economics � wrote his seminal treatise and tittled it �Human Action� precisely because a sound theoretical economic framework could only be valid by accepting human nature.
Instead, Greenspan fails to see the very contradiction at the heart of his own philosophy. Yet this contradiction being what it is, is something vigilant investors ought to be considering as they make their plans in business or otherwise. As the Fed presents more problems for some, understanding the dynamic means opportunities for others.
