Just One of Many Fed Interventions
I’m doing research for a paper on Fed interventions during the financial crisis; there’s a great timeline provided by the St. Louis Fed here. I had not been aware of this entry for November 2008:
The U.S. Treasury Department, Federal Reserve Board, and FDIC jointly announce an agreement with Citigroup to provide a package of guarantees, liquidity access, and capital. Citigroup will issue preferred shares to the Treasury and FDIC in exchange for protection against losses on a $306 billion pool of commercial and residential securities held by Citigroup. The Federal Reserve will backstop residual risk in the asset pool through a non-recourse loan.
Potpourri
==> These foolish people are straining a young marriage by restricting themselves to Bitcoin. But maybe they’re hoping to avoid fighting about money; instead they will fight about a medium of exchange.
==> People I know suspected hanky panky with the Auburn police department’s ticketing policies, but one cop blows the whistle on it (and gets fired).
==> A neat carbon tax calculator. Great for parties!
==> A decent collection of funny behind-the-scenes movie stills.
==> I swear I can never get anywhere in my arguments with Noah Smith. It’s like he doesn’t even get my (awesome) point half the time.
==> You know you got smacked down when John Taylor tells you in public that you misapplied the Taylor Rule.
==> Tom Woods boldly takes a stand against slavery. Speaking of which: I haven’t gotten sufficient reassurance from all the people jumping in on this topic, that they are opposed to mass murder of innocent people during a war. Since they don’t start each article with a firm declaration of this, should we suspect them all of being soft on this issue of collateral damage?
Yellen for Fed Chief! (Matt O’Brien Is Easy to Impress.)
Check out Matt O’Brien’s case for Janet Yellen over Larry Summers as the next Fed chief (HT2 Scott Sumner):
After serving as a Fed governor from 1994 to 1997, as president of the San Francisco Fed from 2004 to 2010, and as Fed Vice-Chair for the past three years, Yellen has emerged as one of the central bank’s intellectual leaders. She talked Alan Greenspan out of targeting zero percent inflation, because it would have increased the odds of falling into a liquidity trap (like we have now), back in 1996. She was one of the first to warn about the risk of the shadow banking blowup and housing slump setting off a credit crunch back in 2007. And she’s been one of the architects of the Fed’s unconventional policies today.
Now this is faint praise indeed. On the first point, O’Brien is crediting Yellen for talking Greenspan out of doing something that would have landed us right where we are anyway (i.e. in a liquidity trap). That’s like crediting William Jennings Bryan for talking Woodrow Wilson out of risking US entry into World War I.
On the third point, O’Brien is crediting Yellen for designing the very policies that have delivered this toiletbowl economy for the last 5 years. May I have another, sir?
Now the second point at least looks good, prima facie. You’re probably imagining Yellen in a Fed meeting in, oh I don’t know, February of 2007, pounding the table and saying, “We are on the verge of the worst crisis since 1929! For the love of Pete, Benjamin, we need to act now!!”
Or, you could follow the link, and see that it’s a Fed meeting that occurred in December of 2007. Here’s Yellen’s demonstration of why she’s the right woman for the job:
At the time of our last meeting, I held out hope that the financial turmoil would gradually ebb and the economy might escape without serious damage. Subsequent developments have severely shaken that belief. The bad news since our last meeting has grown steadier and louder, as strains in financial markets have resurfaced and intensified and as the economy has shown clear signs of faltering. In addition, the downside threats to growth that then seemed to be tail events now appear to be much closer to the center of the distribution. I found little to console me in the Greenbook. Like the Board staff, I have significantly marked down my growth forecast. The possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real. [Bold added.]
(UPDATE: It just occurred to me, that the recession officially began in December 2007. So Matt O’Brien is proudly linking to a Fed meeting in which Janet Yellen proves that she is able to sense a recession coming only shortly after it already started.)
In contrast, here’s what I said, in an online article that ran a few months earlier (and actually this was taken from a private report I did for a bank in the summer of 2007):
Looking back at the chart above, we can see why the worst may be yet to come. In (price) inflation-adjusted terms, the early-2000s levels of the actual fed funds rate is the lowest since the Carter years. And many readers may recall the severe recessions of 1980 and 1982 that followed that period.
…
From 2001–2004, the Fed kept (real) rates at the lowest they’ve been since the late 1970s. One of the consequences that has already manifested itself is the housing bubble. But a more severe liquidation seems unavoidable. The recent Fed cut may postpone the day of reckoning, but it will only make the adjustment that much harsher.
(The title of the above article was, “The Worst Recession in 25 Years?” but I don’t remember if I picked that or not.)
Obviously I’m biased, but I’d have to say that my hedged statement was a lot more accurate than Yellen’s hedged statement. (Full disclosure: I foolishly ignored Austrian business cycle theory in a post in January 2007 when I made fun of Peter Schiff’s doomsaying. My bad.)
Now Matt O’Brien would laugh at my recession call, because it’s based on this wacky Austrian notion that interest rates have anything to do with the business cycle. O’Brien quotes the following passage from Larry Summers:
[SUMMERS:] However, one has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to undertake with rates reduced by yet another 25 or 50 basis points. It is also worth querying the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative real interest rate. There is also the question of whether extremely low safe real interest rates promote bubbles of various kinds.
Then O’Brien comments:
In other words, he [Summers] thinks the Fed pushing down real interest rates might only push companies to make bad investments they otherwise wouldn’t make. It’s a very Austrian view of things — the idea that pushing interest rates “artificially” low makes businesses make mistakes.
This is not good. Now, there are plenty of people who think QE is going to turn us into Zimbabwe or inflate the mother-of-all-bubbles or just bail out the banks, but none of those people should be running the Fed.
Yes that’s right, Summers thinks that when it comes to the economy, it’s not just how much businesses invest, but also what they invest in. You would think this would be an obvious point, but instead he is mocked for it (by Scott Sumner too).
On the one hand, I can’t believe that it’s dismissed as crankish Austrianism to think that businesses need to invest in the proper channels, to have a sustained recovery. On the other hand, it’s job security.
More Pronouncements From the Central Planning, Free Market Scott Sumner
Regarding claims that China is overbuilt:
Yes, there is some infrastructure in the wrong place; Ordos, or the Binhai area of Tianjin. But for the most part it’s where it should be:
1. The subways are under the huge, densely populated cities, where they should be.
2. The high speed rail mostly connects big cities.
3. The larger ports and airports are mostly near the bigger cities.
4. The motorways mostly connect highly populated areas in eastern China.
5. The housing is mostly being built in the cities that are receiving massive rural to urban migration.
And remember, if China ever becomes developed it will need far more housing, subways, airports, roads, rail, water systems, power, etc, etc, than it has now.
China’s in a sweet spot where the inefficient SOEs [state owned enterprises] don’t do all that bad—building big things.
But, he does go on to say that China should move away from the SOE model, thereby punching a hippie.
So we’ve got Krugman claiming China is about to collapse, and Sumner saying all is well. They should make a bet! Then, when one of them loses, I will run victory laps saying, “See?! The people who think we need more Aggregate Demand need to revise their failed model in light of this horrible prediction.”
(In case you’re new around these parts, I’m just kidding. Try this.)
Atheist Libertarians Need to Stop Citing Adam Smith Against Christians
A common complaint in the comments of this blog runs like this: “Bob, how can you possibly believe in a central planner in the sky, when you understand spontaneous order from economics? Man, even Adam Smith wrote that the market works ‘as if’ led by an invisible hand, but that was just a metaphor!”
Perhaps because I spent so much of my formative years as an atheist, I too thought Smith’s famous quote had “as if” in it, but actually it doesn’t, neither in Wealth of Nations nor Theory of Moral Sentiments. Here’s the WoN passage:
As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.
An Inquiry into the Nature and Causes of the Wealth of Nations par. IV.2.9
In case you think I’m harping on a triviality, note that Don Luskin (apparently) made exactly this mistake when arguing on Kudlow’s show about the legacy of Ayn Rand.
One obvious way to demonstrate that there is no problem in reconciling belief in God with free-market economics, would be to cite Smith’s own belief in God. However, this is easier said than done; apparently it is an open question among Smith scholars, although I should mention that the deniers are forced to argue that Smith’s explicit references to the “Great Architect of the Universe” etc. were only done to cover himself from persecution.
So, regardless of Smith’s personal views, I must admit that it’s hard for me to even take this particular atheist criticism seriously. In general, I hope we can all agree that simply using analogies between economics and other fields is a dangerous game. For example, suppose the zookeeper is about to open the lion cage as my son and I are walking by it; would I be a hypocrite for insisting on the maintenance of “coercion” against the giant cat? I mean, I think drugs should be legalized–how the heck can I simultaneously advocate locking up the King of the Forest?!
If you can understand why the above, hypothetical criticism is silly, then you understand my feelings when someone argues:
“Government officials overriding private decisions will lead to inefficiency. ==> There most likely isn’t a God.”
But what if we make things more specific? Isn’t a popular Christian tactic to invoke the “irreducible complexity” of organisms, as apparent proof that there must have been a Designer? Surely that flies in the face of the spontaneous order we see in social life.
Nope, I don’t think so. The sophisticated arguments from people in the Intelligent Design camp take the standard atheist evolutionary explanations and claim that they simply don’t add up, or involve large amounts of hand-waving. It’s really not a good argument when atheist evolutionary biologists respond, “Your lack of imagination is no refutation of my theory.” In any other context, that would be a laugh-out-loud admission of failure, yet it’s taken as a snappy comeback for Darwinians.
And it’s not just biology. There is also the fine-tuning argument, which claims that the physical constants of Nature seem to be exquisitely calibrated to support human life on Earth. The standard atheist response to this one, is to argue that there are an infinity of possible universes, and sentient beings will only observe and ask, “Why?” in the ones with the right combination of physical constants. (If you think about it, that rhetorical move is the worst violation of Occam’s Razor and a few other supposedly cherished atheist scientific principles one could construct. But when you’re fighting a war against religion, all is fair.)
Let me close with an argument I often bring up regarding Intelligent Design: The atheist biologist will usually say something like, “You are throwing out science itself. We can’t answer everything, it’s true; there will always be some boundary of ignorance, that scientific inquiry must take as a starting point. But when you abandon naturalistic explanations in favor of intervention by a conscious being, you are reverting back to explaining thunder by invoking the gods. It’s not just that the ID movement is wrong, its very nature is anti-scientific.”
This is nonsense. It means that doctors can never look at a corpse and tell the government, “You know, this guy was killed by genetically engineered bacteria. Only the Russians could have done this.” Nope, such an explanation is unscientific; you have to explain the bacteria’s DNA by reference to billions of years of random mutation operated upon by natural selection. I don’t care how impossible such a story seems to be; it must be true, because “design talk” is throwing in the towel.
Or on a grander scale: Suppose, just for the sake of argument, that intelligent aliens arose in a different solar system in a very straightforward, step-by-step evolutionary chain. Biologists looking at the cells in an alien’s body wouldn’t hit the “irreducible complexity” that so intrigues the Intelligent Design theorists. Then those aliens came to earth a billion years ago, and designed some “super cells” which they used to seed life here. Those cells had most of the information that is currently found in the DNA of today’s life forms, which could not possibly have arisen in a mere few billion years through undesigned evolution.
The above scenario is theoretically possible. Now, if it were true, how would we ever learn the truth? One obvious way is that our scientists would have to conclude, “There is no way we can explain the structure of cells today, by reference to mere natural selection. The universe isn’t old enough to generate this outcome. Some intelligent thing designed the life we observe on Earth. But who, or what?”
That is a perfectly valid scientific question. To deny this, and insist that life on Earth can only be permissibly explained by reference to non-conscious causes, is itself incredibly unscientific.
One last thing: It should go without saying that I see plenty of Christians and others, spouting all sorts of foolishness in these debates. That doesn’t mean their conclusion is wrong.
Just Singing in the Rain
Uh oh, the leading bid for the “Robert P. Murphy package” (to benefit the Brown Center for Autism) is up to $170. Remember kids, the winner gets to dictate which karaoke song next goes on my YouTube channel.
Oh, plus you get some signed books.
Potpourri
==> John Nash’s PhD dissertation: 26 pages in the body of the paper, and a mere 2 citations, one of which was his own previous paper. (HT2 MR)
==> If somebody wants to wade through this post-game show of my debate with Warren Mosler, I would appreciate it. This guy Rohan is a careful thinker who means well, but I just don’t have the time to read his whole analysis.
==> Somehow Noah Smith manages to discuss asset price inflation without mentioning the classic Alchian and Klein paper on the topic (even though someone in a previous post had brought this up to Smith).
==> David R. Henderson dreamed a dream when men were kind.
==> Everyone say goodnight to the bad guy.
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