it doesn't seem from your response that what Hussman is saying ("the fed is irrelevant") is wrong over the long term
Hussman's basic argument was that developments in other forms of money has rendered FED's control over them limited or non-existent. This isn't true. It just seems as though it is. If FED felt it was necessary to directly control them, it would. In various cases it has. Agency issue is an example. All forms of domestic money is or can be brought under the total control of FED.
- you seem to say that Fed has several other controls that it could use in the short term to maintain control but this option is not viable over the long term if the market pulls in a different direction?
You don't know the power of the instruments available to FED. Indeed, the so-called market which hardly exists now, is a total follower of FED. The NY bond market is locked into the fed funds fixing each day. There's little fluctuation and of small amplitude away from FED's fix, even whil they post, "bid 3.5%, ask 4.0%". What a phantom spread that is.
Given what happened in Japan in the 90s, it appears his opinion has some validity - lowering the funds rate to arbitrarily low values may not necessarily increase loan demand.
CDs are NOT independent of the reserve base. If reserves got tight, banks would stop issuing CDs. If other entities offer a higher yield than CDs, CDs are cashed in and converted. It's easy for FED to create such a condition. It does so by transacting in reverse RPs, a Temporary technique that we rarely see.
The elasticity with respect to marginal demand for loanable loans rises when there's a loan demand supply regime. This usually occurs during an economic slow down. There's little reason to borrow then because activity is dropping so any nominal rate of interest has little effect on marginal demand.
FED doesn't know where the equilibrium that adjudicates between supply and demand for loanable funds lies, and especially not during a supply regime. That's why there's free markets in all other things sold in the world. Free markets very quickly find the equilibrium rate. In contrast, FED arbitrarily fixes the rate rather than let a market, say the NY bond market, determine the rate.
This enables FED to apply "counter cyclical policy", so that in their thinking, a mere slow down doesn't develop into a horrendous recession. In a slow down they may not be able to stimulate loan demand enough to cause it to rise, but they can and have run a fed funds rate below equilibrium. The result is more money is generated than is usable to create higher output of goods and services. The money creates monetary inflation, a firming in price without commensurate increase in output. The purpose of this is to avoid a downward spiral in prices and output. If prices are artificially propped, then the idea is that output won't be shut in, and excesses of the previous cycle will subside. Next, things lie dormant for awhile and then revive.
FED puts the fed funds rate at an artificially low rate that has nothing to do with supply demand equilibrium, so you can't say that the low rate fails to achieve its intent: revival of demand. FED creates excess money. Say's Law: supply creates its own demand. So excess money creates its own demand, and voila, loan demand starts rising.
Another article where he talks about the different approaches of Volker and Greenspan here...
He wasn't a FED insider so he doesn't know the truth of what happened. I've never read anyone in the last 25 years who has a clue about it. All those who did know are gone. For example, you'd expect Wayne Angell would know, but over the decades he's indicated by his numerous comments that he doesn't. In fact, it's amazing how uninformed the last 15 years of various FED presidents and officials have been.
Consider Paul Volcker and Alan Greenspan, both very successful Fed Chairmen in the context of the challenges that each faced.
You simply don't realize how poorly they both did. Wasn't their fault. No one can get monetary policy right when policy is based on contravening the market by fiat. At this time FED does not know where equilibrium fed funds rate lies. They over shot on the downside and now they'll have to overshoot on the upside because the target, loan demand, is moving, and, they've embedded from their overshooting on the downside, a situation that will take more than expected to achieve equilibrium on the upside.
Though they followed very different policies,
Why do you believe that? Volcker is an inflationist. He didn't like the market imposed money supply rule. Did you get that? Market imposed. Both he and AG have conspired to overrule the market and make it moribund.
they shared one thing that was absolutely critical to their success – their policy target was something they could actually control.
You simply don't know what happened in history, nor do you know how the mechanism works, and neither does Hussman. There are few who do know. I haven't reviewed graduate textbooks written in the last 20 years that show any meaningful understanding of what things are or how things got to this point. They all have a media level understanding. That is, they harbor a collection of silly myths that now exist as the official story.
Volcker chose money supply targets. Greenspan chose Federal Funds targets.<
Don't be a lap dog for amateurs. You're buying into the silly myths. That's how the official story gets entrenched. You'll find the silly myths never get you a right understanding and accordingly, nothing in this arena will make sense. You'll find endless ambiguities.
Importantly, these are essentially the only tools available that the Fed directly controls. By choosing one, you essentially have to let go of the other
Nope. You're factually wrong. In fact, FED is doing both right now. They did a 1.1 Perm on Monday while they posted a raised ff to 4 last week. Geeze.
allowing it to be a “slack” variable that does the job of adjusting to various shocks in the economy.
...>
"“slack” variable that does the job of adjusting to various shocks". Huh? Before you can say something accurate you have to learn the subject. There's a lot of guys on this thread that think they know the federal reserve system. They know nothing. It's laughable watching them spin. Why don't they learn the machinery? Because that requires work and they'd prefer the easy way like reading guys like Hussman. If you had a better knowledge of the System, you'd appreciate how trivially true my criticisms of Hussman are, and you'd abandon him and a lot of others who write for money or accolade. Abandoning prejudices is what my students do. They come in programmed with a lot of nonsense, and they go out with a whole new outlook, one that fits with history and explains a great deal of why things work as they do. This gives them confidence in their dealings with markets and with "shocks". |
