Yakuzas, Swonk on Swings and Baum's Balm Bashed
Hi John,
Re: the Japanese Bubble - It is of some note that the Japanese version of the underworld, the yakuza element, played a role in the speculations in the Japanese stock markets of the late 1980's. Apparently, some of them had money back guarantees from the bankers they held guns to the head of. <w>
Re: Swonk on Swings - Her comment on the nature of the "recession" is hardly actionable. Just a somewhat interesting observation on the supertanker nature of the US economy. I guess the lesson might be that a trend, once in place is hard to modify. Since the trend right now is for greater unemployment, weaker corporate profits, fewer entreprenuerial initiatives and weakening government revenues, one could argue that we haven't seen the worst of it yet. OMB reported an expected $158B Federal budget surplus for fiscal 2001. This is within $1B of the Social Security surplus, so, in actuality, the current balance might be argued to be flat. I.e. Surplus? What surplus? It's back to feeding the traders on the bond desks with new issues to grind on. And the permanently parasitic drain on the treasury thereby imposed will continue unabated.
Re: Caroline Baum's Bloomberg Musings on the replacement of the FRB with a computer.
The following is the most interesting and enlightening thing I've read in Marcia Stigum's marvelously lucid explication of the money markets. As of last week, I was in agreement with Baum and Friedman that the monetary role of the FRB could best be handled with a computer, the software of which would be accessible to all players, to control the growth of money. What Stigum was brilliantly able to do was to demolish this argument by asking her reader to review history. Namely, the Humphrey-Hawkins bill of 1978 specifically directed the FRB to target money supply rather than interest rates as the proper metric to control inflation and provide for price stability. In the event, the FRB did undertake just such a practice and the results were disasterous. From mid 1979 until the policy was abandoned in mid 1983, Fed Funds Rates became extremely volatile with no one able to predict week by week where they might be, or even which direction they might move in. The rates yoyoed between 9% and 19.5%, cycling four times in four years. The ability of Main Street to plan based on the cost of money became utterly impossible. Fortunately, this experiment in monetarism was quietly abandoned in 1983, whence stable interest rates and predictability ensued.
So, that was my great insight of the weekend. That the delusion that I've carried for the last several years, and that infects the minds of monetarists is just a bunch of hooey, an ideological shibboleth that has already been proven empirically flawed. Oh, well, back to the drawing board, or whatever came before it.
As to the rest of the Baum re-write of history, she's got it right that the imprudent FRB decision to target money supply in front of the presumed panic surrounding Y2K did seemingly add gasoline to the speculative bubble in the Nasdaq in the first quarter of 2000. But for her to suggest that the FRB's policies from 1994 through 2000 were merely reactive is highly disingenuous, IMVHO. My own sense of things is that the FRB was acting very prudently in steering the monetary and interest policy of the country during the bulk of this period, and it was only the reading of the American public as utterly panic-prone in the face of the Y2K non-event (ain't hindsight great?) that got the financial markets completely out of whack. And, how convenient for my argument, that when the FRB targets money supply instead of interest rates, that the financial markets run off the tracks. Who knew? Anyone who reads and understands history, apparently.
Final thought - Isn't it interesting how the media is now talking about recovery in 2002, having en masse given up the notion that we'll have a meaningful second half recovery. As always, it's "jam tomorrow".
Best, Ray :) |
