Saturday, April 19, 2008
Brave Words From A Dissenter
suddendebt.blogspot.com
Two Fed presidents dissented with the previous rate cut. One of them was Charles Plosser, president of the Federal Reserve Bank of Philadelphia. Yesterday, in a speech at Drexel University, he had this to say about the limits of rate cuts:
The idea that interest-rate cuts can solve any economic ills is a misleading perception. Not only is that not true, it is a dangerous misconception and runs the risks of setting up expectations that monetary policy can achieve objectives it cannot attain.
To ensure the credibility of monetary policy, we should never ask monetary policy to do more than it can do. Lower rates, for one thing, cannot solve the problem of bad debts in the mortgage markets. Nor can they reprice the risks of securities backed by subprime loans.
Mr. Plosser, you just became my Federal Reserve resident hero.
Many think that further rate cuts can and will provide an economic boost. But with real rates already at minus 1.75% - after the fastest plunge into negative territory ever - what we are going to get is plenty of dashed hopes, if the economy does not pull out of its tailspin very soon.
Data: FRB St. Louis
The real estate bubble was created by Mr. Greenspan's spate of negative rates. We are now getting a frenzy in commodities from Mr. Bernanke's negative rates. But unlike previous bubbles that mainly involved speculators in shares and housing, the current spike in food and fuel prices is causing hunger and misery across the globe.
In a fiat currency world experiencing resource limitations there are no more "good" bubbles to blow by using negative rates. Instead, we are implementing a "beggar thy neighbour" policy by stealth, a version of the Smoot Hawley Act updated for 21st Century conditions.
A fiat currency regime, where monetary policy reigns supreme, was appropriate for an expanding world unhindered by resource depletion. An ever-expanding supply of money fit the Permagrowth model well - indeed, it was a necessary condition. However, we are now transiting to a different socio-economic model and the evidence is all around us, plain for all to see: zooming prices for low value-added necessities.
Why has the price of rice quadrupled? Does it now contain four times as much technological or knowledge value-added? Of course not. It is all about scarcity value, a concept we have not experienced in centuries, outside of war.
If I may spin Mr. Plosser's remarks to another level: We can't buy Manhattan for a bag of beads any more. There are too many buyers around and the natives are restless. |
