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To: Simba who wrote (188480)	8/19/2002 9:50:51 AM
From: yard_man	Read Replies (1) \| Respond to of 436258

yeah -- he sidesteps the real issue -- call him a "situational economist." Doesn't mean what to do now isn't a good question ... it's just that policy makers will continue to do what they think has worked: Paper over the problems, so any thoughtful approaches won't be tried anyway ... guess we have to expect this from McCulley. After all, he is one of THEM. <vbg> >>Members of the Austrian school of economics vehemently disagree, arguing that capitalism's boom-bust pathologies, even if they exist, are magnified, not tempered, by the visible hand of government. In particular, Austrians hold central banking in high contempt, arguing that fiat credit creation (printing-press money!) is the dominant source of capitalism's boom-bust proclivities. And contrary to the presumption of the legions of Austrians who write me every month (to accuse me of macroeconomic immorality!), I actually have some sympathy with the notion that central bank policy can be a source of boom-bust pathology itself. But I call that bad central bank policy, not an indictment of the legitimacy of central banking. Good central bank policy involves tempering the pro-cyclicality of capitalists' human urges by acting counter-cyclicality: watering down the punch before the partiers start swinging from the chandeliers, and offering Alka Seltzer before the hung-over partiers start gagging themselves with spoons. Thus, I agree with current-day Austrians that the origin of the current risk of a debt-deflation meltdown was not just irrationally exuberant capitalists, but the enabling hand of the New Age Economy's chief bartender, Alan Greenspan. He could have tempered irrational exuberance, and should have tempered irrational exuberance. And he didn't. Where I disagree with modern-day Austrians is in their righteous advocacy that the time has finally come for Greenspan to repent his sins and make drunken capitalists drink ipecac, rather than serving them yet more monetary policy accommodation. The Austrians are bedfellows with Treasury Secretary Mellon, who said to President Hoover in 1931 that the time had come to: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness of the system. High costs of living and high living will come down. People will work harder, live a more normal life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people." Mellon's advice, and modern-day Austrians' amen chorusing is a perfect prescription for a debt-deflation meltdown. And, my friends, two wrongs do not make a right. Yes, it may have been wrong for Greenspan to have enabled the bubble, but it would be even more wrong for him to embrace debt-deflation in repentance. <<

To: Simba who wrote (188480)	8/19/2002 10:06:42 AM
From: yard_man	Respond to of 436258

McCulley is right about this -- insofar as public approval is concerned -- the problem is the populace cannot look down the road and see the latter-day effects of the policy. Yeah, it's great right now that I can probably go out and buy a house 3 times as big as I need and qualify for a loan I should never get -- but no-one can really appraise me of the risks attendant to the system and citizens at large for the availability of such credit. In effect the result is a sort of peonage, but with the immediate results no-one notices or cares. Austrian economists are right, but can only be shown to be right by the calamity that ensues when free markets are entirely dispensed with. Policy makers are never willing to simply make improvements at the margin. FNM and FRE implicit guarantees are levels of magnitude different than social burden implied by FDIC deposit insurance -- but go far enough and it all becomes the same thing. Man, our government and institutions are so messed up!! >>Yes, it is fraught with moral hazard, but then, government-supported financial intermediation is always fraught with moral hazard: the free rider problem, in which the upside of risk-taking accrues to the individual, but (most) of the downside accrues to the community of individuals. The existence of moral hazard is not, however, a sufficient case for rejecting implicit or explicit government backing for financial enterprise. "We the people" retain the right to enter into risk-sharing arrangements, despite the rantings of "pure" capitalists about the evils of moral hazard. We have done so with both deposit insurance and housing finance in this country, and I submit that an overwhelming majority of Americans ("we the people" again!) applaud the results. <<

To: Simba who wrote (188480)	8/19/2002 10:12:28 AM
From: yard_man	Respond to of 436258

yep -- this is exactly what we need <s> >>The time for bank regulators to get tough is when times are good, not when times are bad. They didn't, of course, during the bubble years, but that is not a rational justification for getting tough now. If counter-cyclical is good for Fed funds policy, then counter-cyclical is good for bank regulatory policy, too. Interestingly, famed economist Henry Kaufman applied this logic just this week5 in calling for a cut in margin requirements for stocks, after having been a fellow traveler with me and Bob Shiller in advocating a hike in margin requirements during the bubble years. Henry surprised me on this score, even though his logic was perfectly reasonable: regulatory policy should be counter- cyclical and since margin requirements are a regulatory tool, a cut certainly wouldn't hurt to break infectious risk aversion (though unlike the case of a hike, it would be less likely to "work," for proverbial "you can lead a horse to water, but…" reasons). What Henry should have advocated, if I may be so presumptuous, is a counter-cyclical easing in the implementation of bank regulatory policies. << let's round up the economists. Cast lots and let 2% stay in the country ... it would be a good start, IMO. <ng>