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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Moominoid who wrote (88786)	9/11/2007 1:46:37 PM
From: GraceZ	Read Replies (3) \| Respond to of 306849

So you're suggesting that the Fed targets the FFR to match some specific market interest rate or just get rid of the Fed? I think the Fed should not target any rate, it should allow for a free market in money, a free market in FFs. I don't know if I can say this any clearer. The rate between banks could easily be determined by the banks themselves, each with their own needs/objectives for entering into the market for overnight lending. Is the price of bread set by a board of experts? Is it indexed to some unrelated market price? Remember that transactions don't occur in a free market unless both parties are better off after that transaction. From Bernstien: Each party is seeking a different objective from the other side, but the market enables the parties to settle on a price that is satisfactory to both of them. Price is the most important signal in any market, it is neither right nor wrong but people who disagree with it are encouraged to go after more information. Additional information then shows up in price leading the market closer to equilibrium. We never would have had three years of negative real rates under a free market regime. We might have had three days, but even that is doubtful since market excesses would never have had a chance to build up the way they did prior to the tech bust. Those who are now pointing to TBill rates and suggesting that these are indicative of a free market for money are missing that the price in TBills today has little to do with trying to discover real value or even inflation expectations, but has a lot more to do with a panic flight to quality in full on reassessment of the risks that exist in the other credit markets. Risks which were taken on with little concern for loss. Those government bond rates tell us very little about the willingness of banks to lend and individuals to borrow in the commercial banking sector. It's like pegging the price of bread to the price of apples. Still, I don't think the Fed should be abolished. The Fed has a place as it was originally created as a lender of last resort in a banking crisis, to prevent bank runs. Also, they are important during serious disruptions in the market for money, as in exogenous events like the 9/11 attacks where large portions of the clearing mechanism for transactions were disrupted because they were so centralized in lower Manhattan. The service they provided post 9/11 was important to restore function quickly to a market where time literally is money. After the Great Depression their role as "lender of last resort" got expanded. It was continually expanded until during the seventies their duties were expanded to include that famous dual mandate, price stability and full employment. Now not only was the Fed expected to act to provide liquidity in a dire situation like the Great Depression where 600 bank failures ended up destroying the savings of ordinary individuals and contracting the real money supply by a third, but to act in the face of the threat of a minor routine recession. The original Federal Reserve Act, in 1913, contained no macro-- economic goals. Rather it instructed the Fed to prevent financial panics and bank runs by providing loans to the banking system. In the aftermath of the Great Depression, the 1946 Employment Act required the Fed to pursue "conditions under which there will be afforded useful employment opportunities ... for those able, willing, and seeking to work, and to promote maximum employment, production, and purchasing power." By the 1970s the term maximum employment was understood to mean not zero percent unemployment, but the level of unemployment that arises in a healthy economy as employers and employees seek good matches. In 1978, the Full Employment and Balanced Growth Act required the federal government to "promote full employment ... and reasonable price stability."