https://asiatimes.com/2023/03/feds-try-to-stop-bank-crisis-of-their-own-making/

Thanks!

dk

On 3/17/2023 9:21 AM, Dan Koren wrote:
> https://asiatimes.com/2023/03/feds-try-to-stop-bank-crisis-of-their-own-making/
>
> Thanks!
>
> dk
>

Well, I've posted before that Milton Friedman over 60 years ago suggested the the Fed should target credit growth around 3% (or so) and not micro manage the money supply based on observation of inflation or employment. The idea is based on the fact that the economy could take up to 2 years or so to respond to changes in monetary policy. If the Fed were to reduce money growth (raise interest rates) in response to seeing inflation and continued until the data show inflation adequately reduced, they would have raised rates to long and too much and likely cause a recession. Conversely if the Fed reduced rates (pumped the money supply) in order to combat a slow economy, they would likely do so for too long and too much and end up with inflation.

This is the pattern that the Fed has in fact followed. I think there has only ever been one "soft landing." I seem to recall it was accidental, but I don't remember right now. Friedman claimed his way would result in much smaller business cycles. It has never been tried in the U.S., I don't know about other countries.

Note I haven't mentioned government spending. You will see every day common folk and pundits alike saying that excessive government spending is inflationary. It is not. Quoting Friedman again, Inflation is always and everywhere a monetary phenomenon. Government spending is directly financed only by taxation (obvious to the voters) and/or borrowing (less obvious, but affecting the real economy, by raising interest rates (in order to get the public to by more bonds, you have offer higher rates than before).

If the Federal Reserve purchases large amounts of Treasury securities (called monetizing the debt), they do so by creating money out of thin air, which in large quantities IS inflationary. By law, the Fed doesn't have to do this, but often does, whether under pressure from the executive branch, or because they think they need to manage the economy properly, I don't know. Probably both.

The forgoing is the monetarist view. Not sure to what extent "Keynesians" would disagree. In graduate school in the 1970s, we studied a book written by one of our professors (of course), called "On Keynesian Economics and Economics of Keynes," which obvious from the title, proposed that a lot of what became known as Keynsian Economic (summarized by me as micro managing the economy) was not what Keynes himself said or believed.

To end up closer to being on-topic, according to Wikipedia, John Maynard Keynes was a supporter of the Royal Opera House at Covent Garden and the Ballet Company at Sadler Wells.

I don't know what kind of music Milton and Rose Friedman liked, but I read an article once that likened his free-market ideas spreading world-wide from Chicago (contributing to the decline of central planning, reduction in runaway inflation, economic growth and a rise in living standards) and the spread of jazz and blues also from Chicago.

Before someone says that free-market ideas produced widening wealth disparity and a global environmental disaster, go right ahead. I warn you, though, I may reply.

Many thanks! Great review. It helped me understand tha article better.

If I understand your points correctly:

1) Systems that have in herently large hysteresis and change relatively
slowly do not respond "instantly" to inputs and cannot and should
not be micro-managed to cause quick corrections.

2) The Fed buying Treasuries is effectively like someone loaning
money to oneself.

dk

On Friday, March 17, 2023 at 11:48:43 AM UTC-7, Frank Berger wrote:
> On 3/17/2023 9:21 AM, Dan Koren wrote:
> > https://asiatimes.com/2023/03/feds-try-to-stop-bank-crisis-of-their-own-making/
>
> Well, I've posted before that Milton Friedman over 60 years ago suggested the
> the Fed should target credit growth around 3% (or so) and not micro manage
> the money supply based on observation of inflation or employment. The idea
> is based on the fact that the economy could take up to 2 years or so to respond
> to changes in monetary policy. If the Fed were to reduce money growth (raise
> interest rates) in response to seeing inflation and continued until the data show
> inflation adequately reduced, they would have raised rates to long and too much
> and likely cause a recession. Conversely if the Fed reduced rates (pumped the
> money supply) in order to combat a slow economy, they would likely do so for
> too long and too much and end up with inflation.
>
> This is the pattern that the Fed has in fact followed. I think there has only ever
> been one "soft landing." I seem to recall it was accidental, but I don't remember
> right now. Friedman claimed his way would result in much smaller business
> cycles. It has never been tried in the U.S., I don't know about other countries.
>
> Note I haven't mentioned government spending. You will see every day common
> folk and pundits alike saying that excessive government spending is inflationary.
> It is not. Quoting Friedman again, Inflation is always and everywhere a monetary
> phenomenon. Government spending is directly financed only by taxation (obvious
> to the voters) and/or borrowing (less obvious, but affecting the real economy, by
> raising interest rates (in order to get the public to by more bonds, you have offer
> higher rates than before).
>
> If the Federal Reserve purchases large amounts of Treasury securities (called
> monetizing the debt), they do so by creating money out of thin air, which in large
> quantities IS inflationary. By law, the Fed doesn't have to do this, but often does,
> whether under pressure from the executive branch, or because they think they
> need to manage the economy properly, I don't know. Probably both.
>
> The forgoing is the monetarist view. Not sure to what extent "Keynesians" would
> disagree. In graduate school in the 1970s, we studied a book written by one of our
> professors (of course), called "On Keynesian Economics and Economics of Keynes,"
> which obvious from the title, proposed that a lot of what became known as Keynsian
> Economic (summarized by me as micro managing the economy) was not what Keynes
> himself said or believed.
>
> To end up closer to being on-topic, according to Wikipedia, John Maynard Keynes
> was a supporter of the Royal Opera House at Covent Garden and the Ballet Company
> at Sadler Wells.
>
> I don't know what kind of music Milton and Rose Friedman liked, but I read an article
> once that likened his free-market ideas spreading world-wide from Chicago (contributing
> to the decline of central planning, reduction in runaway inflation, economic growth and a
> rise in living standards) and the spread of jazz and blues also from Chicago.
>
> Before someone says that free-market ideas produced widening wealth disparity
> and a global environmental disaster, go right ahead. I warn you, though, I may reply.

On Friday, March 17, 2023 at 11:48:43 AM UTC-7, Frank Berger wrote:
>
> Before someone says that free-market
> ideas produced widening wealth disparity
> and a global environmental disaster, go
> right ahead. I warn you, though, I may reply.

"Ideas" don't produce anything by themselves
(sorry Marc). People's actions and behaviors
result in social, economic and environmental
changes. The effects oftentimes differ from
the "ideas" and expectations of the ideas of
the people promoting the changes.

Looking at the Fed's performance over the
past 110 years, it does not seem to work
particularly well. This leads to the question:
Is Jerome Powell a brainfucked imbecile? ;-)

dk

Dan Koren schrieb am Samstag, 18. März 2023 um 02:52:15 UTC+1:
> On Friday, March 17, 2023 at 11:48:43 AM UTC-7, Frank Berger wrote:
> >
> > Before someone says that free-market
> > ideas produced widening wealth disparity
> > and a global environmental disaster, go
> > right ahead. I warn you, though, I may reply.
> "Ideas" don't produce anything by themselves
> (sorry Marc). People's actions and behaviors
> result in social, economic and environmental
> changes. The effects oftentimes differ from
> the "ideas" and expectations of the ideas of
> the people promoting the changes.

Just glanced over this thread to see that my name has been uttered. My dear friends... I don't even understand why my name was mentioned here in the first place. And what I don't understand as well is how simple minded one can be...

What you don't seem to understand is that people's actions are guided by their ideas about this world, and it's this world that makes them think certain things, because this world is constituted in a specific way; if the world were constituted differently, people would think differently (this is even sth one can sort of experience in this world through the different cultures - but the all encompassing ideology is capitalism and capitalism affects our thoughts and thus also our behaviour).

Before the action there is always an idea; or at least there should be. Unfortunately, in this ng actions seem to stem from reflexes or a very primitive niveau/level of self-reflection.

>
> Looking at the Fed's performance over the
> past 110 years, it does not seem to work
> particularly well. This leads to the question:
> Is Jerome Powell a brainfucked imbecile? ;-)
>
> dk

On 3/17/2023 9:33 PM, Dan Koren wrote:
> Many thanks! Great review. It helped me understand tha article better.
>
> If I understand your points correctly:
>
> 1) Systems that have in herently large hysteresis and change relatively
> slowly do not respond "instantly" to inputs and cannot and should
> not be micro-managed to cause quick corrections.
>

Yes. The economics jargon there are information costs and transactions costs. Modeling economic behavior would be a lot easier without these.

> 2) The Fed buying Treasuries is effectively like someone loaning
> money to oneself.
>

Not sure what you mean. When the Fed buys treasuries they pay with money created out of thin air. Buying/selling securities (AKA open market operations) and setting the discount rate are the two main tools of monetary policy.

> dk
>
> On Friday, March 17, 2023 at 11:48:43 AM UTC-7, Frank Berger wrote:
>> On 3/17/2023 9:21 AM, Dan Koren wrote:
>>> https://asiatimes.com/2023/03/feds-try-to-stop-bank-crisis-of-their-own-making/
>>
>> Well, I've posted before that Milton Friedman over 60 years ago suggested the
>> the Fed should target credit growth around 3% (or so) and not micro manage
>> the money supply based on observation of inflation or employment. The idea
>> is based on the fact that the economy could take up to 2 years or so to respond
>> to changes in monetary policy. If the Fed were to reduce money growth (raise
>> interest rates) in response to seeing inflation and continued until the data show
>> inflation adequately reduced, they would have raised rates to long and too much
>> and likely cause a recession. Conversely if the Fed reduced rates (pumped the
>> money supply) in order to combat a slow economy, they would likely do so for
>> too long and too much and end up with inflation.
>>
>> This is the pattern that the Fed has in fact followed. I think there has only ever
>> been one "soft landing." I seem to recall it was accidental, but I don't remember
>> right now. Friedman claimed his way would result in much smaller business
>> cycles. It has never been tried in the U.S., I don't know about other countries.
>>
>> Note I haven't mentioned government spending. You will see every day common
>> folk and pundits alike saying that excessive government spending is inflationary.
>> It is not. Quoting Friedman again, Inflation is always and everywhere a monetary
>> phenomenon. Government spending is directly financed only by taxation (obvious
>> to the voters) and/or borrowing (less obvious, but affecting the real economy, by
>> raising interest rates (in order to get the public to by more bonds, you have offer
>> higher rates than before).
>>
>> If the Federal Reserve purchases large amounts of Treasury securities (called
>> monetizing the debt), they do so by creating money out of thin air, which in large
>> quantities IS inflationary. By law, the Fed doesn't have to do this, but often does,
>> whether under pressure from the executive branch, or because they think they
>> need to manage the economy properly, I don't know. Probably both.
>>
>> The forgoing is the monetarist view. Not sure to what extent "Keynesians" would
>> disagree. In graduate school in the 1970s, we studied a book written by one of our
>> professors (of course), called "On Keynesian Economics and Economics of Keynes,"
>> which obvious from the title, proposed that a lot of what became known as Keynsian
>> Economic (summarized by me as micro managing the economy) was not what Keynes
>> himself said or believed.
>>
>> To end up closer to being on-topic, according to Wikipedia, John Maynard Keynes
>> was a supporter of the Royal Opera House at Covent Garden and the Ballet Company
>> at Sadler Wells.
>>
>> I don't know what kind of music Milton and Rose Friedman liked, but I read an article
>> once that likened his free-market ideas spreading world-wide from Chicago (contributing
>> to the decline of central planning, reduction in runaway inflation, economic growth and a
>> rise in living standards) and the spread of jazz and blues also from Chicago.
>>
>> Before someone says that free-market ideas produced widening wealth disparity
>> and a global environmental disaster, go right ahead. I warn you, though, I may reply.

On 3/17/2023 9:52 PM, Dan Koren wrote:
> On Friday, March 17, 2023 at 11:48:43 AM UTC-7, Frank Berger wrote:
>>
>> Before someone says that free-market
>> ideas produced widening wealth disparity
>> and a global environmental disaster, go
>> right ahead. I warn you, though, I may reply.
>
> "Ideas" don't produce anything by themselves
> (sorry Marc). People's actions and behaviors
> result in social, economic and environmental
> changes. The effects oftentimes differ from
> the "ideas" and expectations of the ideas of
> the people promoting the changes.
>
> Looking at the Fed's performance over the
> past 110 years, it does not seem to work
> particularly well. This leads to the question:
> Is Jerome Powell a brainfucked imbecile? ;-)
>
> dk

I would say he is poorly educated. It's illustrative of the general low regard for economists (or economics) that the Chairman of the Federal Reserve is not an economist.

On Saturday, March 18, 2023 at 6:33:04 PM UTC-7, Frank Berger wrote:
> On 3/17/2023 9:33 PM, Dan Koren wrote:
> >
> > 2) The Fed buying Treasuries is effectively
> > like someone loaning money to oneself.
>
> Not sure what you mean. When the Fed
> buys treasuries they pay with money
> created out of thin air.

This is exactly what I meant! "Thin air" is
not legit currency, except when inhaled
and exhaled by national banks. Thanks
for the confirmation.

dk

On Saturday, March 18, 2023 at 6:38:22 PM UTC-7, Dan Koren wrote:
> On Saturday, March 18, 2023 at 6:33:04 PM UTC-7, Frank Berger wrote:
> > On 3/17/2023 9:33 PM, Dan Koren wrote:
> > >
> > > 2) The Fed buying Treasuries is effectively
> > > like someone loaning money to oneself.
> >
> > Not sure what you mean. When the Fed
> > buys treasuries they pay with money
> > created out of thin air.
> This is exactly what I meant! "Thin air" is
> not legit currency, except when inhaled
> and exhaled by national banks. Thanks
> for the confirmation.
>

https://www.linkedin.com/posts/prof-alexander-lipton-aa2256bb_economy-money-banking-activity-7042785589615575040-CgpS

dk

On Saturday, March 18, 2023 at 7:06:53 PM UTC-7, Dan Koren wrote:
> On Saturday, March 18, 2023 at 6:38:22 PM UTC-7, Dan Koren wrote:
> > On Saturday, March 18, 2023 at 6:33:04 PM UTC-7, Frank Berger wrote:
> > > On 3/17/2023 9:33 PM, Dan Koren wrote:
> > > >
> > > > 2) The Fed buying Treasuries is effectively
> > > > like someone loaning money to oneself.
> > >
> > > Not sure what you mean. When the Fed
> > > buys treasuries they pay with money
> > > created out of thin air.
> > This is exactly what I meant! "Thin air" is
> > not legit currency, except when inhaled
> > and exhaled by national banks. Thanks
> > for the confirmation.
>
> https://www.linkedin.com/posts/prof-alexander-lipton-aa2256bb_economy-money-banking-activity-7042785589615575040-CgpS
>

See https://arxiv.org/abs/1510.07608

dk

On 3/18/2023 9:38 PM, Dan Koren wrote:
> On Saturday, March 18, 2023 at 6:33:04 PM UTC-7, Frank Berger wrote:
>> On 3/17/2023 9:33 PM, Dan Koren wrote:
>>>
>>> 2) The Fed buying Treasuries is effectively
>>> like someone loaning money to oneself.
>>
>> Not sure what you mean. When the Fed
>> buys treasuries they pay with money
>> created out of thin air.
>
> This is exactly what I meant! "Thin air" is
> not legit currency, except when inhaled
> and exhaled by national banks. Thanks
> for the confirmation.
>
> dk

Currency accounts for a small percentage of what is money. The vast majority is checking accounts. When the Fed buys securities from a broker they simply create a deposit in the broker's account. Presto. The money supply has increased. It is perfectly legitimate, in the sense of legality and a cornerstone of monetary policy.

I don't know if Friedman was so libertarian that he thought there shouldn't even be a central bank, but certainly some people (not necessarily conspiracy theorists) do. Private banks would be able to create their own money. Competition would keep them from creating too much and thereby depreciating there own currency relative to other banks. Bank America money might trade at .995 Citibank money, or something like that. The conversion from one Bank's money to another's could easily be conducted at the cash register (literally and figuratively), much as foreign transactions on your credit card are done. If it sounds extreme, I suppose, but it sounds extremely beautiful to my ears. What an experiment it would be!

On Saturday, March 18, 2023 at 8:26:17 PM UTC-7, Frank Berger wrote:
> On 3/18/2023 9:38 PM, Dan Koren wrote:
> > On Saturday, March 18, 2023 at 6:33:04 PM UTC-7, Frank Berger wrote:
> >> On 3/17/2023 9:33 PM, Dan Koren wrote:
> >>>
> >>> 2) The Fed buying Treasuries is effectively
> >>> like someone loaning money to oneself.
> >>
> >> Not sure what you mean. When the Fed
> >> buys treasuries they pay with money
> >> created out of thin air.
> >
> > This is exactly what I meant! "Thin air" is
> > not legit currency, except when inhaled
> > and exhaled by national banks. Thanks
> > for the confirmation.
>
> Currency accounts for a small percentage of
> what is money. The vast majority is checking
> accounts. When the Fed buys securities from
> a broker they simply create a deposit in the
> broker's account. Presto.

Understood. I used "currency" in the broader
sense of "money" or "legal tender".

> The money supply has increased.

This seems counter-intuitive.

> It is perfectly legitimate, in the sense of legality
> and a cornerstone of monetary policy.

Legal legitimacy does not imply fiscal or moral or
any other flavor of legitimacy. 200 years ago it was
legally legitimate for one person to own another
person -- at least in some parts of the world that
cannot be named! ;-)

> I don't know if Friedman was so libertarian that he
> thought there shouldn't even be a central bank, but
> certainly some people (not necessarily conspiracy
> theorists) do.

How would then sovereign nations control their
money supply, conversion abilities/prohibitions,
exchange rates, etc?

> Private banks would be able to create their own
> money. Competition would keep them from creating
> too much and thereby depreciating there own currency
> relative to other banks. Bank America money might trade
> at .995 Citibank money, or something like that. The
> conversion from one Bank's money to another's could
> easily be conducted at the cash register (literally and
> figuratively), much as foreign transactions on your
> credit card are done. If it sounds extreme, I suppose,
> but it sounds extremely beautiful to my ears. What an
> experiment it would be!

This experiment has been going on at least since
crypto currencies became available in 2009. So
far the results have been less than encouraging,
though some might claim the jury is still out.

dk

On 3/18/2023 11:37 PM, Dan Koren wrote:
> On Saturday, March 18, 2023 at 8:26:17 PM UTC-7, Frank Berger wrote:
>> On 3/18/2023 9:38 PM, Dan Koren wrote:
>>> On Saturday, March 18, 2023 at 6:33:04 PM UTC-7, Frank Berger wrote:
>>>> On 3/17/2023 9:33 PM, Dan Koren wrote:
>>>>>
>>>>> 2) The Fed buying Treasuries is effectively
>>>>> like someone loaning money to oneself.
>>>>
>>>> Not sure what you mean. When the Fed
>>>> buys treasuries they pay with money
>>>> created out of thin air.
>>>
>>> This is exactly what I meant! "Thin air" is
>>> not legit currency, except when inhaled
>>> and exhaled by national banks. Thanks
>>> for the confirmation.
>>
>> Currency accounts for a small percentage of
>> what is money. The vast majority is checking
>> accounts. When the Fed buys securities from
>> a broker they simply create a deposit in the
>> broker's account. Presto.
>
> Understood. I used "currency" in the broader
> sense of "money" or "legal tender".
>
>> The money supply has increased.
>
> This seems counter-intuitive.
>

Why? It's not that the Fed is transferring money from itself to the broker. The money didn't exist until it appeared in the broker's account.

>> It is perfectly legitimate, in the sense of legality
>> and a cornerstone of monetary policy.
>
> Legal legitimacy does not imply fiscal or moral or
> any other flavor of legitimacy. 200 years ago it was
> legally legitimate for one person to own another
> person -- at least in some parts of the world that
> cannot be named! ;-)
>

Of course.

>> I don't know if Friedman was so libertarian that he
>> thought there shouldn't even be a central bank, but
>> certainly some people (not necessarily conspiracy
>> theorists) do.
>
> How would then sovereign nations control their
> money supply, conversion abilities/prohibitions,
> exchange rates, etc?
>

Free markets. Not government control. That's the whole point.

>> Private banks would be able to create their own
>> money. Competition would keep them from creating
>> too much and thereby depreciating there own currency
>> relative to other banks. Bank America money might trade
>> at .995 Citibank money, or something like that. The
>> conversion from one Bank's money to another's could
>> easily be conducted at the cash register (literally and
>> figuratively), much as foreign transactions on your
>> credit card are done. If it sounds extreme, I suppose,
>> but it sounds extremely beautiful to my ears. What an
>> experiment it would be!
>
> This experiment has been going on at least since
> crypto currencies became available in 2009. So
> far the results have been less than encouraging,
> though some might claim the jury is still out.
>

I really haven't followed the whole crypto thing. I will say that in the vast majority of cases that purport point out market failure, usually the market isn't free (government regulations). Markets that are small, like new markets, will likely be more volatile and perhaps more open to corruption. One of my favorite gripes is when the media talks about free trade agreements. If there is a free market, no terms are necessary to be spelled out in an agreement. Free trade agreements actually are lists of restrictions on free trade.

I'm not overlooking actual imperfections in markets, like externalities (pollution being the main one) and natural monopolies, this doesn't apply to the monetary question.

> dk