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Oliver McCarthy

This is really sweet. Norman, Saatchi & Saatchi and Mrs T herself have all given up on the Tories, and the Tories think they're going to win by betting against the Republicans on America's first female president. Okaaay!

So the guy hates Bush? Big deal! Bush will be gone, Hillary will have polarised the country, and the Republicans will have to nominate someone pretty darn incompetent politically in order to lose.

Tony Makara

Oliver, did you hear Rush Limbaugh taking bets today on his show that if Hillary becomes president she won't take troops out of Iraq? I think he could well be right. What do you think?


http://www.rushlimbaugh.com/home/daily/site_092607/content/01125109.guest.html

atheling

Hillary is a socialist. Any conservative who could even contemplate voting for her is no true conservative.

She has not "improved" in any way, except by experience in the beltway and as a career politician. Her ambtions and her policies are just as leftist as always.

The latest outrage by MoveOn.org against General Petraeus BEFORE he even gave his testimony and her unwillingness to condemn them has damaged her campaign. Whether she will recover from that (and believe me, all those who oppose her will dredge that up for the next year) remains to be seen.

Americans who believe her to be a poor candidate to be the Commander in Chief of our troops won't forget this. It might do to her what the Swift Boat vets did to John Kerry.

I hope so.

Simon Newman

YAA:
"The same politician who is leading xenophobic Congressional campaigns..."

If I thought Hillary really was an immigration restrictionist I'd join my wife in supporting her!

Simon Newman

JF re Ron Paul:
"His ideas are also sure to be popular in Sudan, Somalia, Chad, Côte d'Ivoire, Democratic Republic of the Congo, and all of the other failed states of the world."

I think this is just mindless slagging-off. If you meant that implementing something like the US Constitution would be popular in those states, it would be nice if it were true, and would solve many of their problems, but I sadly disagree that any of those states are likely to embrace Constitutional democracy with a federal Republic under the rule of law.

davod

Macmillan worked with JFK? - JFK was to the right of most present day Republicans (Whisper - JFK also brought in a large tax cut.)

David September 26, 4:06 PM: Before Pearl Harbour, I doubt that non intervention in another European war was a purely Republican position.

JFK almost started a nuclear war - don't we have this backwards. The Russians pushed and the US pushed back. I do not know much about the UK position on Russian missiles in Cuba but I bet it was "Jaw, Jaw, is better than War War" (I am not sure if this is the correct phrase). All well and good but Kennedy did achieve the objective and I doubt if talk and no act ion would have removed the missiles. With missiles in Cuba I doubt if the Cold War containment strategy would have prevailed.

Hillary may well be the next President of the United States. The domestic policies she espouses are the same policies that some in Europe are now running away from.

davod

PS:

I should also say that much of the loyal opposition policies and funding eminate from that well known friend of England - George Soros. Unfortunetaly, in Hillary he has a kindred spirit.

davod

PS:

I should also say that much of the loyal opposition policies and funding eminate from that well known friend of England - George Soros. Unfortunetaly, in Hillary he has a kindred spirit.

davod

The double post was because the enter the code screen came up twice.

Oliver McCarthy

No, I can't imagine Hillary will pull troops out of Iraq. The Dems anti-Iraqi stance at the moment is based on how much they hate Bush (and how much they love abortion), not on principle on national interest.

But then I cannot imagine Hillary becoming President either.

JF

Simon Newman,

No, I have no hope of failed states embracing constitutional democracy. My meaning is that Ron Paul's calls for the evisceration of the major organs of the federal government are a recipe for the creation of a failed state; I storngly urge you to study the history of the US under the Articles of Confederation, since you don't seem familiar with that period.

In saying that all Ron Paul wants is an embrace of the constitution, you are implying that the current US government is unconstitutional, i.e. illegal. I assure you that 99% of Americans would be horrified by any calls for a coup d'etat, and indeed, Ron Paul rarely breaks 1% in polling support.

Ron Paul, the coward, doubtless thinks that paying ranson equivalent to 20% of the federal budget to the Barbary Pirates was a superior solution to Decatur's commando operation, because the bribes were approved by the Congress and military action was not.

Ron Paul and his followers are not grounded in reality. How does one have a strong military without an IRS? I remind you that income taxes were collected during the Civil War, the Spanish-American War, WWI, and WWII, so Ron Paul's idealized utopia of a tax-free America is a fevered dream.

His paranoid obsession with the Federal Reserve should also give you pause. Not only does it betray an abject ignorance of the interplay between the Federal Reserve and the way the market sets interest rates, it also shows an appalling ignorance of the violent economic cycles experienced by the US prior to the establishment of the Federal Reserve.

Look, I could go on, but it's a waste of my time. Ron Paul is a crackpot with impractical ideas for the real world. He'll never achieve power and no one like him will achieve power as long as the US is a unified political entity.

Jonathan Powell

How does one have a strong military without an IRS?

You could raise as much tax revenue as is raised under the current system without the need for the IRS, by replacing the current tax code with a simple flat tax or national sales tax.

violent economic cycles experienced by the US prior to the establishment of the Federal Reserve

as opposed to the benign economic cycles which have occurred under the Fed's watch, such as the one between 1920 and 1933?

JF

You could raise as much tax revenue as is raised under the current system without the need for the IRS, by replacing the current tax code with a simple flat tax or national sales tax.

I'm amenable to a flat tax, certainly (national sales tax is a bad idea). However, after you've abolished the IRS, who would collect the taxes? The police? Yes, that sounds like an improvement.

as opposed to the benign economic cycles which have occurred under the Fed's watch, such as the one between 1920 and 1933?

It is widely acknowledged that the Fed was incompetent in the aftermath of the stock market crash of 1929, but are you saying that the Fed was more responsible for the Great Depression than Smoot-Hawley? Before you answer that question, I remind you that unemployment was 9% before Smoot-Hawley, but it was only after Smoot-Hawley that unemployment skyrocketed to 25%.

Now allow me to turn the tables. Do you think the Fed was mistaken in its responses to the economic fallout following the disruptions of 1987, 1997-1998, and 2001? Also, do you understand how the Fed sets interest rates? There's a reason why it's called open market operations.

Simon Newman

JF:
"In saying that all Ron Paul wants is an embrace of the constitution, you are implying that the current US government is unconstitutional, i.e. illegal."

No, I'm merely saying that some of the powers currently exercised by the US govt (including Congress and especially including the Supreme Court's use of the incorporation doctrine to limit the powers of the States) are unconstitutional and illegal.

Jonathan Powell

However, after you've abolished the IRS, who would collect the taxes? The police?

The IRS is needed to figure out how much people owe, under a flat tax or national sales tax this is much simpler, so you don't need a special organization. The taxes would be collected much as they are now: under a flat tax people would fill out their postcard tax return and send a cheque to the government, under a sales tax the stores would collect the taxes and send them to the government. There would have to be some system to check the amounts received were correct, but this would be fairly straightforward. If people were suspected of tax evasion the police would investigate, just like any other crime.

but are you saying that the Fed was more responsible for the Great Depression than Smoot-Hawley

I am saying that the existence of the Fed did not prevent a particularly violent cycle, so your assertion that Paul is ignorant about the proceeding cycles is unfounded. Why do you think the lack of a Fed caused the cycles before 1913, when such cycles continued after the Fed was created?

Do you think the Fed was mistaken in its responses to the economic fallout following the disruptions of 1987, 1997-1998, and 2001

Not really, but nor do I think having a Fed was necessary to cope with these disruptions.

do you understand how the Fed sets interest rates? There's a reason why it's called open market operations.

I do understand how the Fed sets interest rates. I do not see it as desirable, however. Why not let market forces determine interest rates?

JF

I am saying that the existence of the Fed did not prevent a particularly violent cycle, so your assertion that Paul is ignorant about the proceeding cycles is unfounded. Why do you think the lack of a Fed caused the cycles before 1913, when such cycles continued after the Fed was created?

Your assertion is incorrect. Only the communists have ever argued that it is possible to suppress the boom/bust business cycle. The Fed was meant to help make recessions more shallow and brief, and the Fed's track record is excellent once the Great Depression is excluded. Especially after WWII, it's easy for anyone to see that the economy has been far more resilient. At worst, the Fed is unnecessary, but at best, the Fed has done a superb job helping to moderate the business cycle. See for yourself:

http://www.nber.org/cycles/

I do understand how the Fed sets interest rates. I do not see it as desirable, however. Why not let market forces determine interest rates?

The market does determine interest rates. Are you sure you understand how the Fed sets interest rates? Do you really understand how bonds function? You are railing against something you don't completely understand.

Richard

"Only the communists have ever argued that it is possible to suppress the boom/bust business cycle."

Where did you get this idea from? Many free-market economists reject the idea that business cycles are inevitable, Ludwig von Mises for one.

Jonathan Powell

The Fed was meant to help make recessions more shallow and brief, and the Fed's track record is excellent once the Great Depression is excluded. Especially after WWII, it's easy for anyone to see that the economy has been far more resilient.

This is bologna. The point is that the Fed is largely irrelevant to the economic cycle. Recessions have been becoming more shallow and brief under the Fed's watch, but the depression of 1929-1933 was at least as bad as those before the Fed was created. So, it's illogical to argue the Fed is responsible for the decline in economic volitilty--it merely presided over it.


The market does determine interest rates. Are you sure you understand how the Fed sets interest rates? Do you really understand how bonds function? You are railing against something you don't completely understand.

The market determines interest rates in the context of massive intervention by the Fed. If you don't understand that it is the Fed that sets (short term) interest rates, I fear it is you who does not understand how monetary policy functions. Because the Fed has an unlimited supply of dollars with which to buy bonds, and a huge resource of government debt to exchange for money, it is free to set interest rates as it sees fit. If you think this is the free market operating, think again. It is analogous to the government fixing the price of a privately traded good (say apartments in NYC).

Tony Makara

On the subject of boom/bust I think politicans need to pay more attention to studying the interest-dynamic. The Labour government have tried to sustain a demand-led economy which has been fuelled by massive volumes of credit. This in my opinion has created huge underlying inflationary pressures related to the interested incurred on debt which will have to be met.

Currently the overvalued strength of sterling is masking inflationary pressures which will explode once the currency depreciates. The lesson from all this is that the only way to approach economic growth is to strengthen the supply side, creating demand artifically through credit will lead to inflation eventually.

JF

Jonathan Powell,

The market determines interest rates in the context of massive intervention by the Fed. If you don't understand that it is the Fed that sets (short term) interest rates, I fear it is you who does not understand how monetary policy functions. Because the Fed has an unlimited supply of dollars with which to buy bonds, and a huge resource of government debt to exchange for money, it is free to set interest rates as it sees fit. If you think this is the free market operating, think again. It is analogous to the government fixing the price of a privately traded good (say apartments in NYC).

I am terribly sorry to destroy the bogeyman that has surely consumed your life thus far. The Fed sets the nominal federal funds rate and the discount rate. The federal funds rate is a target rate, because the Fed cannot fix the exact interest rate, as it must constantly trade in the market against other market participants to maintain a rate near its target. In addition, the "real" federal funds rate is determined by the expected inflation rate, which--surprise!--is determined by "the market."

Even more importantly, prime, LIBOR, mortgage rates, the 10 year bond, and corporate credit spreads, and just about every other rate on which credit is based are all determined by the market with zero Fed interaction whatsoever. These are the rates which are most important to business, since these are the rates on which business gains access to credit.

Your analogy to setting apartment prices is inapt, as treasury securities are not a purely privately traded good (they are created by the government). The Fed is more like DeBeers in exerting a dominant influence over a good, but without complete control. Is it a perfect display of market forces? Of course not, but very little is.

The point is that the Fed is largely irrelevant to the economic cycle. Recessions have been becoming more shallow and brief under the Fed's watch

Down the rabbit hole we go with a Ron Paul supporter. Why have recessions become more shallow and brief under the Fed, if not for the Fed? I'm sure we'd all love to hear.

JF

Richard,

Academics make a lot of claims, certainly. That said, you have your pick of any capitalist economy in the world. Which capitalist economy has stopped the boom/bust cycle? Which capitalist government and/or head of state has claimed it could stop the boom/bust cycle? Take your time.

Jonathan Powell

The Fed sets the nominal federal funds rate and the discount rate. The federal funds rate is a target rate, because the Fed cannot fix the exact interest rate, as it must constantly trade in the market against other market participants to maintain a rate near its target.

This is splitting hairs, because the Fed consistently comes very close (within 0.01%) to its target. Just because it doesn't set the rate exactly doesn't change the fact that it determines what the rate is. The "market participants" are manipulated by the Fed's policies. It's like oil which is sold on the open market yet the price is largely manipulated by OPEC.

In addition, the "real" federal funds rate is determined by the expected inflation rate, which--surprise!--is determined by "the market."

No, the expected inflation rate is determined by the Fed's policies
--if the market observes looser monetary policy it will expect higher inflation e.g. A Jump in Expected Inflation

Even more importantly, prime, LIBOR, mortgage rates, the 10 year bond, and corporate credit spreads, and just about every other rate on which credit is based are all determined by the market with zero Fed interaction whatsoever. These are the rates which are most important to business, since these are the rates on which business gains access to credit.

I concede that the Fed does not set all interest rates, and that its influence on long-term rates is indirect and arguably negligible. However, it does affect a range of short-term interest rates when it chooses the Fed funds rate, because this affects the cost of borrowing faced by banks.

If the Fed funds rate is so unimportant to business, why did Bernanke feel the need to cut it in response to the credit crunch and why did stocks rally on the announcement?

Down the rabbit hole we go with a Ron Paul supporter. Why have recessions become more shallow and brief under the Fed, if not for the Fed? I'm sure we'd all love to hear.

First off I'm not a "Ron Paul supporter", I just happen to think some of his ideas have a lot of merit and deserve a fair hearing. I do not agree with him on abortion or the War on Terror, however.

There are several possibilities about why recessions have become more shallow and brief, including dumb luck, a more service oriented economy, a more sophisticated financial system, globalization etc. I also think the Fed has become less harmful in its responses since it was created (i.e., it's worst response was to the great depression and its best was in 2001).

However, my point is that you can't argue that the existence of the Fed is the cause of the decline in economic volatility because it was in existence during the great depression, and arguably contributed to the severity of that cycle as well as subsequent cycles (particularly in the 1970s). If you want to say the Fed is the cause of the decline in volatility, you have to explain why it continued for so long under the Fed's watch.

JF

Jonathan Powell,

Thanks for the reply.

This is splitting hairs, because the Fed consistently comes very close (within 0.01%) to its target.

Sorry, that's incorrect. You're wrong on this count, as I've tried to explain before, but at least now we're getting to the root of your misunderstanding. Have a look:

Federal Funds Rate Data

The Fed Funds Rate target is currently 4.75%. So why did it trade at 4.93% yesterday? And why did it trade at 4.88% on 9/26, 4.82% on 9/25, and 4.92% on 9/18? And why did it so wildly when rates were at 5.25%, or at any other Fed Funds Rate, for that matter? Because, as the NY Federal Reserve itself says on that page:

"By trading government securities, the New York Fed affects [n.b. not fixes, not determines, not sets, but affects] the federal funds rate, which is the interest rate at which depository institutions lend balances to each other overnight. The Federal Open Market Committee establishes the target rate for trading in the federal funds market."

In short, the market determines the Fed Funds Rate, and the best the Fed can do is establish a relatively wide range (yesterday alone, the Fed Funds Rate traded between 3% and 5.125%) and try to contain the Fed Funds Rate. Moving on...

No, the expected inflation rate is determined by the Fed's policies--if the market observes looser monetary policy it will expect higher inflation

Hmm.. so the market determines inflation expectations after all. I'm not sure how that contradicts what I said. The Fed influences, and it's the market that decides.

I concede that the Fed does not set all interest rates, and that its influence on long-term rates is indirect and arguably negligible.

Thanks. Indeed, the Fed is not the evil and all-powerful entity that hard-core libertarians believe it to be.

However, it does affect a range of short-term interest rates when it chooses the Fed funds rate, because this affects the cost of borrowing faced by banks.

If the Fed funds rate is so unimportant to business, why did Bernanke feel the need to cut it in response to the credit crunch and why did stocks rally on the announcement?

You answered your own question here. The Fed cut rates to try and influence the credit market by providing less expensive liquidity to the banks (both from other banks and from the Fed itself through the discount window). But it is then up to the banks and bond traders to determine how much businesses should pay for that credit. Businesses borrow from the banks and the market (bonds), not from the Fed.

There are several possibilities about why recessions have become more shallow and brief, including dumb luck, a more service oriented economy, a more sophisticated financial system, globalization etc. I also think the Fed has become less harmful in its responses since it was created (i.e., it's worst response was to the great depression and its best was in 2001).

I agree, there are many factors involved in why the economy has become more resilient in the last century. It makes sense that a 15 year old Fed is less competent than a 85 year old Fed, so I think we should expect that the Fed's responses will continue to improve with time as various scenarios are encountered.

However, my point is that you can't argue that the existence of the Fed is the cause of the decline in economic volatility because it was in existence during the great depression, and arguably contributed to the severity of that cycle as well as subsequent cycles (particularly in the 1970s). If you want to say the Fed is the cause of the decline in volatility, you have to explain why it continued for so long under the Fed's watch.

I think we agree that the Fed alone is not able to claim responsibility for the improved economic conditions, but my argument was that it helps more than it harms. As for explaining why "volatility continued for so long under the Fed's watch," I actually proved the exact opposite with the NBER link above (relinked here for your convenience). Recessions have become far shorter after the Fed was established (Great Depression excepted), and they have become increasingly short as the Fed has been in existence for a longer period of time.

This makes sense, as the Fed has gained credibility with the market with its repeated successed over the last few decades (crushing stagflation, recovery from the 1987 crash, the 1997 Asian currency crisis, the 1998 Russian financial crisis/LTCM collapse, the 2000 dot com bubble bursting and the September 11, 2001 terrorist attacks.

The Fed is a desirable entity to the markets for the role it plays. There is a reason why every significant economy in the world has a central bank, including Milton Friedman's favorite, Hong Kong.

When you hear Ron Paul rail against the Fed, just remember that he's an OB/GYN, no matter how much Hayek and von Mises he's read.

Jonathan Powell

The Fed Funds Rate target is currently 4.75%. So why did it trade at 4.93% yesterday? And why did it trade at 4.88% on 9/26, 4.82% on 9/25, and 4.92% on 9/18?...In short, the market determines the Fed Funds Rate, and the best the Fed can do is establish a relatively wide range (yesterday alone, the Fed Funds Rate traded between 3% and 5.125%

I admit there is greater variation than I thought, but the point still stands: if the Fed wants to move the range of interest rates up or down it can do so. I expect the accuracy improves with a larger sample (i.e. that over an arbitrarily large period of time it hits the target perfectly). Also, the data from before the rate cut is misleading, since the Fed had already begun ti shift its policy, see A Secret Rate Cut?

Hmm.. so the market determines inflation expectations after all. I'm not sure how that contradicts what I said. The Fed influences, and it's the market that decides.

No, the market forms expectations based on the monetary policy pursued by the Fed. Thus the real interest rate is under determined by the Fed's policies, if they loosen monetary policy inflation expectations either go up or stay the same and the nominal interest rate goes down so real rates decline. If they tighten monetary policy inflation expectations go down or stay the same and nominal rates go up so real rates go up, too. Again, the Fed doesn't have perfect control of real interest rates as OPEC does not have perfect control over oil prices, but its essentially the case that the Fed determines real interest rates in the short run.

The Fed cut rates to try and influence the credit market by providing less expensive liquidity to the banks (both from other banks and from the Fed itself through the discount window). But it is then up to the banks and bond traders to determine how much businesses should pay for that credit. Businesses borrow from the banks and the market (bonds), not from the Fed.

And the amount they pay is strongly influenced by the Fed, otherwise there would be no point cutting rates. You first suggested businesses only borrowed at long-term rates which were unrelated to the Fed's policies, clearly that isn't the case.

As for explaining why "volatility continued for so long under the Fed's watch," I actually proved the exact opposite with the NBER link above (relinked here for your convenience). Recessions have become far shorter after the Fed was established (Great Depression excepted), and they have become increasingly short as the Fed has been in existence for a longer period of time.

I'm afraid those data are misleading, because they don't report the severity of each contraction, only the duration. The reality is that the Great Depression was BY FAR the most severe contraction in US history, and it happened under the Fed's watch, arguably as a result of the Fed's policies. It's not reasonable to dismiss this episode merely because it disproves your thesis.

If you look at the decline in output in the other cycles those before the Fed's creation were no more severe than those after. There was a contraction in 1907-1908 of similar size to one in 1937-1938, a very large contraction following WWII, and a series of mild recession of similar size before and after the creation of the Fed e.g., 1920-21/ 1980-82, 1893-94/ 1974-75, etc.

The big decline in volatility happened after 1982. It's hard to argue that was due to the creation of the Fed, especially as there has been a similar decline in volatility throughout the developed world (at least since the 1990s).

There is a reason why every significant economy in the world has a central bank, including Milton Friedman's favorite, Hong Kong.

The central bank in HK has a much smaller role than the Fed because it has a fixed exchange rate, which is analogous to a gold standard. And Milton Friedman wanted to abolish the Fed and adopt a free banking system.

JF

Jonathan Powell,

Can it be, you're starting to see the light?

there is greater variation than I thought, but the point still stands: if the Fed wants to move the range of interest rates up or down it can do so

The point doesn't really stand. It can try to do so. It doesn't always succeed, which is a segue to the next point -->

the data from before the rate cut is misleading, since the Fed had already begun ti shift its policy

You completely misunderstood what happened. It was the market that moved the Fed Funds Rate, as it always moves the Fed Funds Rate. As Mankiw points out, the intended rate was still 5.25%. Mankiw just can't decide if the Fed is intentionally or unintentionally sloppy in allowing the market to move rates to this degree. In other words, the Fed failed to engage in battle with the market (as it usually does), and the market pushed rates to the rate it thought appropriate.

No, the market forms expectations based on the monetary policy pursued by the Fed. Thus the real interest rate is under determined by the Fed's policies

Chicken or egg, my friend. The market reacts to the Fed, the Fed reacts to the market. But if one had to determine which was more powerful, the market will win every time (see: Black Wednesday). The Fed's dual mandate includes price stability and full employment. The market determines inflation expectations based on, among other things, CPI, capacity utilization, and unemployment levels. If these and other indicators point to rising inflation, the Fed cannot change those expectations by jawboning the market. In fact, it can only control inflation expectations if its efforts are effective--even if it tightens monetary policy, if such tightening is not to a sufficient degree, or if commodity and natural resource prices skyrocket, or if fiscal policy simultaneously becomes accomodating, the Fed can easily fail in controlling inflation expectations. (See: 1970s)

You first suggested businesses only borrowed at long-term rates which were unrelated to the Fed's policies

It doesn't reflect well on you when you fabricate strawmen. I never suggested such a thing. This is what I said:

"Even more importantly, prime, LIBOR, mortgage rates, the 10 year bond, and corporate credit spreads, and just about every other rate on which credit is based are all determined by the market with zero Fed interaction whatsoever. These are the rates which are most important to business, since these are the rates on which business gains access to credit."

LIBOR is the primary rate used to determine short-term credit line rates when corporations borrow from banks/syndicates. Prime is also used to a lesser extent. Both LIBOR and prime are short-term rates. Depending on the corporation's needs, it can also sell bonds based on treasurys with terms shorter than the 10 year (i.e. notes vs. bonds). Businesses certainly do not borrow at only long term rates, and I never suggested that. My point stands.

the Great Depression was BY FAR the most severe contraction in US history

Indeed, it was a unique event. It's not unreasonable to remove it as an outlier given its uniqueness. Just so, it's not reasonable for you to judge the Fed on this single event, which you appear to be doing.

If you look at the decline in output in the other cycles those before the Fed's creation were no more severe than those after

How do you explain the Panic of 1873 and the Panic of 1893? Besides the Great Depression, which post-Fed recession can compare to these two recessions in severity?

The big decline in volatility happened after 1982. It's hard to argue that was due to the creation of the Fed, especially as there has been a similar decline in volatility throughout the developed world

So ignoring Paul Volcker's actions, why did inflation suddenly subside by 1983? The pro-Fed argument is easy: raising the Fed Funds Rate to a draconian 20% crushed the economy and thus the factors driving inflation.

And why should we so easily gloss over the Fed's radical change in policy as a driving factor (changing from targeting interest rates to targeting inflation rates). Friedman himself saw inflation as a monetary problem, so to dismiss the Fed's role in controlling this phenomenon seems a bit outlandish. I can't comment on Friedman's desire to abolish the Fed, as I don't believe it's ever been tried in the modern era.

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