On Wednesday, April 04, 2001 8:50 AM Brent Allsop allsop@fc.hp.com wrote:
> > "The Federal Reserve, thinking that Americans would withdraw a
> > tremendous amount of cash to protect themselves against computer
> > crashes, added excess liquidity during 1999," Roberts writes in a
> > recent syndicated column. "But Americans did not hoard
> > cash. Consequently, the liquidity found its way into stock prices."
>
> "American's did not hoard cash"? Boy, what out of touch
> universe is this person from? He must not have seen any TV during
> 1999. True, the fed likely did do a bit of an overcorrection because
> of the pre Y2K hysteria. But they were always way ahead of what was
> "common knowledge" about what was occurring. The Fed recognized the
> overcorrection long before the actual Y2K. While the rest of the
> world was watching doom and glom TV shows and fearing the worst, the
> Fed was already tightening monetary policies in an attempt to soak up
> all the excess so many paranoid people had stashed in mattresses, and
> some of which did make it into the stock market.
Actually, browsing through
http://www.access.gpo.gov/congress/eibrowse/broecind.html does not support
your statement. The interest rate increases came much later, February,
March, and after and were tiny. This after cutting rates in 1999. While I
don't think Roberts is totally correct, he might be on to something here.
> Had we been on some alternative system, say a Gold standard,
> for example, there would have been zero flexibility in the system to
> accommodate all the paranoid hoards putting cash in their mattresses.
> We truly would haver seen a huge crash in the market during the years
> before Y2K. Not just a recession, but likely a real depression with
> possible very long term slow down effects.
The alternatives to the Federal Reserve System (FRS) are not all just like a
100% reserve gold standard advocated by von Mises and Murray Rothbard. In
fact, a free market fractional reserve banking seems seem to have been a lot
more flexible than the FRS -- at least in those places for which we have
reliable data. Under such a system, each bank would set its own interest
rate and reserve requirements as well as decide asset portfolios and other
such rules. (See http://www.shef.ac.uk/~var/free-banking/index.html
for more information and links on free banking.)
Remember, also, the Great Depression happened under the FRS!
> Instead of a huge market swing in the negative direction
> before Y2K, we saw an upswing. Then after the Fed soaks up all that
> excess liquidity (most of which was required to accommodate the
> hoarders) during Y2K, things return to normal reality. I don't know
> why everyone is complaining so much. Not only is there not a
> depression, we've really just barely crossed the line and it's hard
> to even claim we are in a real recession. Growth has simply slowed so
> we can all take a breath after the exciting times that was the
> transition into the 3rd millennium. Thank you Alan Greenspan!
It's hard to say. I think if the Fed had not cut rates in 1999 and also
tinkered less in earlier years -- the LTCM and much earlier Mexican bailouts
come to mind -- the US economy might be in much better shape. The
artificial boom of late 1999/early 2000 would not have happened.
Also, inflation, as I've mentioned in earlier posts (in March) is a hard
thing to measure precisely, specifically in terms of the damage it does.
(See "The Costs of Inflation Revisited" by Stephen Horwitz at
http://it.stlawu.edu/shor/Papers/wpmain.htm and his book _Microfoundations
and Macroeconomics_. He also devotes space in his book on discussing
alternative banking systems, including government central banking (like the
FRS and Bank of England), 100% gold reserve banking, the BFH system, and, of
course, free banking.)
> It only seems bad in comparison to the clearly unsustainable
> 100% annual growth rates we experienced during the last few years.
> I'll take a few years of unbelievable growth followed by a mere
> slowdown any day over a depression and the long term consequences to
> growth such would surely have.
Hard to measure the full effects of all that wasted effort. Measures like
employment rates are not good or aggregate capital, since capital is not a
amorphous blob that you just add to. Certain lines of investment forcelose
others, distorting the structure of capital. These are the costs of bad
investments and are not reversible by merely undoing the inflation.
Also, if such growth rates were "clearly unsustainable," then why didn't the
Fed with its army of statisticians and economists see this and prevent the
slowdown? I'm not saying this was possible, but that kind of cuts in favor
of free banking. Free market banks would see immediate losses (in reserves
or profits) for failures to act or bad actions. This would be a quick and
easy measure of whether their policies were working or not. plus, the
information would be local and easy to monitor. Individual banks would have
the data! The Fed does not have this information and has to rely on all
sorts of data collected and processed after a boom or bust is underway --
after it's too late to correct a mistake.
They would have an immediate incentive to correct mistakes. Why? It's to
their profit. The Fed does not have the same incentive. Getting it right
might mean Greenspan gets reappointed and getting it wrong might mean he
doesn't, but other than that he has little incentive not to screw things up.
(Granted, he's not been as wreckless as he could be, but that has nothing to
do with incentives.)
> There could be no stronger testimony that the system is
> working and that the current Federal Reserve System is doing good,
> likely better than any other alternative I've ever heard about,
> especially inflexible rigid unintelligent old fashioned alternatives
> like "The Gold Standard".
See above. It's a false and unrealistic dichotomy to assume either we must
have the current Fed or some whacky 100% gold reserve system. I beg you to
examine the literature on free banking.
This is important to Extropians and transhumanists because being to develop
and enjoy technology requires a sustainably growing economy.
Cheers!
Daniel Ust
http://uweb.superlink.net/neptune/
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