Interest-Rates / US Interest Rates
Oct 20, 2009 - 03:06 AM
The debate about whether it was Alan Greenspans fault will continue for generations, the other side summed up their position nicely in a quip that came up in the debate about whether to let the Fed have more power, Thats like buying your teenager a sports car after he wreaked the family saloon.
Greenspan did point out at one stage that with $100 trillion of debt created by the private sector of which $20 trillion was manufactured between 1998 and 2007 by securitization of assets in USA, something that the Fed had, or elected to have, no control over, what the Fed did or did not do to with the base rate was largely irrelevant.
But the Fed did have a mandate to ensure financial stability, what just happened was not stability. Even if they did not perhaps have the tools or the authority, they should have either got the tools or got out of the kitchen, in other words if Greenspan saw what was going to happen he should have made a fuss, got the tools, done something, or resigned.
The problem is the Fed’s mandate CANNOT be carried out unless it’s operations are politicized, because Fed policy alone does not cause the only sources of major policy interventions in the market economy.
Tax and regulatory policies exert as much artificial stimulus, and drag on the market economy and in order for the Fed to pretend it can steer the economy it must either go along with (assist) the political forces (tax and regulatory policies), or go against them. It cannot ignore them, because it cannot provide “steerage” to the economy by simply letting go of it’s own levers.
Tax policy can greatly hurt the saving rate, which affects interest rates, which affects the economy and yet the ill affects from the savings rate are simply supposed to be countered by so artificial Fed action to offset the ill affects of it. However, it does not work; never has. The artificial - tax policy induced - low savings rate cannot be corrected by an offset somewhere else in the economic stream, without being an action which simply treats symptoms derived from that low savings rate and creates a long-term condition with long-term consequences.
The Fed’s ability to maintain a stable economic growth rate is a phantom chasing bad political decisions that damage the economy in many ways outside of the Fed’s control.
The Fed’s creation of an excess money supply is nothing other than the cumulative affect of its attempt to do what it cannot do - “fix the economy” against all that the politicians do to harm it, without the ‘fixes’ leading to new problems.