A casual reader might not realized that both Greenspan and Bernanke routinely raised interest rates.
Here’s a chart of the short term interest rate, which the Fed controls:
Monetary policy goals of the Federal Reserve are set by statute. They are, “…to foster economic conditions that achieve both stable prices and maximum sustainable employment.” That is sometimes referred to as the Dual Mandate.
So the idea that monetary policy “Went crazy” while implying that it was too loose is sorta nuts. Inflation was very much under control during the Greenspan/Bernanke era. There’s plenty to criticize about their tenure, but the first sentence of the OP is poor guide.
And giving Greenspan sole blame for the tech bubble is silly.
Greenspan himself admitted a mea culpa. He might not be solely responsible but he was at the helm. If anyone was to turn the ship before it hit the iceberg it was him.
Greenspan admitted screwing up regulation during the housing bubble. He didn’t admit to having too loose monetary policy during the tech bubble. (He could have raised margin requirements for buying stocks, but that’s regulatory policy not monetary policy.)
I agree that Greenspan should have regulated financial markets more stringently. His monetary policy during the 1990s was by and large successful though. In fact, real short term rates were high during the tech bubble, higher than they were in the 21st century so far.
Elaboration: Ok, I took 3 month treasury bill rates and subtracted core cpi inflation for the previous year. Then I took averages. Standard deviations in parentheses, for those who know what that is.
Jan 1970 - Sep 1979 (Inflationary era, before Volker) -0.23 (2.11)
Jan 1995-Mar 2000 (tech bubble) 2.54 (.34)
Apr 2000- Dec 2007 (before Great Recession) .90 (1.44)
Jan 2000 - Sep 2018 -0.39 (1.59)
Sep 2018: -.04 and rising. Core inflation: 2.17. Nominal 3 month rate: 2.13
The rates during the 1970s were too low. Monetary policy during the tech bubble was certainly not especially loose as it was. 2.54 as an average isn’t low, relative to other periods. (Sure you can take tight policy and make it tighter, but it isn’t a no brainer and we almost had a recession during the mid 1990s, which Greenspan happily evaded by lowering rates a tad.)
2% inflation is not “stable prices”. It is an ideologically driven attempt to increase growth. Stable prices are, believe it or not, prices that remain stable.
In any case, they went crazy with money printing via credit expansion. Just because the outcome was not hyperinflation but massive malinvestment on an enormous scale twice in two decades does not mean they did not lose their marbles. Proof is the third bout of malinvestment that is about to burst. 30 years of bubble making without any real ideological introspection is insane.
OP may be in a different timezone; let me recapitulate what I think is his argument:
The FRB is an agency of Government; it prints banknotes willy-nilly and forces citizens, at gunpoint, to accept those banknotes.
In a free-market system people would use gold, or silver, or Bitcoins, or whatever common agreement led to, as money. Interest rates would be determined by the free market: “Hey, what would it take for you lend me that bar of gold bullion for a year?”
In the 1990s, with corporate bonds yielding a mere 7 or 8%, money flooded in to buy useless fiber optic cable. Had interest rates been a more sensible 10 or 12%, business invesments would have been more sensible.
@ Will — Is that a pretty good synopsis of your views?
I wondered if the Fed should raise margin requirements when “exuberance” becomes “irrational,” but I suspect that would lead to a political take-over of the Fed.
No that is not a good synopsis. A good synopsis would be what I have already said. Fed suppression of interest rates led to malinvestment which inflated a bubble that popped. Ideology caused the Fed to further suppress interest rates and subvert honest price discovery leading to another inflated bubble that popped. Ideology caused the Fed to further suppress interest rates and subvert honest price discovery leading to another inflated bubble that is poised to pop.
This is not a strange view of recent history to mainstream commentators. Larry Summers has said that this is what happened in so many words. He thinks this is the path to prosperity, endless malinvestment followed by interrupted corrections. And of course bailouts. Lots of bailouts.
Credit expansion by the Fed does not need to result in hyperinflation. Credit expansion can result in price inflation that is higher than it would have been in the absence of expansion. What do we know about the 1980s through today? We know that there has been huge developments in production especially in China. This resulted in deflationary pressure. Prices should have been dropping like they did in the 19th century, another period of great developments in production. Unfortunately, consumers were deprived of the beautiful deflation that never was.
They were treated to an unrelenting mild inflation and malinvestments all over the place. A simple observer might ignore basic economics and opportunity cost and say we had the same economy we would have had absent intervention + fiber optic cables. No. It is not simple.
You had diversion of vast resources into bad technology and it’s support structure. Factories were built and tooled. Supply chains were erected. Human capital was diverted. After the burst, liquidation was prevented. There is a global structure of production that is being distorted by central banks and countless resources of human activity, ingenuity, time, and savings are being diverted into sectors and investments that will not bare fruit.
It always goes off on a tangent to categorize Trump’s intelligence or ‘cunning’ (which sometimes just means smart people you want to make sure everyone knows you think are your moral inferior), but this part is basically right. He is putting himself on record to be able to blame the Fed if the stock market gets worse or real economy wilts. That’s it.
And actually it’s not unprecedented, presidents complaining about Fed rate hikes that is, just fairly unusual. But Trump makes complaints about actions of people who do work for him in the executive branch proper, and then does nothing. He does not even say ‘the swamp ties my hands’. That’s what die hard Trump supporters say to justify his non-action. He himself doesn’t give any such excuse. He will just make certain complaints about stuff he could change as head of the executive branch then do nothing. Along with myriad things (the NFL, the media etc) he has no direct control over and likewise does nothing. IMO it’s 99% likely this will be the same. Or come down to the same debate as whether players/coaches are getting any benefit from the refs for arguing prior calls. If the Fed slows down rate increases, some people will say it’s Trump’s complaining. But markets don’t seem to believe that’s likely.
I’ll note that the OP’s remarks are free of inconvenient data constraints. See my discussion of real interest rates – they weren’t low during the mid 1990s and if they were higher there’s reason to believe they could have set off recession.
For WillFarnaby, 2% inflation, of the sort that we’ve experienced for the past couple of decades, appears to be a terrible problem.
No it wouldn’t. Greenspan didn’t raise margin requirements because he thought that they would be easy for investment banks to circumvent. I say partially effective policy is superior to not doing anything at all. I admit I haven’t looked at any studies on margin requirements. (I’d agree that wholly ineffective policies are not worth doing.)
More generally, fed policy during any time period is certainly debatable. But a discussion that’s proceeds with an unargued presumption that 0% inflation is optimal inflation ain’t the way to do it.
Yes there is reason to believe that. Raising rates sooner would have forced liquidation of malinvestment sooner and the dot-com crash would not have been as drastic.
No I said it was not “stable prices”. It is a problem, but the malinvestment is the main problem with artificial credit expansion.
You are one who brought up the dual mandate. There is no non- ideological way to spin “stable prices” into 2% inflation. That is why nobody tries to. They instead focus on the supposed magical benefit of more dollars, namely growth. Is fostering growth among the Fed’s mandates?
I didn’t say it was optimal. I make no claims about what the inflation rate should be, that is hubris. There are billions of market actors, the trillions of transactions between these actors create prices. There are major developments in the economy you may have heard about. China.
When millions of Chinese were brought in from the unproductive subsistence farms and began working in, at first, primitive, then more efficient factories producing consumer goods that drive down prices and capital goods that in turn increase productivity, the general trend in a world of sound money would be a beautiful, gentle deflation like the great deflation of the 19th century. There is no reason why prices should have rose like that in the 90s and 00s besides credit expansion.
Price stability, the ECB: “The primary objective of the ECB is to keep prices stable. That means prices should not go up (inflation) significantly, and an ongoing period of falling prices (deflation) should also be avoided. This is because long periods of excessive inflation or deflation have negative effects on the economy.” Emphasis added.
Price stability, according to 2 inflation hawks: “Price stability” is usually interpreted to mean a low and stable rate of inflation maintained over an extended period of time. In our view, the ideal rate of inflation is zero, properly measured. Biases in price indexes imply that, in practice, price stability will likely be consistent with a small positive rate of measured inflation, say 0.5 to 1 percent, depending on the specific price index one looks at.1 Further, price stability does not mean that the price index is constant. Monetary policy could never eliminate every wiggle in the inflation rate; nor should policymakers try to do so. So the claim that “Nobody tries to spin stable prices into 2% inflation”, is falsified. It would be better to substitute, “Most informed observers” for “Nobody”.
Will Farnaby appears to advocate a maximally interventionist Fed, that not only targets inflation and output, but also investment and the stock market. There was actually a debate on this during the 1990s; my take is that credit conditions were not especially loose during the 1990s, so fixing chief blame on the Fed for boneheaded decisions on Wall Street seems courageous.
Also the great deflation of the 19th century was anything but gentle: it was an era of volatile output, frequent financial panic, child labor (I just thought I’d throw that in there, though it has nothing to do with monetary policy) and farm unrest.
Am I wrong that a majority of serious economists regard 2% predictable inflation as better than 0%? And that 4% predictable inflation is hugely better than 4% deflation? Reasons:
[ul][li] If inflation rates are predictable, they can be built into interest rates and other transactions. With interest rates set appropriately neither borrowers nor lenders will be victimized by predictable inflation.[/li][li] With the dollar worth only 98¢ next year, employees with poor performance can be penalized by simply not giving them a raise.[/li][li] consumers sitting on cash will be motivated to spend it, stimulating the economy.[/li][li] some businesses will be motivated to seek efficiencies to avoid re-printing menus. And most importantly, …[/li][li] central banks will be able to stimulate the economy when necessary by setting real interest rates to zero or less. Even a nominal interest rate of zero may be too high in a deflationary environment.[/li][/ul]
I’ve heard the claim that 19th-century America enjoyed prosperity during deflationary periods. I even downloaded a long text by Milton Friedman but didn’t get around to reading it. Is there a good on-line essay supporting or refuting the deflation-with-prosperity claim?
Here’s a quick take. The Economist magazine 1999: [INDENT] Deflation is not necessarily bad. Indeed, productivity-driven deflation, in which costs and prices are pushed lower by technological advances or by deregulation, is beneficial, because lower prices lift real incomes and hence spending power. In the last 30 years of the 19th century, for example, consumer prices fell by almost half in America, as the expansion of railways and advances in industrial technology brought cheaper ways to make everything; yet annual real growth over the period averaged more than 4%. [/INDENT] That’s aggregate growth over the era. But the era also had a lot of economic instability, leading to progressive reforms such as regulation of railroads and the Federal Reserve Act of 1913. Not to mention child labor laws, the Food and Drug Administration and other violations of gliberarianism.
Estimates of GDP of the era show pronounced volatility. But! Those estimates are probably biased towards volatility: the concept of GDP was invented until the 1930s (Kuznitz), and data wasn’t collected systematically until after WWII. https://eml.berkeley.edu/~webfac/cromer/e210c_f11/Lecture%201%20Slides.pdf
If you want to equate pandering to the lowest common denominator with “genius”, that’s a value judgment that I don’t care to tangle with.
Political success has never been about genius in one particular skill, it’s the genius of balancing conflicting interests. On the one hand Trump definitely wants to keep power, which entails keeping the stock market juiced with loose money. On the other hand, the ownership class (including Trump himself) definitely doesn’t want to see their assets inflated away to nothing. So the question is less whether Trump is a genius at one thing or the other, but which flavor of genius he chooses to gamble his future on.
Personally i can’t hazard a guess, otherwise I wouldn’t call it a conflict. That’s what makes it interesting.
I don’t truck with the notion that “the Fed will blink”, because really, have they ever blinked in recent history? And what’s at stake for them if they cross Trump? If anything they usually act more cantankerous to prove their independence.
I agree with your causes and outcomes but not necessarily with the notion that interest rates are driven by “ideology.”. I think it’s more simple than that. When choosing between causing a recession on their watch, vs inflation on the next guy’s watch, Fed Chiefs typically choose the latter. When you have years upon years of inflation eroding wealth you get a guy like Volcker, but for the most part,youre gonna get easy money.
That might be what you think should happen, but no. Inflation hasn’t been a problem since the 1980s.
Here’s a chart of core inflation since 1960. We had a problem during the 1970s. Inflation declined during the 1980s, both before and after Greenspan took over from Volker (though honestly Volker did the heavy lifting). Since around 1995, 2% inflation looks a lot like a soft ceiling, though it’s suppose to be a target.
The Fed tries to thread the needle between excessive inflation and recession. IMO, their inflation target is too low, but that’s another discussion.
True, but remarkable to me this question would have been asked in the first place. Before fiat money price levels could vary but retraced the same levels over prolonged periods. But the 19th century was the time of the industrial revolution, and massive growth in the US due to not only technological improvements (higher productivity) but a large increase in the population. So of course the economy got bigger, a lot bigger.
Real GDP in the US expanded by a factor of 47 in the 19th century, 27 in the 20th century.
But US population increased around 14.3x in the 19th century, only 3.7x in the 20th, so real per capita GDP growth was ~2% pa in the 20th century, only~1.2%pa in the 19th.
A debate could be had how much if at all monetary system changes in the 20th century (Fed, later complete abandonment of gold standard) were a factor in higher per capital GDP growth, but a lot of other things were going on: it’s obviously not obvious. But it’s definitely possible to have a gigantically larger economy with the price level falling over a whole century.
I sign off on Corry El’s post, especially “It’s obviously not obvious.” Also, thanks for the links.
I’ll reiterate that folks were unhappy with the business cycle during the 19th century, much more than the long run rate of per person economic growth (which was lower compared with the 20th century). Then again, farmers sure felt ripped off in the late 1800s, while those viewing long run trends sometimes wonder what they were complaining about. This matters, as the share of the population involved in farming exceeded 30% in 1900 (and was 64% in 1850). The 19th century economic structure was very different.
I’m not sure I follow your response. I never said inflation has been a problem since the 80’s. Having said that, there have been problematic asset price inflations since the 80s(tech bubble, mortgage crisis) that have been the result of easy Fed money (among other things). I should probably have said that the only thing that scares a Fed Chair more than being blamed for a recession is being blamed for a market crash.
The last crash was blamed on “fraud” and deregulation. Powell is free to do as he wants. A crash will be blamed on Trump and his tariffs. This unsustainable boom is Bernanke’s doing and mainstream opinion won’t even lay a finger on him. I think Powell should just keep raising the rates and lance the boil. I fear he will yield and back off the hikes, though his signal last week doesn’t seem to have moved the needle.
Trump may pop the bubble with these tariffs, but it was bound to happen at some point. He is continuing to target the Fed for the wrong reasons. I wonder if this will register with his followers as some sort of perverted Bryanism.
There is literally no play for sound money in Washington or New York.
