In today’s article I’ll go through Brad DeLong’s recent defense of Greenspan’s policies. DeLong’s argument is of particular interest to Austrian economists, because he relies on Wicksell’s “natural rate” of interest, a concept that Ludwig von Mises adopted for his own explanation of the business cycle.
I find DeLong’s defense somewhat perplexing. Even on the Wicksellian criteria that DeLong sets up, Greenspan failed and should be held at least partially accountable for the housing boom. FULL ARTICLE
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Mr. Murphy, you seem to want to criticize DeLong with accidental empirical data which can contain several sometimes counteracting causal chains. Aren’t there better critiques just based on the logical validity on the statements that DeLong makes?
Some ¢’s:
“On Wicksell’s definition…the market interest rate was, if anything, above the natural interest rate in the early 2000s: the threat was deflation, not accelerating inflation.”
- What market interest rate? The Feds fund rate? Come on… that’sno market rate in any sense.
- If the threat was deflation wouldn’t natural rates go higher, and wouldn’t the chance be great that the Fed rate would be lower than the natural rate?
- Doesn’t this have causality backwards? It seems to imply that the Fed was anticipating deflation and therefore it’s rate was relatively high? But how could one ever determine that is was higher than the natural rate and therefore not reflecting market preferences?
“The natural interest rate was low because, as the Fed’s current chairman Ben Bernanke explained at the time, the world had a global savings glut (or, rather, a global investment deficiency).”
Wouldn’t it be high since investment/saving where scarce? And wouldn’t it be almost definitely higher than the Fed rate because it would be trying to ‘stimulate’ higher money supplies to make up for willingness to lend and borrow?
Shostak on the Neutral Rate:
http://mises.org/daily/2177
Thanks for the article Nathan.
On a side note, interest rates in the modern monetary economy don’t reflect time preference, so the “neutral rate” is similar to getting it almost there(well, trying that is).
Was Henderson’s and Hummel’s argument published by Cato in a briefing paper, by any chance? I received the paper during this year’s Cato University ( http://www.economicthought.net/2009/07/the-gift-of-knowledge-cato-university-2009/ ), and did a small critique myself ( http://www.economicthought.net/2009/08/assessing-alan-greenspan%E2%80%99s-role-in-the-current-economic-crisis/ ).
They made two perplexing claims. One was that M2 did not grow under Alan Greenspan between 2001 and 2006, and the other was that China had more to do with the increase of the money supply (which seems to imply that M2 did in fact grow).
The Fed Fund Rate had very little to do with the rise in oil. It is kind of funny you left off the drop from $140 to $35 at a time when the rate went to zero.
On gold, you really need to go back to the late 1970′s when gold was up in the $800 range to show how much the commodity has dropped since then.
Basically, your charts don’t show the whole truth and you bend the statistics to make your point.
And once again, you really don’t understand the construction industry. Maybe you should take the time to learn how the business functions.
Regarding Henderson’s and Hummel’s argument, how can China be responsible for an increase in the U.S. money supply? In my understanding, only the Fed/U.S Treasury and the U.S. banking system can increase the U.S. money supply. Any dollars that the Chinese would re-circulate back into the U.S. would have to be dollars that they first obtained from U.S. sources in exchange for Chinese goods.
In reality, because the Chinese and other foreigners have accumulated large dollar balances at their central banks, i.e. increased the demand for dollars, U.S. price inflation has not been significantly higher.
Greg,
I’m not sure what you are trying to argue. I’m not sure what the price of gold in the 1970s has to do with the price of gold today. Well, more accurately, how it is directly relevant to the increase in the price of gold under Greenspan. In regards to petroleum, the dramatic drop in the price per barrel of petroleum could have been caused by a variety of reasons: the fall in future (speculative) demand, the contraction on uncontrolled reserves (although there was obviously an increase in controlled reserves; however, historically speaking this does not always avoid price deflation).
Shostak covered the rise of oil prices: http://mises.org/daily/2999
And byPierre Lemieux : http://mises.org/daily/1892
Interest rates should be determined by the price someone sets for giving up his money for a period of time (time preference) and the risk he will never get the money back at all – and the price that someone is prepared to pay to borrow the money. In short – the normal market process.
The only interest rate Alan Greenspan had a right to set (the only “natural rate” for him) is the interest rate he was prepared to lend out his own personal savings (or the savings of others – voluntarily invested with him). Not the interest rate of money he created out of thin air – not savings at all.
This basic stuff is what so many of the Chicago School do not understand.
For talk of a “natural rate” of interest to make any sense we must be dealing with savings, real savings – not printing press games, or book keeping shell games. Alan Greenspan bailed out credit bubble financial speculation again and again – and failed to understand that he made the credit money bubble bigger each time he launched a credit money bailout.
It is nothing to do with the gold price (now or in the 1970s) and to talk of a “natural rate” (or interest rates or anything else) in relation to the antics of Alan Greenspan is absurd.
By the way if people want to talk about gold (a totally different subject) then just divide the total number of Dollars (include the credit money that the government says it “stands behind” – M3 not just the notes and coins of the Monetary Base) by the amount of gold the United States government acutally owns (the yellow stuff in the vaults). That is the only “gold link” that makes any sense – and I think you would find that the amount of gold per Dollar is TINY.
Interesting that DeLong would bring up Wicksell and his “natural” interest rates. How could he assume that the Fed’s pumping of new fiat money into the system wouldn’t cause a deviation of the “natural” interest rates, since the Fed’s money doesn’t reflect savings of any kind?
“Just ignore the Federal Reserve elephant in the room, folks. It only has consequences when we say it has consequences…”
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