February 27, 2004
Isn’t it shameful enough for Alan Greenspan that his recklessly expansionary monetary policy to keep financial markets afloat has, by pushing interest rates to historically low levels, inexorably led to the much lamented over-indebtedness in the economy? Now the long suffering American taxpayer, saver-investor, and homeowner must endure his hectoring (“Fed Chief Questions Loan Choices,” Feb. 24) for taking advantage of the situation to lock in Fed-suppressed mortgage rates against the increasingly likely prospect that they will rise in the future. In the interest rate environment Mr. Greenspan himself has created, the only sensible strategy for homeowners is to let banks and other mortgage holders, such as Fannie Mae and Freddie Mac, bear the considerable financial risk of rising rates. The “very serious” risks these behemoths pose to financial markets that Mr. Greenspan warns against (“Mortgage Giants Pose High Risk, Greenspan Warns,” Feb. 25) is in no small part a result of his own loose monetary policy. While Congress is taking his advice to reign in Fannie and Freddie, it should bridle the Fed as well.
Jeffrey M. Herbener
Professor of Economics
Grove City College
Grove City, Pennsylvania
{ 9 comments }
What IS the correct level of interest rates and the money supply?
1. The _Wall Street Journal_ is often wrongheaded (imo), but I hope they correct “reign” to “rein” in Mr. Herbener’s letter if they decide to publish it.
2. the correct level of interest rates is: 42
3. strangely enough, the correct level of the money supply is also 42.
I’m sorry but I think you are both mistaken.
The correct level of interest and money supply is 41.92654, and not one percent higher.
I don’t believe the appropriate question is the correct absolute level of the money supply. The absolute level is very nearly irrelevant. A more interesting question is what is the correct level of growth of the money supply. The answer to that is a big fat zero.
If the money supply were to remain constant then the interest rates would very quickly reach their correct level whatever that might be.
I don’t believe the appropriate question is the correct absolute level of the money supply. The absolute level is very nearly irrelevant. A more interesting question is what is the correct level of growth of the money supply. The answer to that is a big fat zero.
If the money supply were to remain constant then the interest rates would very quickly reach their correct level whatever that might be.
Keep in mind that Alan Greenspan was a disciple of Ayn Rand – and he was the author of “Gold and Economic Freedom”. A regular quote within “Atlas Shrugged” was “check your premises”. I know that M. Rothbard thought that Mr. Greenspan was just an expedient politician that could act independently of his objectivist ideological roots but this a benign interpretation of his actions. A less benign interpretation would be to consider the possibility that he is following the script written for him by Ms. Rand. Is Mr. Greenspan a modern day Fransisco d’Anconia? Is he assuming the role of Super Keynesian in order to destroy the “looter” system from within?
Food for thought.
Let me see if I understand this argument…Alan Greenspan is really acting in some undercover fashion to destroy the system from within by doing such disastrous things that everyone will lose confidence in the system? Wouldn’t a more simple explanation be that Alan Greenspan has simply sold out liberty in exchange for a position of power?
Greenspan’s job is to create an “elastic” currency. It is in the Federal Reserve mandate from 1914.
I no longer think that is a good idea for a variety of reasons, which everybody on this site seems to agree with. But that’s a different argument than critiquing his job performance (by the way I think he has done a spotty job especially in the last few years). His job doesn’t require him to disband the Federal Reserve.
“If the money supply were to remain constant then the interest rates would very quickly reach their correct level whatever that might be.”
Don’t you mean that the money supply should remain constant with respect to the productive capacity of the economy? If the money supply remained constant forever, how do new ventures get financed except by taking money away from other ventures?
Assuming that there will be no radical realignment of the world’s finances anytime soon (i.e., return to the gold standard, shutting down of the Fed or other Central Banks, etc.,etc.):
How do you achieve this? Isn’t forcing the money supply to never grow just as bad as growing too quickly or shrinking? Shouldn’t the market somehow decide what the correct amount of money growth should be? Wouldn’t this actually create the “zero-sum game” that Socialists base most of their beliefs on? I think it would take an incredible act of government force to achieve this result. The Federal reserve only indirectly and partially controls the money supply. So additional government force would be required to suppress all money creation, whether temporary permanent.
I agree that the government puposely increasing and decreasing the money supply in anticipation of possible future events is a fools game and causes more problems than it solves, but that’s a different argument. You seem to be suggesting that the market shouldn’t be allowed to create and destroy money through supply and demand either. That doesn’t seem to align with the general sense free market economics that the Austrian School would dictate.
What am I missing? I’m not trying to start a pissing contest, I’m genuinely looking for education here. I honestly don’t know the answers to my questions. If you can answer my questions and educate me, you may have a convert. By the way, I have on order Murray Rothbard’s book on History of Money and Banking, but it hasn’t arrived yet. I’m intrigued by what I will learn. Enlighten me.
The original practice of the Federal Reserve for the first two decades of its existence was to create an elastic currency. An elastic currency expands and contracts to meet the needs of trade. This is known as the real bills doctrine. The real bills doctrine is a discredited theory. Expanding the money supply during booms and contracting the money supply during busts only exasperates the business cycle. The Humphrey-Hawkins act guides Fed monetary policy now.
“If the money supply remained constant forever, how do new ventures get financed except by taking money away from other ventures?”
New ventures would be financed by increases in saving or by saving being reinvested from old investments to new investment. Saving could be increased by reducing consumption or money balances.
There are so many different measures of the money supply – money base, M1, M2, M3, MZM, AMS – if the money supply is to be held constant, which one should be held constant? You correctly point out that the Fed does not completely control the money supply – except for the monetary base – and would not be able to control the money supply (M1, M2, etc.) even if it wanted to.
So, I suppose that if one argued for a constant money supply, one would have to argue for a constant monetary base. Any attempt to control other measures of the money supply would not be successful.
Austrian economists would not argue against a market determined supply of money. But they would disagree on what type of institutions would replace the Fed.
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