Apparently it was published over a month ago, but I only now discovered that big “O” Objectivist (ARI-affiliated) economist Richard Salsman published a review of Alan Greenspan on Capitalism Magazine’s web site. In some ways his review is pretty good, but in other ways it is very confused.
I have previously described how many ARI-affiliated individuals have moved from a Misesian to a Supply-side analysis of the business cycle, with Salsman being one of the most prominent in this regard. The contradictions of supply-side economics who claim to be anti-inflation and pro-gold yet at the same time attack the Fed for pursuing a “too tight” monetary policy is permeating his review.There are some good things about his review. Like me he points out that the consumer price index rose 74% (From 114 to 198) under Greenspan’s watch and attacks Greenspan for it. Like me he also points out that Greenspan was once a gold standard advocate who turned on gold and adds the point that Greenspan not only did not advocate gold, but in fact argued against gold in 1981, claiming it was “impractical”. He therefore like me concludes that Greenspan in no way replicated gold standard conditions and that gold would be preferable to Greenspan-and Bernanke.
But Salsman also indirectly attacks me as well as The Economist and many others, writing:
“Greenspan’s few critics lambasted him for the wrong reason, claiming he improperly “allowed” U.S. stock prices to “rise too much” in the 1990s – or “allowed” house prices to “rise too much” in recent years. In fact, his truly improper behavior entailed enviously smashing such wealth gains with rate hikes and inverted yield curves. His last act on his last day in office last month was to raise rates yet again and invert the yield curve – historically, a leading indicator of recession.”
While he is right to put “allowed” in quotation marks, as the Fed caused the bubbles instead of just allowing them, this criticism flatly contradicts the other things he wrote. Had the Fed not raised rates occasionaly the money supply would have increased further and thus aggravated the loss of purchasing power he later decried in the same article. How could the Fed possibly restrain its money creation with regards to consumer prices and accelerate them with regards to asset prices?
Under a true gold standard, any shift in investor sentiment towards stocks or housing would automatically imply (at least ceteris paribus) higher bond yields, a movement which central banks replicates too late in practice. We see here a perfect example of the previously mentioned contradiction of supply-side economics.
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Under a true gold standard, any shift in investor sentiment towards stocks or housing would automatically imply (at least ceteris paribus) higher bond yields,
Whose bonds?
Salsman’s Randian affiliations aside (“enviously” seems like a curious choice of adjective), I’m not sure there can be any rational basis for debate about the actions of a central planner.
1. The actions of the central planner are of purely subjective value, and therefore we can at best debate ‘my subjective value is better than your subjective value’ (on the order of debating ‘welfare vs. warfare’).
2. Or let’s say we are all in agreement about the standard that the central planner must adhere to, in this case the gold standard, i.e. the central planner must emulate a truely free market’s determination of interest rates. This is the ‘economic calculation under central planning’ problem… i.e. not possible (by Mises). But if the debaters say that the central planner should do this, or should do that (in order to better emulate a free market), how do we then judge which better emulates a free market without knowing in advance the solution the free market would arrive at (presumably impossible).
When someone complains about the interest rate hikes from the Fed we all know what it means – the person who is complaining wants more credit-money.
One should say “I agree that the Fed should hike interest rates, because the Fed should not issue credit (in any of the complex ways it does) at any interest rate – in fact the Fed should not exist”.
There are two sorts of “we want lower interest rates” people.
The vast majority are decent people who simply do not know much about economics (this includes most people with qualifications in economics – due to the pathetic state of the subject in most colleges).
With these people one should take time and trouble and explain how investment must be from real savings (i.e. people choosing not to consume all of their incomes) – and that investment can not be higher than real savings (without going into the boom-bust folly of credit expansion) and that interest rates must be determined by the time preference of lenders and borrowers.
And then there are people who know some economics and still say “we want the Fed to give us lower interest rates”.
Such people (i.e. people who want the drip feed of credit money expansion – even though they know the harm it does to the general economy) are bad -and they should be treated as bad.
They are guilty not of ignorance – but of a failure of basic morality.
The above should read “I agree that the Fed should NOT hike interest rates – but only because the Fed should not expand credit (in any of the complex ways it does) at any interest rate”.
Of course if the Fed is going to offer extra credit it is better that it should do so at a higher rather than a lower interest rate – this is better (in theory) because people are less likely to take the credit at a very high interest rate.
Therefore the ideal interest rate for extra credit from the Fed would be infinity.
“But my financial institution [or other politically connected enterprise] depends on support from the Fed”.
Then your institution is rotten. Part of a system that can not be sustained for ever.
The real problem is that, in a bust, the rotten drag down everyone else (as the economy is interconnected).
The Fed does not set interest rates per say. Instead, by simple law of supply and demand, they either raise or lower the supply of capital available for investment/lending. Though, they always raise the supply of capital by adding money to the money supply, which is how they lower rates. Hence, the rate is irrelevant in that it is a tradeoff between those who save and those who prefer to acquire capital to spend now. If anything, tracking for money supply growth is much better than worrying about interest rate levels.
When the Fed raises commodities rise with it and vice versa when then Fed lowers commodity prices fall. “dont fight the Fed”!, until of course it can be abolished for the gold standard.
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