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Source link: http://archive.mises.org/9938/geithner-admits-the-austrian-case-the-fed-was-too-easy/

Geithner admits the Austrian case: the Fed was too easy

May 12, 2009 by

Here it is in full relief.

Mr. Geithner: “But I would say there were three types of broad errors of policy and policy both here and around the world. One was that monetary policy around the world was too loose too long. And that created this just huge boom in asset prices, money chasing risk. People trying to get a higher return. That was just overwhelmingly powerful.”

Mr. Rose: “It was too easy.”

Mr. Geithner: “It was too easy, yes. In some ways less so here in the United States, but it was true globally. Real interest rates were very low for a long period of time.”

Mr. Rose: “Now, that’s an observation. The mistake was that monetary policy was not by the Fed, was not . . .”

Mr. Geithner: “Globally is what matters.”

Mr. Rose: “By central bankers around the world.”

Mr. Geithner: “Remember as the Fed started — the Fed started tightening earlier, but our long rates in the United States started to come down — even were coming down even as the Fed was tightening over that period of time, and partly because monetary policy around the world was too loose, and that kind of overwhelmed the efforts of the Fed to initially tighten. Now, but you know, we all bear a responsibility for that. I’m not trying to put it on the world.”

{ 19 comments }

Brent Railey May 12, 2009 at 9:23 am

Even when this guy “gets” it, he doesn’t get it. To Geitner, the bust occurred not because it is the necessary outcome of the boom and money-tightening makes the needed correction come quicker, but because the other central bankers stayed looser longer.

I guess a silver lining is this: this conversation makes no sense unless the underlying assumption is that the boom is a misconfiguration of the economy.

Matt R. May 12, 2009 at 9:24 am

“Show me an Obama fanatic, someone for whom this man can do no wrong, no matter how brainless his economic policies or how violent his foreign policies, and I’ll show you a person who hates the guts of George W. Bush — and mostly for the right reasons.”

– Excellent point! This sums up some immediate members of my family, who, for whatever reason, can’t hold both sides accountable. It’s maddening to listen to them.

Matt R. May 12, 2009 at 9:28 am

Sorry, the comment above was meant for Tucker’s piece.

fundamentalist May 12, 2009 at 9:39 am

It’s good that Geithner sees the essential problem, but I’m amazed that he sees no lag between Fed policy and interest rates. Within the US, it takes time for the excess money of the previous policy to work its way through the economy. Geithner seems to think there is no lag at all! In addition, much of the money created by the US goes overseas through the purchase of imports and then comes back as foreign investment. No country in the world, except for Iran and N. Korea, prints US dollars. Only the Fed does that. Every dollar in the US system comes from the Feds.

Michael A. Clem May 12, 2009 at 9:53 am

It wasn’t the fault of the central bank (the Fed) of the most powerful and influential nation in the world, no! It was all those other countries that caused the problem.
sigh…

Bogart May 12, 2009 at 10:05 am

Dismal science indeed…

Now the policy was too loose. But recently it seemed to be too tight as the Fed created upwards of $10 trillion out of thin air.

But despite the lack of any science here, I am confident because Old Tim has recognized the error and will at some point in the future begin to raise interest rates as the economy gets going.

Mac May 12, 2009 at 10:12 am

“… because monetary policy around the world was too loose, and that kind of overwhelmed the efforts of the Fed to initially tighten. Now, but you know, we all bear a responsibility for that. I’m not trying to put it on the world.”

(Emphasis mine.)

Say what?

Tell me that you see the guy flipping back and forth on who is responsible for loose interest rates?

I don’t think he realized any error. Instead, he is just groping for what makes sense to him right now, and he’s just winging it. If we watch long enough, he’ll explain it was something else.

Jason Gordon May 12, 2009 at 10:46 am

Real interest rates were very low for a long period of time.

“Low” in comparison to what Mr. Geithner?

What specific numerical calculations were undertaken to determine the ‘correct’ rate i.e., a rate deemed to not be low?

What specific past policy measures when implemented caused the rate to become “low” and why?

Did the failure to attain a rate that was not “low” result from; collecting the wrong sorts of data, collecting erroneous data, or collecting inadequate data?

Did the failure to attain a rate that was not “low” result from; not being able to predict or rely on projections pertaining to the actions of credit market participants such as central banks and governments?

How do you reconcile the definitively beneficial outcomes of innumerable unpredictable actions of private sector market participants with that of the apparently harmful outcomes propagated by central banks and governments with their intentionally manipulative actions?

Are there specific reasons to presume the market for capital and credit is not analogous (by mechanism of price discovery, etc.) to other markets?

To what degree does the wildly fluctuating so called “multiplier” of fractional reserves stymie credit price calculations by market means, and does this same dynamic effect central planning authorities’ credit pricing methods?

And in closing Mr. Geithner: Obviously all serious economists agree we need a global regulator to manage the world’s interest rates — how could the fringe Austrian theorists possibly disagree with that?

William Rader May 12, 2009 at 11:01 am

I have to agree with Mac. I don’t see any coherence in this line of thinking. I, too, believe he is just winging it. His answers, if they can be called that, seem to be made on the fly.

J Cortez May 12, 2009 at 11:37 am

Wiliam Raider said: “I, too, believe he is just winging it. His answers, if they can be called that, seem to be made on the fly.”

Pretty much like the government’s entire policy, I would say. Make up a bunch of trash and pass it off as a solution to show you’re “doing something.”

Reading the dialogue between Rose and Geithner made me wonder what Helicopter man and Greenspan the unwise are thinking right now. This doesn’t gel with their “It’s not the Fed, it’s the Chinese savers” excuse.

Deefburger May 12, 2009 at 11:55 am

The dog is chasing his own tail, biting it, and then barking at the dog next door for giving him pain!

The dog next door is doing the same thing. So there is a whole neighborhood of dogs barking at each other for the bites on their tails! Next the fences get higher to prevent the “problem” of tail biting. When they’ve knawed their own tails off, the injuries will be blamed on the “animal spirits” that somehow got over the fence and inflicted the wounds.

The dogs will never see themselves as the cause, because they are charged with “protecting” the property from outside causes. The assumption of external source is implicit in the job. Same thing happens with any organization that is created to enforce. With the mandate of enforcement comes an implied innocence and lack of culpability. So the source of any problem must be external to the enforcement. This false assumption is at the heart of Geitner’s, Bernake’s, Greenspan’s, Volker’s, et al errors of judgment.

Jason Gordon brings up the other problem, the problem of measurement. Their “science” has no objective standards of unit measure, and so is without objective comparison. This has an effect similar to an orchestra of tone-deaf musicians playing a peice “by ear” and then blaming the discord on the instruments and the listeners.

They will attempt to fix this by reducing the “orchestra” to one “note” by implementing a single world currency, thus “simplifying” their task. As the audience, we will be required to attend this performance, even though there is no music.

They will continue to fail to create any form of economic harmony. They will continue to fail to measure the single note correctly and will continue to create discord, simply for the lack of a tuning fork, an objective standard of value for their measurements.

Larry May 12, 2009 at 11:59 am

He’s winging it because he has no knowledge of how a free market economy is supposed to operate. Greenspan did back in 1964 but all that money made him forget. Somehow I just can’t bring myself to have any sympathy for any of them. Move along, nothing to see here……………..

AC May 12, 2009 at 12:12 pm

Maybe Mr. Geithner’s comments are reflective of a power play by President Obama over the Fed and Mr. Bernanke.

Consider this possibility, US Treasury (Mr. Geithner) throws down the gauntlet saying the Fed is at fault. After all, the US Treasury is going to need a lot of help raising funds for the HUGE deficit spending coming down the road. It’s likely that neither the taxpayers nor the private market will go along with it, nor will they be able to even if they wanted to fund the whole spending deficit. Therefore, US Treasury is going to need the Fed to provide “liquidity” to the gov’t coffers.

What better way to get that liquidity than to have a big “Gotcha” hanging over the Fed’s head. A “Gotcha” that says the Fed created too much liquidity to evil bankers. Then the super spin cycle will start and will propose that the liquidity needed now is necessary to grow the economy and since it’s going to the gov’t, it won’t result in a huge asset bubble and riches for bankers, but instead be a greater public good. I’m afraid the general voting public will buy into it….until the general stagflation hits, anyway.

Dan May 12, 2009 at 2:52 pm

I am actually more amazed, that Charlie Rose (!!!) pressed him on that issue.

Magnus May 12, 2009 at 4:17 pm

Geithner is blaming “the world” for the disaster because, as Deefburger mentioned, the objective here is to break the US currency to enable them to replace the dollar with a one-world currency. Or maybe an Amero, as a counterpart to the Euro. Maybe we’ll have an Asio, too.

But, let’s entertain Mr. Geithner’s explanation du jour, and accept it at face value.

He now believes that the credit policies of the last 10-15 years were too loose. Fine.

Mr. Geithner, how does the Fed know, at the moment and in real time, whether its credit policies were too loose or too tight?

Or can this determination be made only retroactively? After disaster has struck?

If it’s possible to make a better real-time calculation of the correct interest rate, rather than waiting for disaster to strike to diagnose the problem, then what calculations would you use to determine, at the moment and in real time, whether the credit policies need to be adjusted up or down?

What data would you rely on to make those calculations?

Now, let’s say that, instead of a central bank, there were dozens or even hundreds of credit-issuers, all competing and reacting to each other, instead of a single, monolithic behemoth setting the interest rates for all of America (and most of the world). If that were the case, would it not be true that the market experiences of all of these independent agents be a useful source of economic data?

Couldn’t that data be just the sort of data we need to make the calculations, at the moment and in real time, to determine whether credit is too tight or too lose?

Don’t we need a market for credit-issuance, so it can give us the data inputs we need to make such calculations?

Or must we continue to rely on a retroactive assessment of the devastation caused by the inaccurate analysis of a monolithic, quasi-governmental, monopolist like the Fed?

Because, I have to tell you, using a retroactive evaluation of last year’s economic disasters as our sole source of reliable economic information is rather painful.

Artisan May 12, 2009 at 4:20 pm

“It wasn’t the fault of the central bank (the Fed) of the most powerful and influential nation in the world, no! It was all those other countries that caused the problem.”

What countries does he mean? I don’t even get it. China perhaps?

Lucas M. Engelhardt May 12, 2009 at 5:41 pm

Actually, I’m one that thinks Geithner has a point about the global situation being what matters. Most of the world was more inflationist than the Fed during the boom. As quick examples: The European Central Bank, The Bank of Japan, and the People’s Bank of China were all increasing their monetary bases much more quickly than the US was.

Also, large capital inflows from abroad (which we did have during the boom), indicates that interest rates here are relatively high, compared to the rest of the world – so investing in the US looks like a good idea. If the US’s rates were very low compared to the rest of the world, then we’d expect capital outflows – which are not what we saw.

Of course, the Fed could still have been tighter.

Friedrich May 13, 2009 at 1:22 am

Sorry, but he does not admit anything. It was the others as usual. So he just proceeds with his FUD. It’s as always….

dewind May 13, 2009 at 8:02 am

Fighting inflation abroad with inflation is probably not the right answer. There is some merit in that an boom could potentially be created by an artificial demand created abroad by central banks inflationary monetary policies.

However, our current bust can be squarely placed on the Federal Reserve’s tinkering in the market. There is no viable defense against it.

In other news, CNN is shocked to see that foreclosures are on the rise.

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