There is no such thing as a true "free market" and who would want it anyway. A lawless, unregulated, and volatile "free market" would be disastrous from a social standpoint.
Laws and regulations that protect possessions and their value create incentive to work for those possessions (and the "Invisible Hand" brings the whole economy up). When the ability to hold on to your possessions or to value them (through a stable-ish currency) ceases to exist, you have no incentive other than to fight for shelter and food (Maslow stuff).
Maintaining a stable-ish "value" of possessions (assuming the legal ability to protect possessions) is done by managing their demand, right? Increasing demand (by interest rates or quantitative measures) has proved to be fairly useful over the course of time, no? Also, decreasing demand through the same tactics has been useful too, though the political implications of doing so have left the practice used all too infrequently.
Let's throw away the "free market" discussion in lieu of something more practical. Societies need to ensure safety and relative stability of the value of possessions. To do this, economies need some "tinkering" to ensure possessions maintain their value to avoid "adjustments" that are too painful for modern societies to bear.
Bush and his team are doing the right things. Flooding the markets with cash (among other tactics) to increase demand at a time the taxpayer can get paid to do so (borrowing at negative real interest rates) is a no brainer tactic to protect price stability. Let's not overthink this!
I'll take orderly over free any day!
5 comments:
We seem to have conflicting definitions of a "free market". First, recognition of private property is absolutely essential to a free market. If there is no private property, then who owns property? The state? No one? To me, "free market" does not imply lawlessness.
Now, a "stable" currency is not necessarily a feature of a free market. This requires a discussion of the concept of money, which is far too much for this comment. A free market could theoretically be a barter economy. However, a currency as a medium of exchange is a natural evolution and a component of an efficient economy.
That does not imply stability - or at least your definition of it - is necessary. That applies to both currency as well as goods and services in the economy. Remember, supply and demand are constantly changing. Thus, explicitly, market values as defined by the prices which clear the market are also always changing. This is a healthy economy.
So, your call for "tinkering" to get the proper "adjustments" are nothing more than attempt to avert the natural forces of supply and demand. This goes for the supply and demand of money itself, as well as all other goods and services in the economy. This is an essential point. The very thought of "tinkering" implies that central planners can out-think the market.
This will always result in failure. This has resulted in the boom-bust cycle which is causing us so much consternation today. Eventually, it will lead to the destruction of both our currency and political system. This is not the world I want my child to inherit.
So, when I'm talking "free markets", don't equate that to a lack of laws and regulations. Private property must be respected and protected. Information must be freely available and disclosed. Government has a role to play here. But, interest rate manipulation and other forms of taxes and subsidies only serve to distort the market and inhibit growth.
By the way... let me also address "negative real interest rates".
Let me get this straight. The FED want to drop interest rates. They do this by flooding the market with cash so that supply exceeds demand. This supply comes from the FED's printing press which creates new money and uses it to purchase treasury securities from banks.
The incremental demand for treasuries (from the FED) then drives down yields on the treasuries which leads to very low, if not "negative real", interest rates.
So, the U.S. Government can now borrow at very low rates, but still has the obligation to pay back the FED (who holds the treasuries). Hmm....
The FED prints money, gives it to banks, hopefully that money gets back to taxpayers, who have to turn around and pay it back to the government, who can then pay back the FED. That's quite a bet on the money-multiplier.
Why don't we just give everyone a million dollars?
interesting discussion...just had a few random thoughts that i will now share.
1) Probably the reason not to just give everyone a million bucks is that companies are the ones that are suffering, not consumers. It seems like people are doing fine as long as they keep their jobs, but the banks won’t lend companies any money right now.
2) If this is the problem (which I suspect) why bail companies out? Rather, couldn’t the Fed pick up the slack for other banks and lend out the money, instead of just giving it away?
3) To me, bailing out GM is like bailing out a poop factory. Sure I feel bad for the workers, but their product stinks and it always will. The American economy might be better off in the long run without them.
4) Bush has no idea about any of this. His policies are justified by a lot of hand-waiving, wink-wink type of rhetoric, like “well of course we need to do this, OR ELSE … “ RTC probably makes some valid points here, but the Bush administration seems to be approaching this with a remarkably low level of sophistication, something we’ve also seen in their policies on energy, Iraq, etc.
Thanks, Ryan. In response:
1. Banks are lending to companies - read this paper from the Minneapolis FED: http://www.minneapolisfed.org/research/WP/WP666.pdf. Companies and consumers are obviously inter-related. Your comment begs an interesting question as to the proper relationship between government, business and people.
2. Technically, the FED doesn't just give out money. They take collateral for every loan the give out. Or, the cash is given for the purchase of a security. The collateral lately has been questionable, and both Bloomberg and FOX are pursuing litigation for disclosure under the Freedom of Information Act.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKr.oY2YKc2g
3. While many feel that GM's products are inferior, the problem is that their cost structure far exceeds revenues. A loan of this size will not solve this. Good article from Bloomberg: http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=ai5KpbywxqiQ.
4. I would strongly contend that Bush, Paulson, and Bernanke are not doing the right thing.
Sorry for the slow response - I don't know how to "blog" correctly so I didn't even know the comments were there.
In an effort to briefly hit some major points:
1)the "demand" I discussed was the demand ordinary folks have for stuff, which largely drives prices and inflation
2)I don't agree with lending to GM or Chrysler; I probably should have stated that. Lending people money to make Plymouths and pay people twice the market rate for their skill is just silly. Providing some money for unemployment, training, etc. is ok but lend/provide as far down the ladder as you can.
3)When discussing interest rates and money supply, I'm talking in general. I get the FDIC, Treasury, Fed, etc do different things but their all report up to the same people and work together so.....
4)The Gov is/will lower rates by buying (or at least saying they will) buy (or guarantee) treasuries, agency debentures, mortgage backed securities, whole loans (maybe). This increases money supply (quantitative easing) and (in theory) gives firms/people more money to spend on iPods and loan out therefore increasing "demand" and prices.
5)On cheap borrowing by the gov (call it Fed/Treasury, whatever) - If inflation is say 2.5% long term, we borrow @ 3%, then buy preferred stock @ a 10% div , MBS at 6%, Agency Secusties @ 5%, all from borrowers where the likelyhood of failure is low (given the gov is providing the life preserver in some cases) - and we're propping up prices/inflation at the same time. Smells good to me.
5)And yes - the sophistication is low at 20k ft (but far from it under the surface). Funny Iraq came up. We were losing - we sent more people. We started winning. Doesn't sound too complex :-).
6)Lastly - I think we agree to diasgree on the role of government to some extent. Rampant inflation does bad things to societies - I can point out a thousand examples. Individuals can't control inflation - only overseeing bodies of some sort can. Therefore, I agree with tactics to maintain price "stability".
Cheers!!
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