{"id":4477,"date":"2010-11-07T19:47:08","date_gmt":"2010-11-07T23:47:08","guid":{"rendered":"http:\/\/1boringoldman.com\/?p=4477"},"modified":"2010-11-08T00:40:12","modified_gmt":"2010-11-08T04:40:12","slug":"the-put-heard-round-the-world","status":"publish","type":"post","link":"https:\/\/1boringoldman.com\/index.php\/2010\/11\/07\/the-put-heard-round-the-world\/","title":{"rendered":"the ‘put’ heard round the world…"},"content":{"rendered":"
Ron Paul<\/strong> wants it to go away [fiduciary anarchy…<\/a><\/strong>]. Most of the rest of us want it to save us. But what the hell is the "Fed" anyway? Where did it come from? Did the Founding Fathers think it up? <\/div>\n
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After its big move to boost economy, Federal Reserve reflects on its history<\/a>
Washington Post<\/strong>
By Neil Irwin
November 6, 2010<\/div>\n

JEKYLL ISLAND, GA. – The bankers who gathered on this island resort a century ago to plot out what would become the Federal Reserve System did so secretly, traveling under fake names to avoid attracting attention. The people who run the organization that those bankers dreamed up were rather less subtle this time around. As Fed Chairman Ben S. Bernanke and a long list of past and present Fed officials gathered this weekend for a conference on the history of the central bank, they were surrounded by security guards in black sport-utility vehicles and TV cameras broadcasting their conversation around the world. <\/p>\n

That conversation, particularly a Saturday panel discussion featuring Bernanke, his predecessor, Alan Greenspan, and former New York Fed president Gerald Corrigan, offered a window into how the leaders of the Federal Reserve view their achievements and failures, and their role in a post-financial-crisis world. In particular, Bernanke painted some of the major decisions he has made both during the financial crisis and this past week as consistent with the Fed’s founding mission, hammered out on this island a century ago. <\/div>\n<\/blockquote>\n
The Central Bank we call "the Fed<\/strong><\/a>" was created during the time of Woodrow Wilson [1913], under advisement of the big Bankers of the time. It’s seen as "un-American "by the Libertarians, the essential regulator of our monetary policy by some, and not seen at all by most of us. Yesterday, in a conference on the Fed’s history, Bernanke’s recent plan to boost our recovery made it to the table. <\/div>\n
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The central bank has had no shortage of trials and failures in its first hundred years – the Great Depression of the 1930s and the Great Inflation period of the 1970s most prominent among them. The challenge of the 2010s, it increasingly appears, will be dealing with the aftermath of the most recent financial panic and the Great Recession. The nation is still grappling with the economic devastation those events wrought, most evident in a 9.6 percent unemployment rate. Just last week, the Fed took unconventional steps to try to bring that rate down and to draw inflation up a bit from its rock-bottom levels, pledging to buy $600 billion of bonds to try to push down long-term interest rates. <\/font><\/strong><\/td>\n<\/tr>\n
Speaking at the "Return to Jekyll Island" conference sponsored by the Atlanta Fed, Bernanke argued that the steps are not as revolutionary as many observers in the financial markets and the news media have suggested. "There’s a sense out there that, quote, quantitative easing or asset purchases are some completely foreign, new, strange kind of thing and we have no idea what . . . is going to happen," Bernanke said, sitting onstage in a conference space that was once J.P. Morgan’s indoor tennis court. "Quite the contrary – this is just monetary policy. . . . It will work or not work in much the same way that ordinary, more conventional, familiar monetary policy works."<\/font><\/strong><\/td>\n<\/tr>\n
Corrigan, who was a key lieutenant of Fed Chairman Paul A. Volcker and is now a Goldman Sachs<\/a> managing director, acknowledged some "uneasiness" with that approach. "If you seek to nudge up the inflation rate," he said, "even with very, very low rates of capacity utilization in the labor market . . . is there a risk that getting inflation to 2 percent may turn out to be easier than capping it at 2 percent?" "That’s the source of uneasiness that I wanted to register," Corrigan added.<\/font><\/strong><\/td>\n<\/tr>\n
Bernanke defended the action. "I have rejected any notion that we are going to try to raise inflation to a super-normal level in order to have effects on the economy," he said. "We’re not in the business of trying to create inflation," Bernanke said. Rather, he said, the Fed is trying to avoid a further drop in inflation.<\/font><\/strong><\/td>\n<\/tr>\n<\/table>\n<\/blockquote>\n
This makes some interesting reading at this point. Paul Krugman [everyman’s economist] has been posting that "nudging up" inflation would be a great Stimulus method. His logic is complicated – beyond the likes of me [Generating Inflation Expectations<\/a><\/strong>]. But the gist of it is very different from what Bernanke says here. Fighting "deflation" and using "expectations of inflation" to jump-start the economy are very different things. But the discussion does bring up a central point about "the Fed." Is it responsible for keeping the economy going, micromanaging it? Or is it something else? <\/div>\n
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In recent decades, the major mission of the Fed has been to manage the money supply to try to stabilize the economy. But when the Fed was founded – the private discussions at Jekyll Island in 1910 were followed by congressional passage of the Federal Reserve Act of 1913 and the creation of the Fed in 1914 – its main mission was to prevent bank panics that had intermittently ravaged the U.S. economy from 1873 to 1907. In other words, the Fed was a lender of last resort to the banking system long before it was in charge of stabilizing the economy and inflation more generally. After all, when there was a gold standard, there was little ability to expand or contract the money supply. <\/div>\n

<\/p>\n

Bernanke described the breakdown of several key financial markets during 2007 and 2008 – the short-term funding markets that investment banks used to finance their operations, for example – as a 21st-century version of those pre-1914 bank runs. Those complex securities had "the same structure as a bank, except they didn’t have the protections, the guarantees and the oversight that a bank has," Bernanke said. Referring to a series of unconventional Fed programs launched to pump money into various corners of the financial system, he added, "I really think of it as a classic lender-of-last-resort response, adapted for the complexity of the financial system." <\/div>\n<\/blockquote>\n
As a lot of my speculative posts about Alan Greenspan<\/font><\/strong> have implied, I think he misused his power at the Fed to press a specific ideology: <\/div>\n
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To many Fed critics, a central failure over the past three decades has been the perceived willingness of the central bank to take action to prop up financial markets whenever they are faltering, a phenomenon known as the "Greenspan Put," which uses the term for an option that protects against an asset losing value. The criticism is that by standing in to prevent precipitous declines in financial markets, the Fed made it appear that one could invest without risk – and that this led investors to be overly complacent about risk, which in turn fueled the panic of 2007 to 2009. <\/font><\/strong><\/td>\n<\/tr>\n
Given that his own policies have helped prop up stock prices in the past year, Bernanke echoed the phraseology of some of his critics and referred to the phenomenon, almost sheepishly, as the "Greenspan\/Bernanke Put." Greenspan was unrepentant. "If in effect the Greenspan Put is the notion which says you’re stabilizing the system, then I hope so – that’s what we’re here for," the former Fed chairman said. "I don’t really have an understanding of why that has become a pejorative term… If I understand it, what we’re doing is what we should be doing."<\/font><\/strong><\/td>\n<\/tr>\n<\/table>\n<\/blockquote>\n
I am not a "Libertarian" and I don’t much like Ron Paul<\/strong>, but in this case, he has a point. He wants the Fed to go away and let the Markets just do whatever they want to do. What’s fascinating to me is that Ron Paul is an Ayn Rand devotee, just like Greenspan. He thinks the Markets will handle things unassisted [just like Greenspan]. Yet Ron Paul and Alan Greenspan are on opposite sides of the fence on this issue. To me, that says something about that whole philosophy. Both men preach a gospel of leave the Markets alone<\/em>. Get the government out of things<\/em>. Yet one represents the Federal Reserve overstepping its power. The other wants to divest it of power.<\/font><\/strong> <\/div>\n
 <\/div>\n
You don’t have to look at much on this graph to see why we need the Central Bank. Without it, our economy is capable of some very serious craziness. Greenspan’s [and Paul’s] idea of a super-free market are absurd. Enough of that…<\/div>\n
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There are three areas where the Central Bank has had an obvious function in our economy [many many others in the background]:<\/div>\n
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    1. The Great Depression:<\/font><\/strong> Obviously, monetary policy and economic intervention had a huge impact in the decade+ long financial collapse in the 1930’s. No comment needed.<\/div>\n
    2. Recessions:<\/font><\/strong> It has become a standard practice during a Recession for the Fed to lower Interest Rates temporarily to got cash moving and short-circuit the Recession.<\/div>\n
    3. Inflation [CPI-U]:<\/font><\/strong> Raising Interest Rates has been a standard tool to combat Inflation [1970’s and 1980’s] – particularly under Paul Volcker.<\/div>\n<\/ul>\n
    <\/div>\n
    But the point in question is levelled specifically at the Greenspan years, "To many Fed critics, a central failure over the past three decades has been the perceived willingness of the central bank to take action to prop up financial markets whenever they are faltering, a phenomenon known as the "Greenspan Put," which uses the term for an option that protects against an asset losing value. The criticism is that by standing in to prevent precipitous declines in financial markets, the Fed made it appear that one could invest without risk – and that this led investors to be overly complacent about risk, which in turn fueled the panic of 2007 to 2009.<\/font><\/strong>" I would say it even more forcefully, instead of the Fed moving in to prevent problems in the economy, under Greenspan the Fed moved in to encourage<\/font><\/strong> the economy, to keep it prosperous<\/font><\/strong>. So he added something new to the Fed’s mix: <\/div>\n
      \n
      4. Irrational Exuberance:<\/font><\/strong> Alan Greenspan did something unique in the Feds history from my perspective. In messing with the economy in the way Greenspan did, he wasn’t "stabilizing the economy," he was falsely inflating it and destroying his only buffer to deal with problems when they arose. The "Greenspan Put" [low Interest Rates from 1995-2000] launched our "bubble economy," our overbuilding, our Stock Market boom, and insured the catastrophe that followed. He didn’t stabilize the economy, he irresponsibly fueled it until it burned up. He brought new meaning to the term "Free Market." He gave it away. There’s nothing in the conceptualization of the Federal Reserve that makes it a player in the game. Alan Greenspan was "speculating"…<\/div>\n<\/ul>\n

      <\/p>\n

      So as odious as Ron Paul’s government free America seems, his planned probing of the role of the Federal Reserve in our economy is probably a good idea. Greenspan claimed to be a free-market guy, but he turned out to be a market manipulator who had a big role in our contemporary problems, maybe "the decider."<\/p>\n

      If you read books like Irrational Exuberance<\/font><\/strong> by Robert Shiller or The return of depression economics and the crisis of 2008<\/font><\/strong> by Paul Krugman, it all seems to make some kind of sense – except people didn’t see it coming. Shiller sort of saw it, at least he saw the "housing bubble" growing. Greenspan admitted to the possibility of "irrational exuberance" in 1996, but the train kept running. If you Google Greenspan’s many speeches or other economists speaking, what they saw and wondered about was the amazing performance of the Stock Market. And when they talked about it, there was much speculation that now sounds odd – the "New Economy" that had different rules was a much bantered about metaphor. And as Unemployment fell, Inflation didn’t rise as expected. That was Greenspan’s justification for leaving Interest Rates low – a fatal flaw.<\/p>\n

      Now it seems like the way to look at it is that the CPI-U [Inflation] measures Inflation of currency, but there are plenty of other "Inflations" – the Stock Market, the price of homes, Internet stocks, Oil prices. It’s as if Inflation has a cagey mind and avoided showing itself directly in the general cost of goods but found other avenues of expression. So instead of being alarmed by these radical changes, they looked for creative explanations for our good fortune instead of hearing the dirge in the background. Greenspan was especially at fault, because he aided and abetted the forces even though he didn’t understand them<\/u>. That’s why I call him a speculator.  He played it for some kind of windfall instead of heading us for the storm shelter. History will not be kind to Mr. Alan Greenspan…<\/div>\n","protected":false},"excerpt":{"rendered":"

      Ron Paul wants it to go away [fiduciary anarchy…]. Most of the rest of us want it to save us. But what the hell is the "Fed" anyway? Where did it come from? Did the Founding Fathers think it up? After its big move to boost economy, Federal Reserve reflects on its history Washington Post […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_bbp_topic_count":0,"_bbp_reply_count":0,"_bbp_total_topic_count":0,"_bbp_total_reply_count":0,"_bbp_voice_count":0,"_bbp_anonymous_reply_count":0,"_bbp_forum_subforum_count":0,"footnotes":""},"categories":[2],"tags":[],"class_list":["post-4477","post","type-post","status-publish","format-standard","hentry","category-politics"],"_links":{"self":[{"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/posts\/4477","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/comments?post=4477"}],"version-history":[{"count":0,"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/posts\/4477\/revisions"}],"wp:attachment":[{"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/media?parent=4477"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/categories?post=4477"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/1boringoldman.com\/index.php\/wp-json\/wp\/v2\/tags?post=4477"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}