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05/02/2010

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Jack

Chris: I'm not sure how long a time we'd need to say, the proof is in the pudding, and I don't know then entire history of the Fed, but from what I've seen and read about I haven't seen any real blunders. Consider, we got through WWII with little inflation. The housing boom of the 50's went off with low interest. The devaluation/leaving the "gold standard" behind was not the fault of the Fed, but as today, heavily influenced by trying to hide, at least, the monetary costs of unpopular wars.

Today? While I might hurl a brickbat or so at the Fed for over-tightening at the end of the Clinton admin, and Repubs might hurl a few during the curious tightening at the end of HW's term, neither would deserve more than a few lightweight brickbats.

2. As for the fraud and utter corruption of our?? banking system from top to bottom, I think it would be very difficult to make a case that the Fed had eased too much. For all I know the source of what (actual) funds were being flung out may well have been recycled dollars coming back from China, India or a host of others holding surpluses from our trade deficit. Corruption is simply corruption as we saw with the S&L scam that went on for nearly a decade after being spotted, the Enron affair, and the current mess.

3. Well, I suppose he'd have to argue with those who are just as certain that an expanding, modern economy requires a somewhat steady increase in the money supply along with the occasional tap on the brake.

The alternative it seems, and the reason we and most advanced nations have a central bank, would be wild swings between feast or famine that would destroy viable enterprises that lacked the depth to survive even a short drought and a waste of manpower. As no one can work "twice as hard" the best use of labor is a fairly stable economy that allows folks steady employment.

Consider: Just now our biggest "cost" is the lost productivity of 15 million un- or under-employed working folk. Tally up the wages, and as every job produces more than the wage cost which is then profit and operating overhead for their employer and it's a big number.

Jack

Chris: I'm not sure how long a time we'd need to say, the proof is in the pudding, and I don't know then entire history of the Fed, but from what I've seen and read about I haven't seen any real blunders. Consider, we got through WWII with little inflation. The housing boom of the 50's went off with low interest. The devaluation/leaving the "gold standard" behind was not the fault of the Fed, but as today, heavily influenced by trying to hide, at least, the monetary costs of unpopular wars.

Today? While I might hurl a brickbat or so at the Fed for over-tightening at the end of the Clinton admin, and Repubs might hurl a few during the curious tightening at the end of HW's term, neither would deserve more than a few lightweight brickbats.

2. As for the fraud and utter corruption of our?? banking system from top to bottom, I think it would be very difficult to make a case that the Fed had eased too much. For all I know the source of what (actual) funds were being flung out may well have been recycled dollars coming back from China, India or a host of others holding surpluses from our trade deficit. Corruption is simply corruption as we saw with the S&L scam that went on for nearly a decade after being spotted, the Enron affair, and the current mess.

3. Well, I suppose he'd have to argue with those who are just as certain that an expanding, modern economy requires a somewhat steady increase in the money supply along with the occasional tap on the brake.

The alternative it seems, and the reason we and most advanced nations have a central bank, would be wild swings between feast or famine that would destroy viable enterprises that lacked the depth to survive even a short drought and a waste of manpower. As no one can work "twice as hard" the best use of labor is a fairly stable economy that allows folks steady employment.

Consider: Just now our biggest "cost" is the lost productivity of 15 million un- or under-employed working folk. Tally up the wages, and as every job produces more than the wage cost which is then profit and operating overhead for their employer and it's a big number.

Chris Graves

Jack, as for your comments just above characterizing Hayek and Mises' theories parroting their line to the point that their views have become mindless or even lies, such a response is simply an ad hominem attack. It fails to deal with the substance of Hayek's analysis.

Thanks for your reference to Steele's work on Hayek and Keynes' views on capital. I shall take a look at it when I can locate a copy of it. If you take a look at G.R. Steele's discussion of Hayek's theory of capital, his criticism of Keynes' views on capital seem to bear out my comments above. Here is a link to Steele's discussion (see page 13 and thereafter):

http://www.lancs.ac.uk/staff/ecagrs/hptc.pdf

As Hayek said of Keynes' *General Theory*: "Beyond its contribution to the overall level of expenditure, capital is an unwelcome intruder into the analysis portrayed as a General Theory. All is reduced to the multiplier, with all its attendant problems."

Chris Graves

Correction to my last post. It should have been addressed to NEH.

NEH

Chris, As for "theoretical development", all theories develop in fits and starts (better known as the logic or illogic of theoretical development). There has never been a theory that was born full and complete from the mind of Man. This applies equally well to Newtonian Physics vis a vis Quantum Physics, the Theory of Relativity and the development of a Universal theory of Physics through to a "General Theory of Economics". As for Hayek's comment, this was but an observation on the impact of the variable of "Capital" within the framework of the "General Theory". Now, this "argument" by Hayek does not eliminate the "General Theory" per se, but requires a modification to the "General Theory". Such as the positions postulated by the Neo-Keynesians. Read Steele.

Jack

Chris: I think we end up again at the tension between intervention by our representative government and leaving all, (in my view -- being enslaved by) "the market". I'd certainly agree that most often "government" is too slow and perhaps too mindful, or not enough, of political pressures to respond to small or short term problems.

Let's consider one "market" for a moment. Oil for most of oil's history has been plentiful and had so little market power to increase price that OPEC was created. Until very recently oil remained in the $20 range that represents a reasonable profit for existing oil and might fall a bit short in terms of the costs of developing new oil. In short, we've never had to bid for oil in short supply. I don't know if the price of four times the $20 is a result of beginning to bid against actual supply shortages, but let's assume for the moment that is the case or soon will be the case. IF, it is the case, oil is likely to soar over a relatively short time -- a decade or less.

The problem of course is that of a nation, and world, so dependent on oil, needing perhaps 50 years to respond to either a shortfall or prices in the 100's.

We received our first wake up call when President Carter was in office. The warnings included America no longer being the captain of the ship in terms of producing one of its most crucial economic inputs. At that time we had 30-50 years to respond.

During the crisis we did respond with some intelligence with CAFE standards, lower speed limits and at least an attempt to put a small, demand limiting tax on gasoline. But the price of oil crashed and "the market" told us to waste our time opportunity and instead build the biggest fleet of gashogging SUV's and oversized P/U's the world has ever seen along with 50 million energy wasting homes, shopping centers and buildings.

Human intelligence of the 70's could have and did predict that, if not "peak oil" for the world, that the lines between supply and demand would sharply diverge at some time in the intermediate future and we could have and should have responded. Were America a corporation a CEO would be consider negligent not to assure future supplies of their number one resource for production.

Instead, we took our orders from "the market" and while the market will send us signals, in the case of oil it will come far too late for an orderly response.

That's why, instead of a VAT tax that would put a chill on all consumption of goods and services, I'd begin with an oil, BTU, or carbon tax. As we've legions of unemployed craftsmen, I'd intervene even further with direct employment to improve the energy efficiency of all of OUR government buildings, and offer strong incentives to do the same in the private sector.

I'm CERTAIN that I'd rile Hayek, but hey, he lived in an era a bbl of oil cost about 2 hours of min wage and we'd not even begun to address air pollution........... which, of course was begun, not by "the market" but by democratic action.

awfrey

Along those same lines, it should be noted that there should be some responsibility placed on the media, which tends to stir the pot with sensational language (in my opinion).

Check out this article from Fisher Investments analyst Mike Hanson: http://investingiq.wordpress.com/2010/04/19/sensational-economics/

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I agree with Jack that the duductibility of mortgage interest is grossly unfair to renters. And, the tax exemption on capital gains when houses are flipped could very well have been a factor fueling the inflation of the housing bubble

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Shelia

simply stimulating demand in the aggregate too little or too much is not the main concern if we are interested in stable and sustained economic growth as much as it is preventing the distortions in the production process as well as misallocation of resources among various markets. These distortions that give rise to bubbles that by their very nature cannot be sustained are precipitated by the central bank tinkering with the supply of money. If the money supply grows at predictable rates, then the price system is more likely to send reliable information to producers and to consumers about which goods and services are needed coupled with information about their continued availability.

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I'd have to disagree that derivatives are a "natural" outgrowth of anything, other than the schemes of those unwittingly or purposefully constructing the latest greatest Ponzi.

Looking back at what seemed to happen after we went off the gold standard (ha! when we could not own gold bullion or coins) with inflation and oil going through the roof, we might long for the good old days. But, it was a combo of WWII and Vietnam costs "hidden away" that made it impossible to maintain gold at $35/oz. In short going off the GS was a devaluation.

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