Love of Liberty : business cycles

Is it Greenspan's Fault?

ChrisR — Sun, 27 Jul 2008 23:25:00 GMT

Greenspan's book has been released, and it just so happens the recession that he helped create is occuring at the same time. I've been reading a lot of complaints about the many mistakes that Greenspan made as Fed Chairman. But how much blame does he really deserve? Is it all Greenspan's fault?

I would answer the question in the following way:

Instead of blaming one individual, perhaps we should look at the institution itself. If we blame one individual's decisions, then we end up talking in circles about "mismanagement." But a more important question is: "Should the economy be managed at all?" and "Is that even possible?"

History says no...as does the Austrian Business Cycle Theory.

As far as bad decisions that Greenspan made......I think the mistake (of any Fed Chairman) begins at the moment the Fed fixes interest rates, and the market rate is abandoned. That is when the crisis begins. Even though we call the return to reality a "crisis," the real crisis is when the price fixing and malinvestment (i.e., boom) occurs. I think everything else is just talk. If the market set interest rates, it would be impossible to have conversations about "mismanagement," and who has a better "plan."

I think Ron Paul has set an excellent example on how to think about these matters. You never hear Dr. Paul blaming specific individuals at the Fed. In fact, if I recall correctly, he's said several times that we can't place all of the blame at Bernanke's feet. Dr. Paul has pointed out that the mess we are in is an accumulation of trying to centrally plan an economy. I've never heard Dr. Paul blame a specific Fed Chairman by name. Instead he challenges the institution itself.

NY Times on Bernanke's Toughness

ChrisR — Thu, 10 Jan 2008 15:12:00 GMT

The New York Times has an article titled For Bernanke, a Question of Toughness. Here is an excerpt:

Is the Federal Reserve’s chairman, Ben S. Bernanke, too nice for the job?
That’s the view of many on Wall Street, who argue that with the stock market falling, unemployment rising and the economy flirting with a recession, Mr. Bernanke should be dealing with the situation more aggressively than he has so far.
Their quarrel is partly with the Fed’s reluctance to cut interest rates even more than it already has...
“Personally, I think we should be at 3 percent right now,” said James Glassman, a senior economist at JPMorgan Chase. “You ask anyone on Wall Street, ‘If Bernanke cuts to 1 percent or 2 percent or 3 percent, would that fix the problem?’ Most people would tell you that would certainly start the healing.”

It's interesting that cutting rates would somehow constitute Bernanke as acting "tough".

Major malinvestments have been made over the last 20+ years, thanks to the artificial rates and monetary inflation of the Federal Reserve. A recession is the liquidation of those malinvestments. A recession ushers in the return to a healthy economy. How can cutting rates and creating further imbalances be seen as acting "tough"?

If Bernanke really wanted to act "tough", he would remove all interventions, and let interest rates rise to the market level. Then the healing process would truly begin.

Determining If The Recession Has Begun

ChrisR — Thu, 27 Dec 2007 15:02:00 GMT

In this article from Fortune, the author tries to make the case that you don't know you're in a recession until months after it starts. The author writes:

Investing successfully is about looking ahead, while determining whether we're in a recession involves looking behind. Way behind. We won't know that a recession has started until months after it's begun.

I will agree that investing successfully is about looking ahead. This is true.

However, I disagree that in order to determine if we are in a recession, we have to look behind.

The writer then goes on to state at which point he considers a recession to have arrived:

Now, exactly what is a recession? Opinions vary. Many people think that a recession is defined as two consecutive quarters in which "real" gross domestic product - GDP adjusted for inflation - declines. If you accept that definition, which I don't, you don't find out that a recession is underway until six months - two calendar quarters - after it has started. (Sorry, too late!) If you use what I consider the proper definition - a declaration by the National Bureau of Economic Research's business cycle dating committee that the economy has peaked - you may have to wait even longer. Nevertheless, I prefer the NBER version because it's the collective opinion of seven savvy people rather than a rote formula.

If you use either of the two above methods, then yes, you do have to look behind to see if we are in a recession. But I would advise against relying on government statistics to find out if the recession has arrived.

A recession is a natural consequence of an artificial boom. Without the boom, there would be no recession. So the starting point is the boom.

Artificial booms are created by an inflation of the money supply. The Federal Reserve, through the process of holding down interest rates below market levels, increases the money supply by creating money out of thin air. This new money sets in motion major malinvestments in the economy.

A recession is the liquidation of the malinvestments created during the boom.

If you understand this, there is no reason to rely on government statistics, or the opinion of "seven savvy people." All you need to do is ask a simple question: "Are the malinvestments being liquidated?"

If the answer is "yes", then a recession has come to the rescue. The cure to the artificial boom has arrived. Capital moves into more productive and efficient hands, and the time becomes ripe for investing in the markets. If the answer is "no", i.e., the malinvestments of the boom are not being liquidated, it would be wise to stay away from the markets.

No need to look back (or way back)...The answer as to whether or not the recession has arrived is here and now.

Greenspan On A Possible Recession

ChrisR — Fri, 14 Dec 2007 01:41:00 GMT

Alan Greenspan gave an interview to NPR News' Morning Edition. Here is an excerpt (via AP):

Former Federal Reserve Chairman Alan Greenspan says the odds the U.S. will fall into a recession are "clearly rising"...
He said he felt this way because of the slowing pace of growth. "We are getting close to stall speed," he said. "We are far more vulnerable at levels where growth is so slow than we would be otherwise," he added. "Indeed, it's like someone who has an immune system that's not working very well is subject to all sorts of diseases and the economy at this lever of growth is subject to all sorts of shocks."

Mr. Greenspan's immune system analogy implies that the economy is healthy during the boom...that the economy is working well during the boom.

This is not true.

For it is during the boom that damage is being done. Malinvestment occurs during the boom.

Mises wrote, "The boom produces impoverishment." By this, he meant a boom created via the inflation of the money supply. With sound money, a boom in one particular industry would not be cause for alarm for the entire economy.

A credit-induced boom is not the healthy state of an economy, and recession is not a disease. The recession is the cure; the return to a healthy state of affairs.