Ideology and What Matter
Dave Boaz offers links to a variety of Cato products on Alan Greenspan and the Greenspan legacy. What’s interesting is that there’s no consensus whatsoever. And yet, libertarianism is probably more prone to consensus-building than other ideologies. And of course people with progressive views disagree a lot about Greenspan’s monetary policies.
What’s telling here is that the Chairman of the Federal Reserve is the second most-important person in the American government. As Brad DeLong details in an excellent American Prospect article the Fed has incredibly sweeping powers over the economy. And those powers give the chairman leverage — and thus, in effect, more power — over other areas of policy. And yet knowing which broad ideological family someone subscribes to tells you very little about his likely views on monetary policy. But it’s a hugely important subject. Which I think tells us something about the bounded relevance of these ideological considerations.
23 Responses to “Ideology and What Matter”
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November 21st, 2008 at 3:18 pm
“…And of course people with progressive views disagree a lot about Greenspan’s monetary policies.”
But there agreement among those like Fleckenstein who predicted this fiasco: Greenspan sucked.
November 21st, 2008 at 3:39 pm
The powers of the Fed are greatly exaggerated. Greenspan abused them and the Feds power was magnified by a Mighty Wurlitzer of self interested cheerleaders for easy money but that’s over now.
Greenspan embraced irresponsible credit expansion and the resultant asset inflation and called it monetary policy.
Now the Fed is powerless. The only thing they can do now that would alter things significantly would be to monetize aggressively and destroy currency. When having to choose to enter one of two doors both of which promise great pain, in this case deflation or inflation, every rational person chooses inflation. At least you will be able to buy your food tomorrow is how the thought process goes. Or everyone would rather have some money, no matter how little buying power it has, rather than no money at all.
I’m not an Austrian School ideolog nor a gold bug. There is no answer as to how to solve the current crisis without stupendous amounts of pain lasting a long time. Even the severest critics of the system who are not among the nutters named above hold an absolute faith that our leaders will somehow save us. It’s far better to think of yourself now being swept up in a great historical tide that your powerless against. That is where our leaders are if they know it or not.
Perhaps I exaggerate. Perhaps it won’t be as bad as 1930. Maybe more like 1907. A quick spike down and a quick recovery. I hope so.
November 21st, 2008 at 3:44 pm
Libertarianism is a sick joke that was originally improvied by Ayn Rand.
Alan Greenspan who used to bang Ayn Rand would accept whatever that ersatz intellectual blurted out from her toxic mouth.
The Joke is of course on you – the American people.
November 21st, 2008 at 3:56 pm
I don’t see any rational for the view that “Libertarianism is more prone to consensus building than other ideologies.” Sure if define ‘libertarianism’ very very narrowly. But that would be true if defined ‘conservative’ very narrowly- Among conservatives who buy the Republican platform hook line and sinker, for example, one can probably get a great deal of consensus on most things. But that’s actually a small subset of conservatives.
The most famous ‘Libertarian’ of 2008, Ron Paul, thinks Greenspan sucks because he didn’t self abolish the Fed and return to the Gold Standard. Not sure that’s official Cato policy, exactly.
November 21st, 2008 at 4:25 pm
I agree with DTM and AJ. If anything, libertarianism is even less prone to consensus building than other ideologies.
Libertarians are pretty ideologically rigid, and every sub-group regards every other sub-group as a bunch of heretics.
It’s like the Judean People’s Front vs. the People’s Front of Judea.
November 21st, 2008 at 4:37 pm
Libertarianism is the simplest and most logically consistent of all political/economic ideologies. Consensus come pretty easily at the theory end. Of course when theory and ideology meet the real world compromise must be made.
For instance if your child is dying and your a broke libertarian showing up at the emergency room all good libertarians would think the best thing would be for the hospital to check your credit limit and give a thumbs up or a thumbs down to treating the little one. Not surprisingly said libertarian would grovel and beg to become a parasite.
November 21st, 2008 at 5:03 pm
It might surprise most that the Fed does not consider monetary or credit aggregate measurements when executing what is called monetary policy.
“My topic today is the role of monetary aggregates in economic analysis and monetary policymaking at the Federal Reserve. I will take a historical perspective, which will set the stage for a brief discussion of recent practice…” “It would be fair to say that monetary and credit aggregates have not played a central role in the formulation of U.S. monetary policy since [1982], although policymakers continue to use monetary data as a source of information about the state of the economy.” Bernanke from a speech delivered to a monetary conference in Europe in Nov. 06
How is it possible to conduct monetary policy without considering money you might ask. Well it will just give you a headache so do like the Cato boys do and pretend you know what monetary policy is.
November 21st, 2008 at 5:32 pm
rapier:
It isn’t that they don’t consider money. The Fed is certainly aware of the money supply. It’s that the purpose of monetary policy is to maintain low inflation with full employment. Not to ensure that there is any particular supply of money.
Gold-standard types and others who don’t like fiat money very much get very mad that the money supply inflates. Your argument is a proxy for that contention. But the rest of us don’t care how large the money supply gets, as long as we are meeting the twin goals of full employment and low inflation.
November 21st, 2008 at 8:40 pm
But the rest of us don’t care how large the money supply gets, as long as we are meeting the twin goals of full employment and low inflation.
Please be more precise with your words. I think you mean the twin goals of full employment and low rates of money devaluation. You cannot have the money supply get really big and also have “low inflation” because an increase in the money supply is inflation. Even if prices do not rise, increasing the money supply is the definition of inflation. Please do not use the term “inflation” as if it were synonymous with “rising prices.” It isn’t.
I also think that you discount the problems with inflation. Inflation does not simply devalue currency and cause an aesthetic pain. Inflation, when it devalues currency, decreases savings, because people will not save money if they cannot get a rate of interest better than the rate of monetary devluation. In addition, the new money makes it look as if more is saved than has actually been saved, causing people to invest too much money in enterprises that are not sustainable.
Increases in the money supply are what caused the tech bubble, and the countercyclical monetary policy that was used to try to cushion the blow of the tech bubble popping is what financed the housing bubble and the various financial instruments that caused our current mess.
Now the Fed is powerless. The only thing they can do now that would alter things significantly would be to monetize aggressively and destroy currency.
Which is what you think they ought to do? In any case, you have derided he Austrians for worrying about hyperinflation when the real problem that has come to us is deflation – yet, if we were to pass the policies that you seem to advocate, we would have hyperinflation, which is what the Austrians predicted. You seem to be saying that we are at a point where the economy will naturally deflate unless we choose policies that can only lead to hyperinflation.
I hate to point this out to you, but what you are saying is completely consistent with the Austrian school.
When having to choose to enter one of two doors both of which promise great pain, in this case deflation or inflation, every rational person chooses inflation.
Hyperinflation (which inevitably results in monetary devaluation, as the increase in the money suply is too large for productivity to keep up with) causes people to forego savings and dollar-denominated investments (as both would have to have huge payoffs to offset the decline in the value of money) and to focus all of their energy on consumption and on hoarding durable goods (or anyhting that actually retains its value). I don’t think that it is rational to choose the thing that will lead to the destruction of profitable investment.
At least you will be able to buy your food tomorrow is how the thought process goes. Or everyone would rather have some money, no matter how little buying power it has, rather than no money at all.
I question the idea that deflation would make people unable to buy food. Falling wages and unemployment would almost certainly be offset by falling prices (which usually occur with deflation).
The problems will occur if the government tries to manage prices so that we have to pay more for food than the market determines. (This would happen if, e.g. the government sets price floors). This is what happened during the early years of the Great Depression, and the eventual end result is that the government destroys food to keep prices up even when people are hungry.
November 21st, 2008 at 8:44 pm
Oh, and by the way, increases in the money supply occurred even prior to us getting off of the gold standard.
For one thing, there were the bills issued to help fight the Civil War. Much of the late 19th century deflation was likely a result of the earlier inflation used to fund the Civil War. This was able to happen because the government did not make these bills redeemable for gold right away, so that they could issue bills far in excess of the gold supply.
The other culprit was fractional reserve banking, which allowed banks to expand a small amount of commodity money (i.e. gold or silver) into a great deal of fiduciary money, by loaning out the same money several times. By fiddling with reserve ratios, the money supply could be increased until the people stopped trusting the bank and tried to pull all of the money out, at which point there would be a bank run.
Contrary to popular belief, there were a lot increases in the money supply during the 1920s and Herbert hoover did indeed try to use countercyclical monetary policy to stop the Depression. It was an utter failure, and many would argue that it made the problem worse by slowing the process of liquidation that had cured the earlier depression/recession of 1920-1921.
November 22nd, 2008 at 12:21 am
Glaivester -
You do have some interesting points to make, but please don’t try to make everybody converse using your Austrian obsessive’s dictionary. Matt, like most English speakers, uses the word inflation to mean rising prices (CPI or some analog thereof). That’s why the statement “Americans are worried about inflation robbing them of their purchasing power” makes sense.
If there’s a technical term you want to use, feel free to say “inflation in the sense of whoever.” But don’t tell us we’re confused because we use the word inflation the way everybody else does; we’re not confused, and we’re not gonna stop.
November 22nd, 2008 at 2:24 am
Inflation devalues wages earned in the past (savings) in favor of wages earned in the near future. It makes maintaining savings impossible, since they are in devalued currency, and forces them into the economy as investment. Wages earned right now are not as affected provided the workers have enough bargaining power to make sure they arise with prices.
So I can see inflation inducing policies as an appropriate response to an economic downturn caused by a lack of investment, and oversaving. The problem is that the current crisis was caused by too much investment and too much debt. What people like Krugman are proposing are policies that woudl hit hardest the one group of people who did things right in the last twelve years, the savers. Even if the economy could be “fixed” in this way, which I doubt, it would not be worth it for the moral hazard it would create.
Just like members the generation that lived through the Great Depression would often go to absurd lengths decades later to keep down their expenses, if we continue to adopt hyperinflationary policies we won’t see any Americans save money at all for decades afterwards. We would be lucky to wind up with an economy similar to that of Argentina.
November 22nd, 2008 at 3:50 am
Though I do think you would make a good Secretary of Something-or-other, I think we have learned to be wary of Gallegos in high office.
November 22nd, 2008 at 12:28 pm
Ed – I think that you have a correct understanding of the situation. I might have one or two technical disagreements with using the phrase “too much investment,” but your general point is correct.
ask2 -
But don’t tell us we’re confused because we use the word inflation the way everybody else does; we’re not confused, and we’re not gonna stop.
It’s not that you are confused so much as that I think that using inflation as a synonym for rising prices is a habit that was promoted by people who wanted to disconnect in people’s mind the relationship between the money supply and currency devaluation. I know that you know what you mean, but I think that the use of the term “inflation” in that way leads to sloppier economic thinking, and I think that it has been encouraged by those who want sloppier economic thinking.
December 16th, 2008 at 11:23 am
Tokyo: Japan is ready to offer $106 billion to the International Monetary Fund if it needs extra funds to help emerging economies, a Japanese government source said on Thursday, as a central bank board member warned the financial crisis has
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