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Fed "Protection"?

 
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jabailo



Joined: 20 Mar 2006
Posts: 1273
Location: Kent (East Hill), WA

PostPosted: Sun Aug 19, 2007 9:53 am    Post subject: Fed "Protection"? Reply with quote

My E-mail response to Washington Post regarding

Fed Chief 's Measured Response to Crisis
http://www.washingtonpost.com/wp-dyn/content/article/2007/08/18/AR2007081801220.html

Quote:

Why is the Fed protecting markets...aren't markets supposed to be free?

The current behavior is based on reality -- overpriced stocks such as AAPL, GOOG, and MSFT have too much capital tied up in them and need to be deflated. That was happening until Bernanke stepped in to muddle with it.

All he's done is given false optimism and pulled investors into bad long term stocks.

I thought at best Bernanke would as a bad as Greenspan. Sadly, he's worse!
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brian-hansen
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Joined: 17 Mar 2006
Posts: 712
Location: Oregon

PostPosted: Tue Aug 21, 2007 4:13 pm    Post subject: Re: Fed "Protection"? Reply with quote

While you may or may not have reached valid conclusions about what the
Fed should do, the value of Microsoft, and the quality of current and past
Fed chairmen, I find your premise quite faulty.

Quote:
aren't markets supposed to be free?


The US has not had a free market for a very long time, and rightly so.
Unregulated capitalism leads to a vast array of unpleasant, counter-
productive, and heavily-documented effects, including wild boom/bust
cycles, monopoly control of vital resources, corruption, tainted foods, etc.
Think depressions. Think Robber Barons. I'm sure, together, we could list
others. We live in a society with a regulated market. We could argue,
I suppose, where the regulatory line should be: should drug companies
be required to list side-effects of their medicines, for instance; but as
far as Laissez-faire goes, its been tried and it doesn't work. If you want
to tie it back to our founding documents, it doesn't "promote the general
welfare".


[rant about the word "supposed" moved to "turns of phrase" forum]


Last edited by brian-hansen on Sat Aug 25, 2007 12:40 am; edited 2 times in total
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jabailo



Joined: 20 Mar 2006
Posts: 1273
Location: Kent (East Hill), WA

PostPosted: Fri Aug 24, 2007 3:56 pm    Post subject: Reply with quote

Quote:
The US has not had a free market for a very long time, and rightly so.


1st clause: agree
2nd clause: disagree

I maintain that is it is government which maintains and protects the upper classes and entrenched businesses, when the free market should be allowing the rise and fall based on smarter choices, better technologies.

Right now there is demand to "save" the housing, DOW stocks, big technology, agribusiness and energy companies.

I say, let these fall, so newer companies in alternative energy, nanotechnology, linux, web 2.0 can have access to capital bottled up in these non-productive investments.

I lay much of the "dot com bust" at the feet of Greenspan, who kept credit at 6% when it should have been 2% -- prompting a big pullout when return on money exceed that of stocks.

Also, the Great Depression in part was prolonged because capital was not flowing fast enough to new industries like aerospace due to restrictive policies by the Roosevelt administration.
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brian-hansen
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Joined: 17 Mar 2006
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Location: Oregon

PostPosted: Sat Aug 25, 2007 1:28 am    Post subject: Reply with quote

jabailo wrote:
I maintain that is it is government which maintains and protects the upper classes and entrenched businesses, when the free market should be allowing the rise and fall based on smarter choices, better technologies.

Right now there is demand to "save" the housing, DOW stocks, big technology, agribusiness and energy companies.

You make a good critique of one of the problems with government
(I call it "the problem of picking winners"), but I think you have a
profound misunderstanding of what the Fed is.

The Fed represents "big money" so directly, that "government" barely
plays a role in its decisions. I remember a young friend first learning
about the Fed and wondering what it was and how it worked. By way
of teaching him, I asked 2 questions: 1) why does the Fed lower
interest rates? and 2) why does the Fed raise them?

The answers: 1) because they have to, and 2) because they can.

The Fed is not made up of people who want money, either to buy a
house, or to invest in a new technology. It is made up of the people
that *have* money and their representatives. They want interest rates
to be as high as possible, consistent with there still being a market of
people and businesses wanting to borrow.

jabailo wrote:
I say, let these fall, so newer companies in alternative energy, nanotechnology, linux, web 2.0 can have access to capital bottled up in these non-productive investments.


What about all those widows and orphans? (heartless bastard!) :wink:
(but seriously) I agree to a certain extent, but I'm a little unclear
as to the mechanism involved. I'm not sure I see a lot of new
investment in MSFT, for instance, and a drop in its stock price would
not "free up" capital, so much as destroy it. If MSFT and its ilk wanted
to free up the capital tied up in them, they could give dividends, or
do stock buy-backs.

jabailo wrote:
I lay much of the "dot com bust" at the feet of Greenspan, who kept credit at 6% when it should have been 2% -- prompting a big pullout when return on money exceed that of stocks.


I remember when credit was 2%. I remember my interpretation:
"nobody knows what to do with money." For years, Japanese banks
were lending money at 0%. I saw an economist lecture and say that
they obviously could not go lower (pointing out one of the limitations
of control -- what I guess you would call meddling -- by the central
banks). If there is deflation, then banks could, and I think should,
lend money at a negative interest rate.

As for the lag involved in dropping interest from 6 to 2%, again,
your interpretation will vary depending upon how you view the Fed.
As representatives of "Big money", I view the Fed as a pretty close
first approximation of the free market at work. I don't know enough
to be able to evaluate that lag. There are lags in every field: between
recognizing global warming, for instance, and doing something about
it. It seems to be a feature of our age that lags are getting shorter.

jabailo wrote:
Also, the Great Depression in part was prolonged because capital was not flowing fast enough to new industries like aerospace due to restrictive policies by the Roosevelt administration.


I didn't give any evidence of the ill effects of unregulated capitalism
because they are so widely and deeply documented, but I'd say that
this claim requires documentation if it is to be persuasive.
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