tag:blogger.com,1999:blog-8897997766931633186.post8932749257184557335..comments2024-02-14T03:21:37.506-05:00Comments on Monetary Freedom: In Defense of the Greenspan (and Bernanke) PutBill Woolseyhttp://www.blogger.com/profile/06330232724290161369noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-8897997766931633186.post-49984223050065303032015-12-12T11:44:25.416-05:002015-12-12T11:44:25.416-05:00I really want to appreciate this mind blowing blog...I really want to appreciate this mind blowing blog given there is so much updates here of everything, I usually keep close eye on the fundamental parts, but I prefer to stay away from Stock trading, as I am more of currency trader. I have to pay very low charges thanks to OctaFX broker with their small spread of 0.2 pips for all major pairs while there is also swap free account option available to be used for anyone without restrictions.Sheranoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-50985624120962334482010-02-04T15:29:16.511-05:002010-02-04T15:29:16.511-05:00I didn't.I didn't.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-29747087325505009822010-02-04T12:58:56.761-05:002010-02-04T12:58:56.761-05:00Bill,
Did anyone ever notice that Greenspan has 6...Bill,<br /><br />Did anyone ever notice that Greenspan has 6 fingers on his left hand?!Tom Doughertynoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-45460070682024937492010-02-04T12:24:31.536-05:002010-02-04T12:24:31.536-05:00In my opinion, you're quite right, Bill. I tha...In my opinion, you're quite right, Bill. I thank you for pointing this out, because I have criticised the "Greenspan Put" from time to time.<br /><br />Enacted properly, the Greenspan Put merely prevents monetary disequilibirum following a bursting asset bubble. The "greater fools" suffer their losses and a reallocation of resources begins, but it is unlikely to manifest as anything more than a minor recession.<br /><br />Basically, the Greenspan Put enables the financial system to expand the money supply as it would if financial institutions issued their own private banknotes (and had full control over reserve requirements, etc).<br /><br />Certainly, the Federal Reserve should not be attempting to pop asset bubbles. Even should we suppose its administrators competent and trustworthy enough resgonise bubbles, its power over the money supply is too blunt an instrument to perform such delicate surgery.Lee Kellynoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-59738603033242198742010-02-04T07:19:06.386-05:002010-02-04T07:19:06.386-05:00Thank you for your comment.
To the degree the &qu...Thank you for your comment.<br /><br />To the degree the "Greenspan Put" means responding to a large drop in stock or home prices by "flooding the economy with liquidity," I find it undesirable. As I explained, if a large drop in asset prices results in people choosing to hold more money, then the Fed should accommodate this by increasing the quantity of money. Failure to do this will lead to falling real expenditures and unless prices are unrealistically flexible, a falling volume of production and employment. An alternative way to stating the same thing is that if the natural interest rate falls due to a drop in asset prices, which would be caused by increased saving or reduced investment (spending on capital goods) the Fed should lower the market interest rate. <br /><br />The Fed should do what it always should do--adjust the quantity of money to the demand for money which is the same thing as adjusting the market interest rate to the natural interest rate.<br /><br />The Fed can maintain a steady growth path of nominal expenditure in the economy. If bank failures (all the way to collapse, I suppose) should result in reduced productive capacity, largely through a shift in the composition of demand (who buys what goods and services,) the result will be shortages of many goods and services and inflation.<br /><br />Commercial banking (which is the only sort that deserves the name,) is financial intermediation. Money is borrowed in order to lend. That model is infinite leverage. And it is fragile. Because of deposit insurance, there was no danger that commercial banks would collapse. <br /><br />The broker dealers on Wall Street, on the other hand, had no deposit insurance. They were undertaking commercial banking business on the side (selling very short commercial paper and funding portfolios of mortgage backed securities.) Losses on that banking operations meant that they had too little net worth to operate their core trading operations. They can only trade if those they trade with are confident they will complete the trades. <br /><br />I am sure that the broker dealers trading operations create some value. The hedge funds they deal with certainly need them. But it is not central to the production of goods and services. Most expenditure is funded from current income. All of it could be. And the boring old commercial banking system can shift funds between borrowers and lenders, though perhaps not as effectively Wall Street. <br /><br />In my view, the "bailouts" were "necessary" to avoid losses to the politically connected. And the rest was mostly rationalization.<br /><br />If there were no deposit insurance, then rapid bankruptcy for financial firms would be more important. My understanding is that Lehman's trading arm was allowed to operate, and so, I am not sure that there was a real problem.<br /><br />Let me say it in another way. The financial "crisis" was that Goldman Sachs would have been next. Maybe, or maybe not, but that was the fear.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-84818817413378450692010-02-04T00:00:37.855-05:002010-02-04T00:00:37.855-05:00Thanks for your reply. Still, there seems to be a...Thanks for your reply. Still, there seems to be a general perception that the financial system--especially the banking system--is very fragile, precarious, unstable, leveraged; that if a few large institutions failed, the whole system might collapse. Your prescription for "expedited bankruptcy" may be unrealistic; the legal system may be inherently incapable of dealing efficiently with large bankruptcies. Are you saying that if the Fed flooded the economy with lots of extra liquidity, we could (for a while, at least) do without the (largely collapsed) banking system, without harm to the general ecomony?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-60847777540044780712010-02-03T17:32:50.733-05:002010-02-03T17:32:50.733-05:00Thank you for your comment.
Yes, I think that rec...Thank you for your comment.<br /><br />Yes, I think that recession can be avoided in the wake of the collapse of an asset bubble even though particular investors (speculators) are fully allowed to suffer losses.<br /><br />There is never any need to bail out institutions that are Too Big Too Fail. There may be a need for expedited bankruptcy, but it really wasn't necessary over the last few years.<br /><br />"The greater fool" plays a role in an asset bubble. Clever speculators buy into a bubble planning to sell to a greater fool. Those left when the bubble pops are the "greater fools."<br /><br />If there really was no asset bubble, and the price of some asset sharply decreased, then those suffering losses made entrepreneurial errors. Moral blame isn't appropriate, but they should still take their losses. <br /><br />To the degree there was an asset bubble and those left in the role of "greater fool" were "unlucky" in the grand casino, then they deserve their losses. For example, when someone goes to Las Vegas and loses their home, they were unlucky, but they deserve their fate. Of course, it is really worse because some of those who were "unlucky" knew that someone would take the loss, and they planned for it to be some "greater fool." The joke was on them.<br /><br />I do pity those who really believe that past price appreciation should be forecast into the future and so provide a reason to invest. I feel like we economists have failed in our jobs as educators. There are too many naive investors.Bill Woolseyhttps://www.blogger.com/profile/06330232724290161369noreply@blogger.comtag:blogger.com,1999:blog-8897997766931633186.post-72205876968423306922010-02-03T14:24:56.810-05:002010-02-03T14:24:56.810-05:00"[I]t is possible that a sharp decrease in as..."[I]t is possible that a sharp decrease in asset prices and net worth [in the wake of the popping of an asset bubble] may result in an increase in the demand to hold money. . . . To avoid monetary disequilibrium, the Fed must increase the quantity of money more than usual to meet the temporarily increased demand to hold money."<br /><br />Is it your view that this increase by the Fed in the quantity of money would generally suffice to avoid a recession in the wake of the collapse of an asset bubble, even though particular investors (speculators) and lenders were fully allowed to suffer losses? Would there never be any need to bail out institutions that were "Too Big to Fail"? (By the way, I think you should delete the moralizing reference to "fools": maybe the investors [speculators] and lenders suffering losses were *just unlucky*.)Anonymousnoreply@blogger.com