In another online forum I came across this absolute garbage a Keynesian wrote, in reply to another person.
"- The correlation between interest rates and the proliferation of subprime loans is roughly -.49. Subprime mortgages only started skyrocket at around 2004. This is when, you will notice, the interest rate started going up. Suprime loans then continued to increase in volume well until 2006, even though the interest rate was hanging out around 5% at the time.
Now, moral hazard. During the S&L bailout, the government saved the failing institutions but also instituted heavy regulations on those institutions once the crisis was over, and also took over large parts of some firms. That’s the incentive for companies to behave: if they screw up, the government will regulate them heavily and take over some of their offices.
As to your general description of monetary policy…the federal reserve does not set interest rates. The Open Market Committee merely buys/sells in such as a way as to manipulate interest rates according to the laws of supply/demand. But that’s just a quibble, really, nothing to concern yourself over. The real problem with what you wrote has to do with the part about “borrowing over saving”. The interest rate merely determines the amount of demand for money; it does not cause people to save less, it merely causes them to borrow more. If a businessman makes 100k a year, he’s not going to save any less of that money, he’s merely going to borrow more money to expand his business. That said, very low interest rates are dangerous because they lead to too much money in the market, causing inflation. But inflation was not a problem during the Greenspan era, when rates were at 1%; the problem was that this easy credit was being invested and used incorrectly, known as “malinvestment”. Monetary policy simply cannot cause malinvestment or bubbles in the long run, due to the neutrality of money. As I pointed out in another thread, while malinvestment opportunities might increase in number due to cheap money, that does not mean cheap money causes malinvestment, anymore than an increased population (and therefore an increased number of murders per year) causes murder. Indeed, what we should be looking at is rates of malinvestment. And as mentioned earlier, the rates bear little correlation to monetary policy.
In other words, if monetary policy is going to distort market signals, it’s only going to do so with regard to borrowing/lending money, not how that money is spent/invested. Malinvestment is affected by fiscal policy, or by the nature of markets themselves. That is, markets tend to “stick” or “pull” towards one direction or another absent any outside force; so, when they’re doing well, they do REALLY well, but when there’s a slump, it’s a HUGE slump. You have huge, swinging parties in Wall Street followed by a bleary-eyed morning."
Now, he is accurate on his first point about so called sub-prime lending. But the rest can be shredded to pieces
How do one actually go about measuring the rate of malinvestment?
In any case I would agree that there is no one-to-one relationship between “cheap money” and “malinvestment”, as he puts it. If there was, even the laziest empiricist would be able to establish high correlation, i.e. “causation”; provided of course “cheap money” and “malinvestment” were easily measured [:S]
Indeed fiscal policy = malinvestment. What else could we call coercibly funded spending? I’ve always thought it strange how erecting bridges and pyramids, or just simply digging holes in the ground, goes from being a bad thing on day one to a good thing the second day all because of “animal spirits” and “the natural tendencies of markets”. The truth is Keynes never understood markets as other than black boxes, and could thus never prove real causation.
That doesn’t remove the incentive to behave as poorly as possible and abscond with as much money as possible, in as short a time as you can get away with it.
That’s just being silly. They don’t “set”, they merely “manipulate”, which is to say their actions determine in one way or another, the prevailing short term rates.
Must be an idiot. If I can earn a relatively risk-free 8%, I’m certainly going to sock more into savings than I would if the rate is 2%. Conversely, if the best rate at which I can borrow is 8%, I’m going to borrow much less than if the rate were 2%. This is elementary.
Someone needs a primer on “malinvestment.” It is not a qualitative, value judgment. The very idea, at least in Austrian terminology, is inextricably tied to time-preference.
LOL. As if money that is borrowed is not (almost) immediately spent? If more money is borrowed, that money finds its way in to the system, and affects the prices of the goods and services on which it is spent. This immediate- to short-term rise in prices then causes more land/labor/capital to be allocated towards the production of these goods and services. Moreover, interest rates are market signals, as the price of present goods in terms of future goods.
You don’t change supply or demand curves for real credit when you alter the interest rate by inflating. Overall “credit” increases appear to be a supply increase (greater supply at lower price), but using the old supply curve (representing real saving) and looking at the new price on that curve, the quantity of real savings supplied to the market will obviously decrease as the price does.
The market price of credit does not match the equillibrium price of demand and real savings. The further these two mismatch, the more unsustainable investments will be made. Trying to keep this up with greater amounts of credit, eventually, interest rates hit 0 and artificial credit cannot be created or hyperinflation sets in.
This whole analysis is wrong because it ignores both real savings rates and price inflation. Has he looked at producer prices in the times he speaks of?
He is right that the Fed doesn’t set interest rates. They do push the hell out of them to get the rates where they want, but they don’t actually set rates as some seem to suggest.
