Greenspan on 60 Minutes - I call BS

[Zygote]

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let me rephrase: within the confines of "given the existance of the fed" what is your opinion on the best action coming up?

i.e. no rate drop, 25 bp, 50bp etc.?


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At worst they should leave rates flat. At best they should raise them.

bailing out domestic unions and businesses should not be a consideration they make.

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and do you get the distinction of my definition of bailout vs. no bailout?

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Yes, but do you see why the principle of the one being bad resonates to the other because the underlying problem is the same?

[adios]

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to me there is a diference between a bailout (i.e. saving thos who made poor investments) vs. "managing the economy" which would be attempting to increase consumption.


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Actually lowering the Fed Funds rate isn't a bailout nor is it an attempt to increase consumption. The Fed has control over the money supply and the Fed controls the money supply via the Fed Funds rate. Applying the Quantity Theory of Money:

Quantity Theory of Money

the Fed anticipates changes in GDP and the velocity of money to affect interest rates such that inflation is contained within a desired range. Milton Friedman wrote an article in the Wall Street journal about 4 or 5 years ago explaining what the Fed does and some of the challenges it faced in the nineties with unanticipated rapid increases and declines in the velocity of money.


The problem some mortgate lenders are having is getting short term funding for their loan portfolio. They make their money by leveraging the spread between long term and short term rates. Lenders doing conforming loans are having no problems basically. Lenders doing non conforming mortgages are another story.

[DcifrThs]

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to me there is a diference between a bailout (i.e. saving thos who made poor investments) vs. "managing the economy" which would be attempting to increase consumption.


[/ QUOTE ]

Actually lowering the Fed Funds rate isn't a bailout nor is it an attempt to increase consumption. The Fed has control over the money supply and the Fed controls the money supply via the Fed Funds rate. Applying the Quantity Theory of Money:

Quantity Theory of Money

the Fed anticipates changes in GDP and the velocity of money to affect interest rates such that inflation is contained within a desired range. Milton Friedman wrote an article in the Wall Street journal about 4 or 5 years ago explaining what the Fed does and some of the challenges it faced in the nineties with unanticipated rapid increases and declines in the velocity of money.


The problem some mortgate lenders are having is getting short term funding for their loan portfolio. They make their money by leveraging the spread between long term and short term rates. Lenders doing conforming loans are having no problems basically. Lenders doing non conforming mortgages are another story.

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in effect, the fed conducts open market operations to directly control the supply of money.

those changes in the supply of money determine the rate at which banks can get short term funding.

banks then loan that money out (on the long end) and make the spread you referenced. their liabilities are short and highly sensitive to the fed funds rate and their assets tend to be long dated.

some direct consequences of the fed's actions are three fold, 1) affects amount individuals choose to deposit (or keep on deposit/savings) in banks vs. consume today and 2) affects the rate at which companies can borrow on average (lower base rate=lower overall average rate of borrowing), and 3) affects the rate at which individuals can borrow directly to finance current consumption.

when the fed lowers rates (by buying securities from member banks), one of the direct assumed impacts is an increase in the rate of consumption via borrowing and by increasing the desire and ability to consume today.

the reason that is a desireable end for the fed (whose mandate is to manage growth vs. inflation) is because consumption accounts for 2/3rds of gdp.

problems at mortgage lenders are onet hing. runs on banks (in britain's northern something bank) and huge issues regarding the bank's abilities to borrow from each other are a very bad indirect affect of this subprime meltdown (lenders on non-conforming loans, the performance of securities based on those loans, and the resulting mistrust and insecurity regarding potential losses and risks).

just thought i'd add some thoughts there since i think you can view the fed lowering rates, at least in part, as an attempt to spur consumption.

Barron

[Zygote]

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Actually lowering the Fed Funds rate isn't a bailout nor is it an attempt to increase consumption.

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i mustve missed/didnt understand the part where you showed this to be the case.


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Applying the Quantity Theory of Money:



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Quantity theory of money does not represent the real world. Read http://www.econlib.org/library/mises/msTContents.html