Greespan say's he doesn't know what he's doing, Trust me

Easy Al in a speech at a Jackson Hole WY confab said that "Uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape."

Oh, now you admit it Al. Thanks. You've allowed a cult to develop about your abilities to see the future, and mangage it. Now you are saying, oh never mind.

"Despite the extensive efforts to capture and quantify these key macroeconomic relationships, our knowledge about many of the important linkages is far from complete and in all likelihood will always remain so. Every model, no matter how detailed or how well designed conceptually and empirically, is a vastly simplified representation of the world that we experience with all its intricacies on a day-to-day basis. Consequently, even with large advances in computational capabilities and greater comprehension of economic linkages, our knowledge base is barely able to keep pace with the ever-increasing complexity of our global economy."

THe play this is getting in the press centers on Al's insistence that the Fed should not be bound by rules when setting policy. Rules which say if such and such happens then we will do such and such. Instead he insists that we have to trust his and other mens judgement. Judgements which determine policies which are among the most powerful in all government vis a vis effecting the lives of people and in fact the very nature of the economy and thus the culture.

Oh, I don't think he mentioned these men we are supposed to trust are unelected. Why should he? The most powerful meme in existence says that the Fed must remain 'independent' of politics and that its sphere is actually outside government. I recall zany Stever Forbes saying the goernment should get out of the way and let the Fed do its thing. The absurdity of this conception of the Fed and government itself is bizzare, yet almost universal. After all, matters of money are just to complex for the average citizen or even politician to undestand. Best leave matters of money to the High Priests. (This means you too DU'ers. You've been duped into thinking you cant understand this stuff. Your eyes glaze over when finance and money is mentioned. WE are reaping the rewards. The Federal Reserve sprang from a Progressive idea. It was long ago hijacked by other interests. Which was inevitable without scrutiny or understanding of its role)

Theer will be some fallout from this speech. Let's see how it plays.

To those not familiar with my rantings I say Al is the most irresposible centra banker of all time.

It's hard to listen to anyone who writes "say's".

Sez

I fully admit bad typeing and worse spelling, with little or no editing. Al Greenman and Wall St. and the Market Fundamentalists and globalizers have shaped a system which encourages the worst of our culture and is destroying everything we belive in.

Obviously my editorial weaknesses are more important.

but editorial weaknesses to distract and undermine an author's credibility.

why be so defensive when you can just fix the typo?

posts are completely irrelevant and meaningless unless they contain perfect grammar and syntax.

And needless criticism and rudeness such as yours is going to help our cause HOW? Please enlighten us all!

of incorect speling.

a wurthy coz if evr their wuz won.

...is a little different.

As I understand the Fed's role, it is supposed to be one of the many checks and balances offsetting an Adminstration's fiscal policy.

I took his speech to mean that the economic system and its complexity is not predictable enough to be hindered by policies the Bush Administration and/or Congress might consider, and as a warning shot to the Administration that they would likely mess things up far beyond what they already have if they try to regulate the Fed.

I agree with Greenspan that legislation is more often too black and white to tackle the grey that is the economic system.

Just my 1 cent worth. I need to save the other cent in case I get laid off.

This is not meant as an insult but I would like to know if Rapier has ever taken Macro Economics.

Later,
JM

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I like Dean. I would rather have a candidate in the pocket of the Ice Cream Lobby than the pocket of the Insurance Lobby.

Checks and balances were never a part of the Feds design. The only check on the Fed is congressional approval of the governors, and now the testimony of the chariman. (which for the most part has consisted of congress people kissing the ring of the great man) In 1913 fiscal policy, as we understand it now, was not on the radar screen. The original purpose of the Fed was to stabilize the banking system by improving the QUALITY of bank assets. Long ago that morphed into managing the quatity of those assets, and money and credit itself.


His speach first of all meant that econometric models are simply nowhere near good enough to use as a basis of setting policy. While common sense and complexity theory make this an obvious conclusion, thruout the financial world the myth of Greenspans use of models to 'manage' the economy thru monetary policy is an article of faith. That faith has had real consequenses. Simply put, astounding amounts of risk especially in interest rate derivatives has been discounted based upon a childlike faith in the Chaiman.

Sheilding monetary policy from the whims of politicians seems laudable. Inconsistent with representitive government perhaps, but understandable. Politicians always want easy money. The thing is that Al's reign has only been about easy money. (The money supply has doubled over the last 8 years. Meaning as many dollars have been created since 95 as were created between the nations birth and 1995)

I am not aware of any proposed legislation mandating Fed behavior. That was not what he was addressing in my opinion. Rather he was fending off critics who want Fed policy to be more rule based.

I don't disagree with his very late debunking of the validity of econometric models and understand his aversion to rule based policy. The deeper question is why now does he admit that the Fed is run by men, who make mistakes, using crude tools to try and understand the economy. He is demystifying himself and his institution long after the damage caused by the myth of his omnipotence has done its damage.

My still unproven soapbox stand is that the credit system is out of control and due for a massive accident. Al has been at the forefront of the morhping of the credit system from a real market into a speculative behemoth. In line with this analysis is the idea that below the still calm surface of the financial world vast danger lies. Vast enough to have consquenses rivaling the Great Depression.

I've had a few econonomic courses, long ago. I'll defend myself in this way. Milt Freidman, Noble Prize winner, just admitted that his theory of moneterism, a cause celeb among conservatives for a generation, thus making him famous and rich, was wrong. Never mind he said. He was greenlighted to debunk his theory after the GOP discovered the absolute wonder of profligate fiscal and monetary policy. It was apparant years ago the core of Freidmans theory was wrong. At least since the early 90s. I, a dilettante, was well aware of this and back in the murky DU archives I think I made mention of it.

...I was just curious. It was always my understanding of the Fed that their role was to offset/assist fiscal policy with monetary policy.

I am not quite clear, however, as to which definition of money supply you refer to when you say it has doubled. There may very well be a good reason for the doubling. First, if you refer to the creation of dollars in the supply, assuming all else equal, that would be the responsibility of the Treasury. If you are referring instead to an increase in money in M2 or M3, there may be a valid reason for it outside of the Fed based on the "rash exuberance" (to use a Greenspan phrase" in the stock market and mutual funds. I am not sure how that would be the Fed's responsibility or fault.

As for the credit collapse you speak of, I agree with you it is due, but I disagree as to why. I don't think Greenspan has as much to do with the issue as credit issuers, eager to make more money, relying more on an Enronesque system of fictional accounting and risk. Greenspan and the Fed set rates according to the size of M2 and M3 and monetary velocity. Lenders simply add their profits to the top of the base rate and use whatever tools and methodologies (possibly including chickenbones) to determine risk.

As for why he made this speech, he may want to preemtively remove the idea that the Fed knows all. The Bush Administration could easily point to the Fed as either the solution or the problem, and if things continue to go south, blame the Fed for Jr's failures. By admitting it is not an exact science, he removes/reduces the ability of the Bush/Rove battleship to point its turret in their direction.

In my own opinion, right or wrong, I think the Fed succeeds when the Governors are on the same page with Treasury. When Rubin was in Treasury, he understood how the capital markets worked. Appointing lackey CEOs in Treasury has been laughable and we see the result. O'Neill was bad enough, but Snow's claim to fame was not his financial knowledge, rather the fact he sold CSX to Carlyle group.

IMHO, Greenspan has had no choice but to be totally reactionary in the face of stupid Treasury fiscal policy made by do-nothing know-nothing MisAdministration officials.

Later,
JM

THe money supply, by any definition, M1,2 or 3, is not directly under the control of the Fed. Money is created by the banking system. This is Econ 102 and I sort of hate to get into it. The idea of how fractional reserve banking creates money was once controversial, in the 1880's. Now it is absolutely understood to be true, without question. It is the role of banks in creating money which played a part in the creation of a central bank.

What isn't understood now is how the non bank credit system also creates money. A massive flood of money. The mechanism of securitiation of all kinds of loans, from mortgages to guitars and boob jobs has displaced banks as the primary source of credit and money growth. The thing is that banks have been partners in this growth. When you hear the term derivatives you should know that the vast majority of them are based upon credit derivatives and that the major money center banks, particularly JPM, have on their books trillions of dollars of said trades. The Fed member banks ike JPM are the conduit thru which the new credit mechanism has grown.

This has been done with the blessing and encouragement of Al. Al has insisted that total risk has been reduced by this, which is a logical fallacy. Risk in derivatives is simply transfered. Total syatematic risk is not reduced. Credit growth over the last 15 years has soared relentlessly. All credit has risk. Thus it follows that risk has been increased.


Rubin was also a main author of this system. It is the Wall Street system. An abonimation of Democratic principals. To my mind your making a bad partisan error embracing Rubin. I'm sorry but my analysis is essentially non partiasn. Bush of course enhances all the bad trends but the meme that has it that both parties are the same holds a lot of water when it comes to monetary policy and finance in general. Every politial and cultural trend liberal/progressives abhor spring in large part from the nature of finance.

As to the Treasury, they do not make fiscal decisions. Congress does. Your idea that the Fed is a balance to the Treasury is off the mark.

To my mind there is a disaster in the making. Think about it. Credit is and has been growing 2 to 3 times faster than GDP. It doesn't take a Phd to understand this cannot go on forever for eventually the debt will outstrip the ability to pay. Debt is after all a drag on future earnings.

We cannot borrow and consume our way to prosperity. Need I mention that most of this new credit is for consumption. Bank lending for commercial and industrial use is cratering.