November 6, 2015

Meet Your Central Planners!

By In Blogs, Brian Jacobson

Meet one of your central planners: (thanks to @rudyhavenstein and Kevin McNerney for making me aware of this)

That’s Brad Sherman, a house representative from California (blame CJay) talking to Federal Reserve chairwoman Janet Yellen and the Federal Open Market Committee. The argument is right on par with Miss South Carolina arguing “people in the South Africas and such as the Iraq don’t have maps.” Compared to this guy someone should give her a Nobel Prize in economics. The argument reminds me of girls at a Christian college informing a sad lonely freshman that she prayed about it and God doesn’t want us to go out.  Apparently congressman and Fed Chairs are getting their monetary policy from messages in their alphabets cereal and it says the interest rate should be “oooooooooooooooooooooooooooooo,” O wait, maybe those were Cheerios. I thought for a second when he said “God’s plan is…” he was about to turn into a prosperity gospel preacher “for you to prosper, and not be sick. Amen?” This would explain how anyone ever thought it would be a good idea to have ZIRP (zero interest rate policy) for six years.

Get her in contact with Sherman's people and we have a candidate for congress. We can put her on the Education Committee, it's her passion. Or maybe land surveyors.
Get her in contact with Sherman’s people and we have a candidate for congress. We can put her on the Education Committee, it’s her passion. Or maybe land surveyors.

I imagine Rep. Sherman’s argument, which we may affectionately call “Shermans argument from providence,” is quite different from what the Westminster Divines called “the light of nature.” But its good to know the 28 year failed experiment in monetary central planning disaster that Greenspan kicked off is now treated with the respect and intellect it deserves. By the way, Sherman later tweeted “Don’t actually think God has an opinion on monetary policy, but if She did, She would agree that the FOMC shouldn’t increase rates in winter.” Like I said, he’s from California.

The worst part may be that the man in front of him doesn’t even crack a smile through this whole thing. As if nothing out of the ordinary has just been said, let alone cuckoo for crack.

Okay now for some actual comments on how crazy this actually is. Beyond the idea of using seasonal patterns to guide interest rate manipulation lets think about what we are actually talking about. We are talking about raising the short term interest rate from 0.00-25% to 025-50%. We are talking about a raise of 25 basis points after six years of ZIRP. For reference, during the build of the housing bubble the Federal Funds rate was at 1% for year. The historical average is 5-7%, during the Volker years that rate hit 22%. So for one, we are talking about an absolutely minuscule rate hike, so why the big fuss? Well there is actually a reason, and its funny in light of what Sherman argues about fall versus spring. The funny thing about this rate hike discussion is that it puts people like Rep. Sherman in funny place. Didn’t we have the great recovery under Obama? Isn’t everyone on CNBC yelling its a bull market and publicly flogging anyone who is a bear for more than a week? Isn’t being pessimistic unpatriotic? If the Obama-economy and the stock market are so fantastic why can’t they handle a twenty five basis points increase? Because they know it can’t. It is drunk with Zero Interest Rate and any rise will be the equivalent of a meth addict going cold turkey.

The truth is the market is unbelievably fragile. A couple weeks Janet Yellen simply gave press conference in which she intimated that the FOMC will consider raising rates at their next meeting and within the hour the Dow Jones Industrial Average dropped 300 points. Conversely when Marco Braghi of the ECB (European Central Bank) announced that they would be looking at expanding their Quantitative Easing and stimulus program the markets skyrocketed. So I don’t know that Rep.. Sherman’s analogy even works. A twenty five basis points rise will mean a pretty large correction in to stocks.

This is how utterly dependent it has become central bank monetary policy. People have been predicting for years now the Fed is just on the cusp of “”normalizing” interest rates and that lift-off from zero is imminent.Just to get in writing this time, I find it highly unlikely that we will see a rate hike in December. The Central Bank of China just cut their rates, the ECB is expanding QE (which is pretty much the same thing as dropping interest rates), and other central banks around the world are following. It seems unlikely that the Fed will raise rates precisely when other banks are cutting, especially considering how much they complain that a strong dollar is “killing” us. O, and Janet Yellen also refused to rule out negative interest rates, so that’s cool.

So let’s think about Sherman’s argument from providence and the Austrian Theory of the Business Cycle. It is interesting that winter must come before spring, isn’t it? That a seed must go into the ground and die before it comes up. Or that medicine taste bitter but candy is sweet. Or as the proverb say “a little sleep, a little slumber, a little folding of the hands to rest, and poverty will come upon you like a thief in the night” (Prov. 24:33-34) but the ant slaves all summer just getting ready for winter. Such is life. You produce, save, and then consume. If you mess up that order it goes poorly. Money is not a neutral thing in our economy. It cannot be manipulated and changed for your own convenience and desires without consequences.  You cannot print wealth.

This is also the Austrian cure for the boom and bust of the market. Yes, the bust is painful and the boom is a lot of fun but it is during the boom that is damage is being done to the economy. It is during the boom phase that interest rate manipulation causes the misallocation of capital and the distortion of prices, the bust is what corrects this. When there is an artificial boom in housing, we can’t say that we refuse to let housing prices go down or let sales drop, we need sales and prices to drop. We need capital and construction equipment and labor to be liquidated from that sector and go where it is needed. They price discovery to properly appraise the true level demand and price of intermediary factors.

This is why Mises compared the boom and bust from artificial interest rates to great builder constructing a home. If he thinks he has more resources than he does, because an accountant lied to him, he will build a much more elaborate and roomier house than if he had less resources. So he may start his project and have less resources than he thought and may not be able to finish the project. The sooner he finds out the better, and the easier it will be to either cut his losses or rearrange the project, or change the design. The sooner the builder knows the reality the easier and better the correction. The Fed’s answer has been essential to get him drunk, just liquor him up and hope he doesn’t realize he doesn’t have enough to finish the project until he grabs for another brick and finds himself empty handed. The drunker builders problem will not be the pain his hangover but the drunken stupor. The hangover is what purges the ill effects from his body, it is the painful but necessary correction. If easy-money policy has distorted prices, entrepreneurial confidence, and bid up factor prices beyond sustainable levels the answer cannot be even lower interest rates.

Janet Yellen needs to raise rates or we will be riding the ZIRP train into the next recession which will be bigger and worse than if she just bit the bullet and face the consequences of her disastrous policies. She needs allow price discovery, let the price of money to be set by the market. As to Rep. Sherman:

 

 

 

Written by Brian Jacobson

Brian Jacobson works as a quality technician for a manufacturing company in St. Louis, Mo where he lives with his new bride. He studied biblical and theological studies at Reformation Bible College under R.C. Sproul in Orlando, FL. He’s an Old-School Presbyterian who enjoys the simple means of grace, Machen, and living the high life on a budget. Follow him @briankjacobson on Twitter.