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Can you show me something from a few central banks saying that they were trying to force savers into riskier assets? I agree that can be a consequence (althoug

Can you show me something from a few central banks saying that they were trying to force savers into riskier assets? I agree that can be a consequence (although it isn't necessarily so; many people just leave their savings be), but I don't believe it ever was a goal. And regardless, I think it's a big leap from "some savers wanted higher returns" to "let's throw a lot of money into things without due diligence or a coherent success story". Which unarguably happened lately. E.g., all the "smart" money invested in FTX, which we now know to be an absolute clown show. Other, better choices were possible. Including the supposed experts saying, "Sorry, we can't deploy this capital for you, as we don't think there are good opportunities in the current market conditions."

hervature 4y ago
Here you go: https://en.wikipedia.org/wiki/IS%E2%80%93LM_model https://en.wikipedia.org/wiki/IS%E2%80%93LM_model From the article: I(r) represents business investment decreasing as a function of the real interest rate Businesses invest less as the rate increases. That's equivalent to businesses save less as the rate decreases.
- wpietri 4y ago
  That's a theoretical model of a consequence. I never denied the consequence, I denied that this particular consequence is the goal for central banks. Which is why I asked for something different than what you provided.
  - 1123581321 4y ago
    Central banks are famously cryptic. If you’re looking for a smoking gun, this 2020 statement by Powell might satisfy you. “If you look at P/Es they’re historically high, but in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you’d look at,” Powell said. As you may know, this statement was made after Powell famously reversed course on his 2018 unwind of Yellen’s put after asset prices started to fall. https://www.hindustantimes.com/world-news/powell-busts-out-fed-model-to-defend-high-equity-valuations/story-EaUaBbV06sYj8edEdT8FYO.html https://www.hindustantimes.com/world-news/powell-busts-out-f...
    - wpietri 4y ago
      Central banks are famously cryptic about some things, especially about things that may be taken as indication of future action. But they are pretty transparent about goals. E.g.: https://www.stlouisfed.org/in-plain-english/the-fed-and-the-dual-mandate https://www.stlouisfed.org/in-plain-english/the-fed-and-the-... What you have is at best an acknowledgement of a typical consequence of one kind of Fed intervention, but I don't think that's at all evidence of a goal.
      - 1123581321 4y ago
        I suppose I can only appeal to the broadly held view that investment and debt are considered to have effects on employment rates and economic growth.
        wpietri 4y ago
        Sure. I agree that there are broad effects and never said otherwise. My objection in this subthread is to the much more specific claim "the goal of low interest rates was to force savers into riskier assets".
        1123581321 4y ago
        At no point has your question been misunderstood.
CharlieDigital 4y ago
Central banks are forcing the rich to create capital flows because our politicians can't do it (e.g. taxes). They do this by suppressing interest because parked money loses value to inflation in such an environment. In reality, the better solution is probably to raise taxes, but none of our politicians have the will.
- wpietri 4y ago
  Rich people aren't forced to do anything here. They're rich. They have have plenty of choice. They may be choosing riskier investments in pursuit of the returns they want. But then they are also choosing higher risk of the sort of losses that would also lose money over time.
  - CharlieDigital 4y ago
    They are forced to because in a low interest environment, they are literally losing value to inflation.
    - wpietri 4y ago
      They are not forced. The FBI did not show up with guns and say, "Invest in this dumb-ass startup or we shoot you." During a recession, they decided that rather than lose some value to inflation, they wanted to risk losing all of their investment in hopes of a higher long-term return. This is called a choice. They made it. Nobody owes them a guaranteed safe rate of return just because they're rich.
      - ifyoubuildit 4y ago
        So many of these kinds of arguments end up just being semantics. Strictly speaking, they were not forced. Realistically, an environment was purposefully created that would make the average actor move a certain way. Sure, the individual may have had the option to just eat the losses.
        4y ago
luckylion 4y ago
> some savers wanted higher returns Or, to put it differently, some savers didn't want to pay the bank for holding their money and suffer 10% inflation. Of course that'll push them into funds and shares. Is it a goal? Possibly not, but it's a known and unavoidable side-effect, like having to poop at some point after you eat things. As for the terms of investment being better for companies: that's just supply and demand. Everyone wants to invest their money, so the deals get worse.
- wpietri 4y ago
  Yes, as I have been clear, I'm not saying it's not a predictable outcome. I'm just saying it's not a central bank goal. Their goal is just to prevent recessions and keep inflation under control. > that's just supply and demand. Everyone wants to invest their money, so the deals get worse. If people would rather lose money in a bad investment than due to overall inflation, that is a choice they can make. But that doesn't force the creation of bad investments. Some people create the bad companies, and others, ones who nominally should know better, put other people's money into them.
  - luckylion 4y ago
    Forcing is probably too strong since nobody is holding a gun to anyone's head, but risk is part of the cost of the investment. When the supply side is limited, the cost increases - that could be paying more for less equity or taking riskier deals. Since there isn't an unlimited amount of low-risk deals that you can bid on and pay more to be a part of, accepting higher risk is the only other option that still has a chance at being better than keeping the money in a bank and losing 10+% per year.
    - wpietri 4y ago
      Exactly. Some people want to maintain their return on capital during a recession even at higher risk of losing their money. That's a choice they make based on desires they have. Other people make different choices. Which can be quite good ones! US inflation in 2022 was 6.5%, but the NASDAQ lost something like 30%. Might VCs choose a spray-and-pray approach when money is abundant? Sure. Might LPs choose to give money to those VCs? Yes. But my point here is this is not mean old Jerome Powell ordering around robots or slaves or whatever. VCs can just not invest if there isn't something good. They can return the money or not take it. Heck, even startups are not compelled to take the money. The last time I did one we eventually decided we had dug a dry hole, so we gave back the remainder of they money to investors. We were not compelled to spend it past the point we thought it was actually a good investment.
jpadkins 4y ago
Central banks don't say a lot about what they are / are not trying to do. Ask the reverse question: What do Central Banks say they are trying to do when lowering interest rates? They only really make vague statements like 'easing conditions' or 'providing liquidity'. In the US, we can only go by their stated goals, dual mandate from congress: keep inflation and unemployment low. https://www.stlouisfed.org/in-plain-english/the-fed-and-the-dual-mandate https://www.stlouisfed.org/in-plain-english/the-fed-and-the-... So what are the mechanisms that they can keep unemployment low (create jobs)? They lower interest rates, which causes people to sell assets that don't create jobs (treasury bills) and buy ones that do (corporate bonds, VC funds, etc) in attempt to get a return on capital (however, with more risk). It's not some secret that lowering / raising interest rates affects all investors risk curve.
- wpietri 4y ago
  I of course agree that they are affecting incentives. I am specifically disagreeing with the claim that the "goal of low interest rates was to force savers into riskier assets". Force is the wrong word here, and I don't think individual savers are at all the people the Fed is trying to affect here. And although they are affecting incentives, people are not robotically obliged to follow them. VCs cannot be simultaneously such brilliant investors that they deserve to be wildly rich and also so without agency that a drop in the federal funds rate forces them to waste money on bad startups.
chmorgan 4y ago
The whole concept of reducing interest rates was to encourage borrowing and discourage saving, to get money moving. Naturally this was into more risky investments as pretty much everything is more risky than savings accounts, bonds, and not borrowing money at all.
emodendroket 4y ago
I feel like it is pretty uncontroversial that the purpose of the Fed fiddling with interest rates is to encourage or discourage investment. What else would they be up to?
- wpietri 4y ago
  I am specifically objecting here to the notion that the "goal of low interest rates was to force savers into riskier assets". What a given central bank is up to depends on the central bank. But the Fed is pretty clear about its goals. E.g.: https://www.stlouisfed.org/in-plain-english/the-fed-and-the-dual-mandate https://www.stlouisfed.org/in-plain-english/the-fed-and-the-... I agree it's true that they change interest rates as a way of influencing investment rates as they pursue their goals. But I believe they have very interest in influencing the average individual saver in any particular direction, let alone having that as a goal. And I absolutely disagree that "force" and "encourage or discourage" mean the same thing. My broad point here is that the Fed, using pretty blunt instruments, tries to keep us from both recession and inflation, but that does not "force" rich people to do anything. Those investing in startups have enough money that they have incredible agency in what they do with that money. I can believe that VCs feel compelled to invest so they can keep up their reputations and their fat checks. But if so, they are compelled by prestige and greed, not by Jerome Powell.
  - emodendroket 4y ago
    They write here that they intend to maximize employment and yet I can easily pick up a newspaper and read them fretting that employment is too high. e.g., https://apple.news/AtzUI_uozTyOjXZhyAcUpPw https://apple.news/AtzUI_uozTyOjXZhyAcUpPw Now sure, we can say that’s just the “dual mandate” at work, since they tie this concern to inflation. But still, I wouldn’t take a public statement like this as gospel. I suppose it is true that no one person is forced to do anything, but if you create strong incentives to do one thing and disincentives to do another then I don’t think the difference is that meaningful in the aggregate.
    - wpietri 4y ago

hervature 4y ago

Here you go: https://en.wikipedia.org/wiki/IS%E2%80%93LM_model https://en.wikipedia.org/wiki/IS%E2%80%93LM_model From the article: I(r) represents business investment decreasing as a function of the real interest rate Businesses invest less as the rate increases. That's equivalent to businesses save less as the rate decreases.

wpietri 4y ago
That's a theoretical model of a consequence. I never denied the consequence, I denied that this particular consequence is the goal for central banks. Which is why I asked for something different than what you provided.
- 1123581321 4y ago
  Central banks are famously cryptic. If you’re looking for a smoking gun, this 2020 statement by Powell might satisfy you. “If you look at P/Es they’re historically high, but in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you’d look at,” Powell said. As you may know, this statement was made after Powell famously reversed course on his 2018 unwind of Yellen’s put after asset prices started to fall. https://www.hindustantimes.com/world-news/powell-busts-out-fed-model-to-defend-high-equity-valuations/story-EaUaBbV06sYj8edEdT8FYO.html https://www.hindustantimes.com/world-news/powell-busts-out-f...
  - wpietri 4y ago
    Central banks are famously cryptic about some things, especially about things that may be taken as indication of future action. But they are pretty transparent about goals. E.g.: https://www.stlouisfed.org/in-plain-english/the-fed-and-the-dual-mandate https://www.stlouisfed.org/in-plain-english/the-fed-and-the-... What you have is at best an acknowledgement of a typical consequence of one kind of Fed intervention, but I don't think that's at all evidence of a goal.
    - 1123581321 4y ago
      I suppose I can only appeal to the broadly held view that investment and debt are considered to have effects on employment rates and economic growth.
      - wpietri 4y ago
        Sure. I agree that there are broad effects and never said otherwise. My objection in this subthread is to the much more specific claim "the goal of low interest rates was to force savers into riskier assets".
        1123581321 4y ago
        At no point has your question been misunderstood.

CharlieDigital 4y ago

Central banks are forcing the rich to create capital flows because our politicians can't do it (e.g. taxes). They do this by suppressing interest because parked money loses value to inflation in such an environment. In reality, the better solution is probably to raise taxes, but none of our politicians have the will.

wpietri 4y ago
Rich people aren't forced to do anything here. They're rich. They have have plenty of choice. They may be choosing riskier investments in pursuit of the returns they want. But then they are also choosing higher risk of the sort of losses that would also lose money over time.
- CharlieDigital 4y ago
  They are forced to because in a low interest environment, they are literally losing value to inflation.
  - wpietri 4y ago
    They are not forced. The FBI did not show up with guns and say, "Invest in this dumb-ass startup or we shoot you." During a recession, they decided that rather than lose some value to inflation, they wanted to risk losing all of their investment in hopes of a higher long-term return. This is called a choice. They made it. Nobody owes them a guaranteed safe rate of return just because they're rich.
    - ifyoubuildit 4y ago
      So many of these kinds of arguments end up just being semantics. Strictly speaking, they were not forced. Realistically, an environment was purposefully created that would make the average actor move a certain way. Sure, the individual may have had the option to just eat the losses.
      - 4y ago

luckylion 4y ago

> some savers wanted higher returns Or, to put it differently, some savers didn't want to pay the bank for holding their money and suffer 10% inflation. Of course that'll push them into funds and shares. Is it a goal? Possibly not, but it's a known and unavoidable side-effect, like having to poop at some point after you eat things. As for the terms of investment being better for companies: that's just supply and demand. Everyone wants to invest their money, so the deals get worse.

wpietri 4y ago
Yes, as I have been clear, I'm not saying it's not a predictable outcome. I'm just saying it's not a central bank goal. Their goal is just to prevent recessions and keep inflation under control. > that's just supply and demand. Everyone wants to invest their money, so the deals get worse. If people would rather lose money in a bad investment than due to overall inflation, that is a choice they can make. But that doesn't force the creation of bad investments. Some people create the bad companies, and others, ones who nominally should know better, put other people's money into them.
- luckylion 4y ago
  Forcing is probably too strong since nobody is holding a gun to anyone's head, but risk is part of the cost of the investment. When the supply side is limited, the cost increases - that could be paying more for less equity or taking riskier deals. Since there isn't an unlimited amount of low-risk deals that you can bid on and pay more to be a part of, accepting higher risk is the only other option that still has a chance at being better than keeping the money in a bank and losing 10+% per year.
  - wpietri 4y ago
    Exactly. Some people want to maintain their return on capital during a recession even at higher risk of losing their money. That's a choice they make based on desires they have. Other people make different choices. Which can be quite good ones! US inflation in 2022 was 6.5%, but the NASDAQ lost something like 30%. Might VCs choose a spray-and-pray approach when money is abundant? Sure. Might LPs choose to give money to those VCs? Yes. But my point here is this is not mean old Jerome Powell ordering around robots or slaves or whatever. VCs can just not invest if there isn't something good. They can return the money or not take it. Heck, even startups are not compelled to take the money. The last time I did one we eventually decided we had dug a dry hole, so we gave back the remainder of they money to investors. We were not compelled to spend it past the point we thought it was actually a good investment.

jpadkins 4y ago

Central banks don't say a lot about what they are / are not trying to do. Ask the reverse question: What do Central Banks say they are trying to do when lowering interest rates? They only really make vague statements like 'easing conditions' or 'providing liquidity'. In the US, we can only go by their stated goals, dual mandate from congress: keep inflation and unemployment low. https://www.stlouisfed.org/in-plain-english/the-fed-and-the-dual-mandate https://www.stlouisfed.org/in-plain-english/the-fed-and-the-... So what are the mechanisms that they can keep unemployment low (create jobs)? They lower interest rates, which causes people to sell assets that don't create jobs (treasury bills) and buy ones that do (corporate bonds, VC funds, etc) in attempt to get a return on capital (however, with more risk). It's not some secret that lowering / raising interest rates affects all investors risk curve.

wpietri 4y ago
I of course agree that they are affecting incentives. I am specifically disagreeing with the claim that the "goal of low interest rates was to force savers into riskier assets". Force is the wrong word here, and I don't think individual savers are at all the people the Fed is trying to affect here. And although they are affecting incentives, people are not robotically obliged to follow them. VCs cannot be simultaneously such brilliant investors that they deserve to be wildly rich and also so without agency that a drop in the federal funds rate forces them to waste money on bad startups.

chmorgan 4y ago

The whole concept of reducing interest rates was to encourage borrowing and discourage saving, to get money moving. Naturally this was into more risky investments as pretty much everything is more risky than savings accounts, bonds, and not borrowing money at all.

emodendroket 4y ago

I feel like it is pretty uncontroversial that the purpose of the Fed fiddling with interest rates is to encourage or discourage investment. What else would they be up to?

wpietri 4y ago
I am specifically objecting here to the notion that the "goal of low interest rates was to force savers into riskier assets". What a given central bank is up to depends on the central bank. But the Fed is pretty clear about its goals. E.g.: https://www.stlouisfed.org/in-plain-english/the-fed-and-the-dual-mandate https://www.stlouisfed.org/in-plain-english/the-fed-and-the-... I agree it's true that they change interest rates as a way of influencing investment rates as they pursue their goals. But I believe they have very interest in influencing the average individual saver in any particular direction, let alone having that as a goal. And I absolutely disagree that "force" and "encourage or discourage" mean the same thing. My broad point here is that the Fed, using pretty blunt instruments, tries to keep us from both recession and inflation, but that does not "force" rich people to do anything. Those investing in startups have enough money that they have incredible agency in what they do with that money. I can believe that VCs feel compelled to invest so they can keep up their reputations and their fat checks. But if so, they are compelled by prestige and greed, not by Jerome Powell.
- emodendroket 4y ago
  They write here that they intend to maximize employment and yet I can easily pick up a newspaper and read them fretting that employment is too high. e.g., https://apple.news/AtzUI_uozTyOjXZhyAcUpPw https://apple.news/AtzUI_uozTyOjXZhyAcUpPw Now sure, we can say that’s just the “dual mandate” at work, since they tie this concern to inflation. But still, I wouldn’t take a public statement like this as gospel. I suppose it is true that no one person is forced to do anything, but if you create strong incentives to do one thing and disincentives to do another then I don’t think the difference is that meaningful in the aggregate.
  - wpietri 4y ago