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I think the Fed's biggest problem is that setting interest rates has never shown to be a broadly effective way to control inflation, but it's the only tool they

I think the Fed's biggest problem is that setting interest rates has never shown to be a broadly effective way to control inflation, but it's the only tool they currently have. The most provably "effective" way that they can work is to raise rates to the point where it crushes the economy and there is a huge recession (which usually also brings down inflation), but up until that point they really don't seem to work very well. And obviously pushing everyone into recession, while in a way effective at bringing down inflation (because it makes it so most people can't afford to buy anything anyway), it's not a good way of doing it either. So it's altogether just bad policy to try and control the economy that way. We've been running this experiment for a few decades now, and I think people really have to start pointing out that it's entirely failed.

gndk 3y ago
Why is pushing everyone into recession not a good way of doing it? Recessions are healthy for the economy. We need double digit interest rates for ~5-10 years to clean up the past mismanagement. The longer we delay this, the more painful it will be, peaking at massive civil unrest.
- boppo1 3y ago
  We can't afford the payments on the debt. We're basically backed into a corner unless we innovate like we did in the early 1900s again.
rjbwork 3y ago
The Fed's biggest problem is a gridlocked congress and a categorical reluctance to take money out of existence at the rate it needs to be (e.g. tax the rich). It's tantamount to trying to fly a hot air balloon. You might be able to keep the thing from crashing, but all you've got is one lever and you've got no real control over where it's going.
- boppo1 3y ago
  Taxing the rich won't fix the fact that centrally planning interest rates doesn't fucking work. Let the treasury auctions decide yields.
- gndk 3y ago
  Yes, more taxes will solve all the problems. /s The solution is making government significantly smaller, more efficient and stop handing out all kinds of subsidies, welfare payments and other transfers. Let the economy breath again.
  - rjbwork 3y ago
    >stop handing out all kinds of subsidies, welfare payments and other transfers. We can agree there as well. But unprecedented wealth accumulation at the top is not some mysterious magical force - it's what happens when we stop taxing capital accumulation the way we used to. Both are necessary to control money supply.
    - from-nibly 3y ago
      No its what happens when the government is involved in any way. Power will be seized by the powerful. Take the power away from the government. Think about all the meddling the government has done in the economy for the last few decades and where all the money has gone.
  - mindslight 3y ago
    The problem is that such calls inevitably get neutralized and perverted by the political establishment, which of course does not wish to shrink itself. Entrenched interests have been very good at making sure the trough of corporate welfare is never called into question (including the artificially low rates powering the overleveraged financial industry), by construing that message of "smaller government" to mean only cutting back on spending and legislation that's aimed at mitigating the damage from the overwhelming government welfare going to companies. So while I'm a proponent of decentralization in general, as long as the corporate welfare (and the rest of the general corporate legislative agenda) continues unabated it does make sense to point out how much taxes have been cut for the same upper class that is the chief beneficiary of most types of government handouts.
- friend_and_foe 3y ago
  Taxes were, up until the 80s, how the government controlled inflation. They run a deficit and print to spend (or more accurately, borrow from the fed who prints), and then they tax to remove some of that from circulation. Now they don't do the last part. But you've got to ask yourself, why do it this way? How is it better for everyone? First, consider that in a democratic system, there will always be political will to spend, and there will always be political will to reduce taxes. It was inevitable that taxes would come down and inflation would then soar. So "run a deficit and then tax the rich/corporations/just a little more" doesn't work forever. Eventually people demand more for less. It also has the added feature that the cantillion effect can be used to redistribute wealth. Sounds good, but then you're at the mercy of whatever is more politically expedient to the representative voting on the tax rates. If he is more beholden to his constituents, capital flows to them. If he's more beholden to his donors, guess who benefits from it. If his constituents are corn farmers, prepare for farming subsidies. Also think of this: rich people understand this wealth redistribution mechanism, most regular people or poor people do not. So while it sounds good, tax the rich more and redistribute wealth, it is more likely to be used in the opposite direction, and inevitably it will be. Better if the tool just doesn't exist at all. To me, just getting rid of this complexity and budgeting based on tax revenue, the old way, and keeping money supply out of the hands of government, solve all these problems. Government can't print and spend, it taxes who can afford to pay based on what it needs, and it can't spend money on things that aren't in the interest of the people and businesses it is sovereign over. It doesn't find itself in a political conundrum that ensures that it spends more and taxes less, it spends only based on its ability to pay and it taxes people only based on their ability to pay. And you get rid of the cantillion effect, so no siphoning wealth to the top from the working stiff.
  - sverhagen 3y ago
    Not sure what political will is, here. If it is doing what the population wants, wouldn't taxing the rich be hugely popular?
    - boppo1 3y ago
      The population that matters politically is not the general population.
bryanlarsen 3y ago
There's a steady history over the last 200 years of the economy becoming much less cyclical. Are you suggesting we return to the wild chaos of the booms and busts of the 1800's?
- gndk 3y ago
  Yes. Either that or get used to 10-20% inflation.
- boppo1 3y ago
  Yes. We're having booms and busts anyway if you haven't noticed.
  - bryanlarsen 3y ago
    LOL. Busts in the 1800's led to people starving to death. Nobody from that time period would call 4% unemployment a bust
    - boppo1 3y ago
      Include discouraged workers in that stat.
      - bryanlarsen 3y ago
        In a recession in the 1800's a "discouraged worker" would be thrilled they could buy food.
marcosdumay 3y ago
Just to point out, it's absolutely not the only tool that they have. They can control deposit reserve requirements, and they have a huge power over investment regulations. Oh, and they can also print money, don't they? (Or is it the direct government?) That said, yes, all the precision interventions are on the hands of the direct government, and out of reach to the FED. I do think all countries need an UBI whose value is decided by the monetary authority. This would give them an entire new degree of freedom.
patrick451 3y ago
It makes little sense that low interest rates get credit for fueling the current housing bubble, but higher interest rates are somehow ineffective at curbing it.
- UncleEntity 3y ago
  One could say that people still need a place to live regardless of the interest rate. If average people can't afford the interest rates my parents were paying back in the '70s and the people who can afford these rates -- because they can get a reasonable ROI through something like AirBnB -- are still buying up the supply of 'excess' homes then it could be argued that the Fed's meddling is ineffective.
  - patrick451 3y ago
    So your contention is that ZIRP had zero impact on the run up in prices over the last few years?
    - UncleEntity 3y ago
      Not at all, the Fed's meddling could easily be blamed for that too.
      - mitthrowaway2 3y ago
        It stands to reason, then, that a low interest rate now would potentially drive an even bigger bubble in the future. A high interest rate now might not solve housing affordability today, but it could perhaps stabilize things farther down the road.
- MattPalmer1086 3y ago
  House prices are sticky on the way down. It also takes quite a few years for interest rises to really affect them. Volume of market may shrink as it is unaffordable but unless there are a lot of forced sales, home owners will just stay put.
- 3y ago
boppo1 3y ago
Can anyone point me to the primary source for the theory that underpins the Fed's policy of interfering with interest rates (instead of letting the market decide)? At best I understand it's Keynes, but last I spoke to an economist, they said he was only concerned with fiscal policy, not monetary.
- gndk 3y ago
  Basically what you want to look at is "Modern monetary theory".

gndk 3y ago

Why is pushing everyone into recession not a good way of doing it? Recessions are healthy for the economy. We need double digit interest rates for ~5-10 years to clean up the past mismanagement. The longer we delay this, the more painful it will be, peaking at massive civil unrest.

boppo1 3y ago
We can't afford the payments on the debt. We're basically backed into a corner unless we innovate like we did in the early 1900s again.

rjbwork 3y ago

The Fed's biggest problem is a gridlocked congress and a categorical reluctance to take money out of existence at the rate it needs to be (e.g. tax the rich). It's tantamount to trying to fly a hot air balloon. You might be able to keep the thing from crashing, but all you've got is one lever and you've got no real control over where it's going.

boppo1 3y ago
Taxing the rich won't fix the fact that centrally planning interest rates doesn't fucking work. Let the treasury auctions decide yields.
gndk 3y ago
Yes, more taxes will solve all the problems. /s The solution is making government significantly smaller, more efficient and stop handing out all kinds of subsidies, welfare payments and other transfers. Let the economy breath again.
- rjbwork 3y ago
  >stop handing out all kinds of subsidies, welfare payments and other transfers. We can agree there as well. But unprecedented wealth accumulation at the top is not some mysterious magical force - it's what happens when we stop taxing capital accumulation the way we used to. Both are necessary to control money supply.
  - from-nibly 3y ago
    No its what happens when the government is involved in any way. Power will be seized by the powerful. Take the power away from the government. Think about all the meddling the government has done in the economy for the last few decades and where all the money has gone.
- mindslight 3y ago
  The problem is that such calls inevitably get neutralized and perverted by the political establishment, which of course does not wish to shrink itself. Entrenched interests have been very good at making sure the trough of corporate welfare is never called into question (including the artificially low rates powering the overleveraged financial industry), by construing that message of "smaller government" to mean only cutting back on spending and legislation that's aimed at mitigating the damage from the overwhelming government welfare going to companies. So while I'm a proponent of decentralization in general, as long as the corporate welfare (and the rest of the general corporate legislative agenda) continues unabated it does make sense to point out how much taxes have been cut for the same upper class that is the chief beneficiary of most types of government handouts.
friend_and_foe 3y ago
Taxes were, up until the 80s, how the government controlled inflation. They run a deficit and print to spend (or more accurately, borrow from the fed who prints), and then they tax to remove some of that from circulation. Now they don't do the last part. But you've got to ask yourself, why do it this way? How is it better for everyone? First, consider that in a democratic system, there will always be political will to spend, and there will always be political will to reduce taxes. It was inevitable that taxes would come down and inflation would then soar. So "run a deficit and then tax the rich/corporations/just a little more" doesn't work forever. Eventually people demand more for less. It also has the added feature that the cantillion effect can be used to redistribute wealth. Sounds good, but then you're at the mercy of whatever is more politically expedient to the representative voting on the tax rates. If he is more beholden to his constituents, capital flows to them. If he's more beholden to his donors, guess who benefits from it. If his constituents are corn farmers, prepare for farming subsidies. Also think of this: rich people understand this wealth redistribution mechanism, most regular people or poor people do not. So while it sounds good, tax the rich more and redistribute wealth, it is more likely to be used in the opposite direction, and inevitably it will be. Better if the tool just doesn't exist at all. To me, just getting rid of this complexity and budgeting based on tax revenue, the old way, and keeping money supply out of the hands of government, solve all these problems. Government can't print and spend, it taxes who can afford to pay based on what it needs, and it can't spend money on things that aren't in the interest of the people and businesses it is sovereign over. It doesn't find itself in a political conundrum that ensures that it spends more and taxes less, it spends only based on its ability to pay and it taxes people only based on their ability to pay. And you get rid of the cantillion effect, so no siphoning wealth to the top from the working stiff.
- sverhagen 3y ago
  Not sure what political will is, here. If it is doing what the population wants, wouldn't taxing the rich be hugely popular?
  - boppo1 3y ago
    The population that matters politically is not the general population.

bryanlarsen 3y ago

There's a steady history over the last 200 years of the economy becoming much less cyclical. Are you suggesting we return to the wild chaos of the booms and busts of the 1800's?

gndk 3y ago
Yes. Either that or get used to 10-20% inflation.
boppo1 3y ago
Yes. We're having booms and busts anyway if you haven't noticed.
- bryanlarsen 3y ago
  LOL. Busts in the 1800's led to people starving to death. Nobody from that time period would call 4% unemployment a bust
  - boppo1 3y ago
    Include discouraged workers in that stat.
    - bryanlarsen 3y ago
      In a recession in the 1800's a "discouraged worker" would be thrilled they could buy food.

marcosdumay 3y ago

Just to point out, it's absolutely not the only tool that they have. They can control deposit reserve requirements, and they have a huge power over investment regulations. Oh, and they can also print money, don't they? (Or is it the direct government?) That said, yes, all the precision interventions are on the hands of the direct government, and out of reach to the FED. I do think all countries need an UBI whose value is decided by the monetary authority. This would give them an entire new degree of freedom.

patrick451 3y ago

It makes little sense that low interest rates get credit for fueling the current housing bubble, but higher interest rates are somehow ineffective at curbing it.

UncleEntity 3y ago
One could say that people still need a place to live regardless of the interest rate. If average people can't afford the interest rates my parents were paying back in the '70s and the people who can afford these rates -- because they can get a reasonable ROI through something like AirBnB -- are still buying up the supply of 'excess' homes then it could be argued that the Fed's meddling is ineffective.
- patrick451 3y ago
  So your contention is that ZIRP had zero impact on the run up in prices over the last few years?
  - UncleEntity 3y ago
    Not at all, the Fed's meddling could easily be blamed for that too.
    - mitthrowaway2 3y ago
      It stands to reason, then, that a low interest rate now would potentially drive an even bigger bubble in the future. A high interest rate now might not solve housing affordability today, but it could perhaps stabilize things farther down the road.
MattPalmer1086 3y ago
House prices are sticky on the way down. It also takes quite a few years for interest rises to really affect them. Volume of market may shrink as it is unaffordable but unless there are a lot of forced sales, home owners will just stay put.
3y ago

boppo1 3y ago

Can anyone point me to the primary source for the theory that underpins the Fed's policy of interfering with interest rates (instead of letting the market decide)? At best I understand it's Keynes, but last I spoke to an economist, they said he was only concerned with fiscal policy, not monetary.

gndk 3y ago
Basically what you want to look at is "Modern monetary theory".