Archive for the ‘Federal Reserve’ Category

If Prices Are Communication, Then The Fed Is A Liar

Saturday, January 5th, 2008




If you went shopping and saw that a retailer had marked an item down fifty percent, you’d intuitively have a pretty decent understanding of the chain of events that led to this.


The retailer had received a collective message from his or her customers– a message that might be loosely summed up as: “No thanks.”  The retailer might respond with many possible messages in many different mediums (perhaps including an email to the product designer: “Idiot, I told you that tasseled rainbow pastel jock straps stitched ‘Roids Rule’ in faux old english calligraphy wouldn’t move at $99”); or perhaps he or she may just respond with that one communication to customers by the medium of the dropped price, that translates into English as: “What about now?”


As you continue shopping (having snagged two or three of the jocks which you recognize as actually really, really cool anyway), you may think nothing more about it.  Or you may suddenly stop and drop your rainbow jocks in astonishment:


If prices are communication here in this store, is it possible that prices are communication everywhere?  And if we think of prices as the way that people in one part of an economy talk to people in another part, rather than as something that can be objectively and universally assigned a value (as for example in the often politically charged statement: “The price of oil is too high”), then most of what our federal government does in the sphere of economics (their main sphere) should be viewed as jamming the communications channel with noise, which pretty much sounds like inherent uselessness at best.


We’re getting the payoff now from years (if not decades) worth of piled up market miscommunication, enabled at all levels of government by principles of magical thinking sometimes collectively called “managing the economy” or “encouraging growth”.  What it should be called is tricking and arm-twisting people into transactions they wouldn’t otherwise make, wracking up ridiculous sums of debt, wasting money and calling it stimulation, and rolling the dice on behalf of future generations.   Admittedly a mouthful, but much more accurate.


Though economics may not be a zero-sum game, it’s not an infinite-sum game either.  We would instinctively know (or at least we should), that if a U.S. Senator proposed a program to build a billion new homes in the next six months to stimulate the economy and create jobs, that it would actually be very bad for the economy, because we don’t otherwise need all those homes (especially now), while we may need other things which we’ll be forced to neglect.  However, that’s exactly the type of thing, absent the reductio ad absurdum (usually), that most government decision makers propose as standard fare. 


“We need to create more jobs.”  What about the utility of those jobs?  Doesn’t matter– jobs are good.  Any added economic activity is good.  The idea is to create a perception of a good economy– then perception becomes reality and you get an actual good economy. 


This kind of logic made it seem like a good idea to make money available at zero or even negative real interest rates– jamming that particular price/communication channel so thoroughly that most of a nation, if not the world, was tricked into believing that if you rent an apartment you might as well be a child of Satan, and that one home purchase isn’t enough, since everyone should be Donald Trump anyway.


Now finally, common sense screams so loudly that there’s no noise that Federal Reserve Chairman Bernanke or anyone else can make to drown it out.


That’s going to seem like a really bad thing, and indeed there’s no arguing that pain isn’t painful (especially if some of the pain turns out to be mine).  But if you eliminated your body’s ability to feel pain, you’d be continually giving yourself life threatening injuries that you didn’t notice until you collapsed or saw that you were standing in a pool of blood.  Pain is bad as pain, but that’s missing a larger point– it’s essential as communication.


It will be interesting (though repulsive), to watch the inevitable congressional hearings on subprime mortgages, hedge funds, derivatives, and whatever else hits the fan.  However, the premise behind most of what congress tries to do is economic stimulation, and as a corollary, interference with the perception of risk.  Congress as much as begged for this mess, and now they’ll need to dig deep into their reserves of cognitive dissonance if they’re going to avoid seeing themselves as a primary cause.  With few exceptions, I believe they’ll manage it.


Out in the real world though, there won’t be enough credit (or for that matter heroin) to go around.  If our economic system is going to remain systematic and economic, there’s going to have to be examples made of some folks and firms suffering from debt management deficit disorder. 


There will be some stern lectures on the subject of risk, delivered in the languages of price, and pain.  On a milder level, this would be periodically normal.  What isn’t normal, is the number of ordinary folks who took no such risks getting hurt as collateral damage.  That’s what happens when you lie– innocent people get hurt.

By Les Lafave 

 Banking Reform –