Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Silver Market - 22nd Oct 20
Goldman Sachs Likes Silver; Trump Wants Even More Stimulus - 22nd Oct 20
Hacking Wall Street to Close the Wealth Gap - 22nd Oct 20
Natural Gas/UNG Stepping GAP Patterns Suggest Pending Upside Breakout - 22nd Oct 20 -
NVIDIA CANCELS RTX 3070 16b RTX 3080 20gb GPU's Due to GDDR6X Memory Supply Issues - 22nd Oct 20
Zafira B Leaking Water Under Car - 22nd Oct 20
The Copper/Gold Ratio Would Change the Macro - 21st Oct 20
Are We Entering Stagflation That Will Boost Gold Price - 21st Oct 20
Crude Oil Price Stalls In Resistance Zone - 21st Oct 20
High-Profile Billionaire Gives Urgent Message to Stock Investors - 21st Oct 20
What's it Like to be a Budgie - Unique in a Cage 4K VR 360 - 21st Oct 20
Auto Trading: A Beginner Guide to Automation in Forex - 21st Oct 20
Gold Price Trend Forecast into 2021, Is Intel Dying?, Can Trump Win 2020? - 20th Oct 20
Gold Asks Where Is The Inflation - 20th Oct 20
Last Chance for this FREE Online Trading Course Worth $129 value - 20th Oct 20
More Short-term Stock Market Weakness Ahead - 20th Oct 20
Dell S3220DGF 32 Inch Curved Gaming Monitor Unboxing and Stand Assembly and Range of Movement - 20th Oct 20
Best Retail POS Software In Australia - 20th Oct 20
From Recession to an Ever-Deeper One - 19th Oct 20
Wales Closes Border With England, Stranded Motorists on Severn Bridge? Covid-19 Police Road Blocks - 19th Oct 20
Commodity Bull Market Cycle Starts with Euro and Dollar Trend Changes - 19th Oct 20
Stock Market Melt-Up Triggered a Short Squeeze In The NASDAQ and a Utilities Breakout - 19th Oct 20
Silver is Like Gold on Steroids - 19th Oct 20
Countdown to Election Mediocrity: Why Gold and Silver Can Protect Your Wealth - 19th Oct 20
“Hypergrowth” Is Spilling Into the Stock Market Like Never Before - 19th Oct 20
Is Oculus Quest 2 Good Upgrade for Samsung Gear VR Users? - 19th Oct 20
Low US Dollar Risky for Gold - 17th Oct 20
US 2020 Election: Are American's ready for Trump 2nd Term Twilight Zone Presidency? - 17th Oct 20
Custom Ryzen 5950x, 5900x, 5800x , RTX 3080, 3070 64gb DDR4 Gaming PC System Build Specs - 17th Oct 20
Gold Jumps above $1,900 Again - 16th Oct 20
US Economic Recovery Is in Need of Some Rescue - 16th Oct 20
Why You Should Focus on Growth Stocks Today - 16th Oct 20
Why Now is BEST Time to Upgrade Your PC System for Years - Ryzen 5000 CPUs, Nvidia RTX 3000 GPU's - 16th Oct 20
Beware of Trump’s October (November?) Election Surprise - 15th Oct 20
Stock Market SPY Retesting Critical Resistance From Fibonacci Price Amplitude Arc - 15th Oct 20
Fed Chairman Begs Congress to Stimulate Beleaguered US Economy - 15th Oct 20
Is Gold Market Going Back Into the 1970s? - 15th Oct 20
Things you Should know before Trade Cryptos - 15th Oct 20
Gold and Silver Price Ready For Another Rally Attempt - 14th Oct 20
Do Low Interest Rates Mean Higher Stocks? Not so Fast… - 14th Oct 20
US Debt Is Going Up but Leaving GDP Behind - 14th Oct 20
Dell S3220DGF 31.5 Inch VA Gaming Monitor Amazon Prime Day Bargain Price! But WIll it Get Delivered? - 14th Oct 20
Karcher K7 Pressure Washer Amazon Prime Day Bargain 51% Discount! - 14th Oct 20
Top Strategies Day Traders Adopt - 14th Oct 20
AMD is KILLING Intel as Ryzen Zen 3 Takes Gaming Crown, AMD Set to Achieve CPU Market Dominance - 13th Oct 20
Amazon Prime Day Real or Fake Sales to Get Rid of Dead Stock? - 13th Oct 20
Stock Market Short-term Top Expected - 13th Oct 20
Fun Stuff to Do with a Budgie or Parakeet, a Child's Best Pet Bird Friend - 13th Oct 20
Who Will Win the Race to Open a Casino in Japan? - 13th Oct 20
Fear Grips Stock Market Short-Sellers -- What to Make of It - 12th Oct 20
For Some Remote Workers, It Pays to Stay Home… If Home Stays Local - 12th Oct 20
A Big Move In Silver: Watch The Currency Markets - 12th Oct 20
Precious Metals and Commodities Comprehensive - 11th Oct 20
The Election Does Not Matter, Stick With Stock Winners Like Clean Energy - 11th Oct 20
Gold Stocks Are Cheap, But Not for Long - 11th Oct 20
Gold Miners Ready to Fall Further - 10th Oct 29
What Happens When the Stumble-Through Economy Stalls - 10th Oct 29
This Is What The Stock Market Is Saying About Trump’s Re-Election - 10th Oct 29
Here Is Everything You Must Know About Insolvency - 10th Oct 29
Sheffield Coronavirus Warning - UK Heading for Higher Covid-19 Infections than April Peak! - 10th Oct 29
Q2 Was Disastrous. But What’s Next for the US Economy – and Gold? - 9th Oct 20
Q4 Market Forecast: How to Invest in a World Awash in Debt - 9th Oct 20
A complete paradigm shift will make gold the generational trade - 9th Oct 20
Why You Should Look for Stocks Climbing Out of a “Big Base” - 9th Oct 20
UK Coronavirus Pandemic Wave 2 - Daily Covid-19 Positive Test Cases Forecast - 9th Oct 20
Ryzen ZEN 3: The Final Nail in Intel's Coffin! Cinebench Scores 5300x, 5600x, 5800x, 5900x 5950x - 9th Oct 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

When Zero Interest Rates Don't Work

Interest-Rates / US Interest Rates Jun 28, 2012 - 04:20 AM GMT

By: Fred_Sheehan

Interest-Rates

Best Financial Markets Analysis ArticleJon Hilsenrath, the Wall Street Journal's ferret at the Fed, reports what the Federal Reserve wants the public to know while retaining anonymity. He found the professors in a stew. In the June 19, 2012, edition, Hilsenrath disclosed: "Fed officials have been frustrated in the past year that low interest rate policies haven't reached enough Americans to spur stronger growth, the way economics textbooks say low rates should. By reducing interest rates-the cost of credit-the Fed encourages household spending, business investment and hiring, in addition to reducing the burden of past debts. But the economy hasn't been working according to script."



Since the professors wrote the textbooks, Fed headquarters is not a source of economic inspiration. Textbooks in the U.S. are the monopoly of Bernanke, Romer, Mishkin and a few other cross-pollinated primates.

Notable in Federal Reserve Chairman Ben Bernanke's Essays on the Great Depression is its inbreeding. The professor is unsparing in his praise of such contemporaries as Romer, Mishkin, and of course, devoted to Friedman and Schwartz. He neglects earlier economists who might have modified the certainty of his negative real interest rate policy.

There were many prominent economists - two, three, and four generations ago - who warned that low- and lower- and zero-percent interest rates may fail to waken an economy. Bank reserves may sit in the bank. That's that.

This happened in the Great One. It was obvious by the mid-1930s there was little appetite for lending or borrowing, even with interest rates below one percent. If ever the phrase "it takes two to tango" fits, here we are. A loan includes two parties: a lender and a borrower. Reading Hilsenrath's article, the stalagmites in the Eccles Building only think about the lack of lending. The possibility that credit-worthy customers do not want to borrow is apparently negligible.

By 1934-1935 the domestic banking system had become saturated with idle cash. So notes David Stockman, former director of the Office of Management and Budget under President Reagan, in the draft of his future book: The Great Deformation: How Crony Capitalism Corrupted Free Markets and Democracy. Stockman writes that excess bank reserves at the Fed rose from $2.7 billion in 1933 to $11.7 billion by 1939. These fallow dollars remained sterile, like Grandpa Joad's farm. They accounted for 75% of the Fed's balance-sheet growth during the period.

Bernanke has entirely ignored earlier scholarship, but it may be of interest to readers:

In 1910, William Beveridge (of the 1942 Beveridge Report) wrote:

"Clearly a mere offer of cheap money does not suffice; banks at times of depression may go on offering cheap money for months or even years together before any recovery happens."

-- William Beveridge, Unemployment: A Problem of Industry, Longman, Green and Co. (1910)


In 1926, Dennis Robertson:

"...while there is always some rate of interest which will check an eager borrower, there may be no rate of money interest in excess of zero which will stimulate an unwilling one."

Robertson also wrote:

"...those theorists are right who have found cause of 'crises' in a 'deficiency of capital.' But what is deficient is not money, otherwise the situation could be cured, as all experience shows it cannot, by continued inflation."

-- Dennis Robertson, Banking Policy and the Price Level, King, 1926


In 1936, Wilhelm Ropke:

"The American experiences have amply verified the surmise that even an interest rate which approaches zero may be insufficient...to induce entrepreneurs to enter upon new investment."

--Wilhelm Ropke, Crises and Cycles, William Hodge & Company, Limited, 1936


In 1937, C.A. Phillips, T.F. McManus and R.W. Nelson:

"[W]e have witnessed for four years and more a policy of deficit borrowing which has forced Government bonds on the banks and has created new credits to such an extent that the demand deposits of the Federal Reserve System are now higher than they were in 1929 ($16,324 million on June 29, 1929, $19,161 million on March 1936); and for almost five years we have experienced excessively low rates of interest for short-term capital coincidentally with unprecedented excess reserves in the banking system; both conditions indicate that the basic immediate need is not for more credit, but rather that conditions in the investment market are still such that extensive long-term investment is not being made."

Also from the trio:

"What is to be desired is a greater use of bank credit now in existence rather than a greater absolute volume of credit....The total volume of bank deposits now in existence is in excess of the 1920 total ($51,335 millions of deposits [exclusive of interbank deposits] on June 30, 1936, as against $37,721 million in June, 1920), yet the price level and the cost of living are both below the levels prevailing in 1920-1921. Between December 30, 1933, and December 31, 1935, total deposits [exclusive of interbank deposits] increased by $10,459 million, or at a rate of $100 million a week."

--Banking and the Business Cycle, 1937


The reader may note a common theme in the titles to these books, "banking" and "cycles" recurring. This suggests why Bernanke & Co. may remain detached from such tomes. They do not believe in cycles. If bad things happen, the intruders are thwarted by good policy. That the policy is "good" is assumed. (I am not making this up.)

In 1937 (probably: this is from the 1946 edition), Gottfried Haberler:

"During a depression, loans are liquidated and gradually money flows back from circulation into the reserves of banks....Interest is by this time fallen to an abnormally low level; but, with prices sagging and with a prevalence of pessimism, it may be that even an exceedingly low level of interest rates will not stimulate people to borrow."

-- Gottfried Haberler, Prosperity and Depression: A Theoretical Analysis of Cyclical Movements, United Nations, 1946.

Haberler discussed Ralph Hawtrey, who changed his mind. Hawtrey's shift is mentioned since there is an inverse relationship between one's status (regardless of whether we are discussing economists, biologists, or motor mechanics) and the willingness to admit one's error. Hats off to Hawtrey:

"Mr. R.W. Hawtrey is confident that eventually, if only the purchases of securities are carried far enough [and, by implication, interest rates are low enough - FJS] the new money will find an outlet into circulation, consumers' income and outlay will begin to rise, and a self-reinforcing process of expansion will be started."

Haberler wrote of Hawtrey's maturation: "In more recent publications, under the impression of the slump of the nineteen-thirties, Mr. Hawtrey has modified his views to some extent. He still believes that 'a failure of cheap money to stimulate revival' is 'a rare occurrence' but he admits that since 1930, it has come to plague the world and has confronted us with problems which have threatened the fabric of civilization with destruction."

Frederick Sheehan will speak at the Committee for Monetary Research and Education (CMRE) dinner on Thursday, May 17, 2012. It will be held at The Union League Club in New York. He will discuss "How We Got Here." Sign up here

By Frederick Sheehan

See his blog at www.aucontrarian.com

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, November 2009).

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

gAnton
28 Jun 12, 09:50
Bernanke's Reverse Midas Touch

Bernanke was an unfortunate choice to lead the FED. He has a reverse Midas touch. Everything he touches doesn't turn into gold--ir turns into something else.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules