Sound Money Essay Contest
Our friends at the Atlas Economic Research Foundation are offering prizes for the best essays on sound money by students and young faculty and policy analysts:
The Atlas Economic Research Foundation invites you to participate in its Sound Money Essay Contest, which has a deadline of November 24th, 2009.
The contest is open to students, young faculty, and policy writers who are interested in the cause of sound money. It aims to engage you in thinking about sound money principles with relevance to today’s economic challenges.
The overall winner will receive a cash prize of $5000. Two additional prizes of $1000 each will be given to outstanding essays written by junior faculty, graduate students, or policy writers. And three additional prizes of $500 each will be given to outstanding essays written by undergraduate students.
Essay topics include:
· “Money and the Free Society: Can Money Exist Outside of the State?”
· “The Ethical Implications of Monetary Manipulation”
· “Monetary Policy and the Rule of Law in the United States”
To be eligible, you must be a legal resident of the U.S. or engaged as a full-time student or faculty in the U.S. You must also be no more than 35 years old on the date of the contest deadline (November 24, 2009). Atlas welcomes involvement of older and non-U.S. scholars in its discussions and ongoing work on sound money, but this essay contest is targeted to the audience described above.
For a list of reference materials and writing guidelines, please visit the Atlas website.
And for Cato research on sound money, check here.
New Paper: Would a Stricter Fed Policy and Financial Regulation Have Averted the Financial Crisis?
Many commentators have argued that if the Federal Reserve had followed a stricter monetary policy earlier this decade when the housing bubble was forming, and if Congress had not deregulated banking but had imposed tighter financial standards, the housing boom and bust—and the subsequent financial crisis and recession—would have been averted.
In a new study, Cato scholars Jagadeesh Gokhale and Peter Van Doren investigate those claims and dispute them.
Filed under: Cato Publications; Finance, Banking & Monetary Policy
Inflation Warning
In the last few days, we have witnessed an almost unprecedented chorus of warnings about inflation prospects by senior Fed officials. Dallas Fed President Richard Fisher said the Fed must be prepared to tighten monetary policy by raising short-term interest rates with “alacrity.” President Charles Plosser of Philadelphia had spoken of the need to raise interest rates before unemployment returns to normal in order “to prevent the Second Great Inflation.” The comments of the two Reserve Bank presidents reinforce those made by Fed Governor Kevin Warsh.
Financial markets are confused because the Fed’s policy-making committee (the Federal Open Market Committee) had just indicated its intention to keep interest rates low for an extended period. The inflation warnings represent an internal debate that has gone public. Formal dissents from the FOMCs policy directive have reportedly been discouraged. So Fed officials are in effect offering up virtual dissents in public speeches. Confidence in Chairman Bernanke’s policy is waning.
Most economic forecasters profess to see little inflation risk. They need to reconsider their forecasts in light of the inflation warnings from within the central bank.
Filed under: Finance, Banking & Monetary Policy; General
Reform Needed, but Obama Plan Would Result in More Financial Crises, not Less
Today President Obama took his financial reform plan to the airwaves. While there is no doubt our financial system is in need of financial reform, the President’s plan would make bailouts a permanent feature of the regulatory landscape. Rather than ending “too big to fail” — the President wants us to believe that with additional discretion and power, the same Federal Reserve that missed the boat last time will save us next time.
The truth is that the President’s plan will result in a small number of companies being viewed by debtholders as “too big to fail”. These companies would see their funding costs decline, allowing them to gain market-share at the expense of their rivals, making these firms even larger. Greater concentration in our financial services industry is the last thing we need, yet the Obama plan all but guarantees it.
Obama also chooses myth’s over facts. The President claims that de-regulation and competition among regulators caused the crisis. The facts could not be more different. Those institutions at the center of the crisis — Fannie Mae, Freddie Mac, Bear Stearns, Lehman –could not choose their regulator.
The President’s plan chooses convenient targets and protects entrenched interests, rather than address the true underlying causes of the crisis. At no time have we heard the President discuss the expansionary monetary policies that helped fuel the bubble. Nor has the President talked about the global imbalances — the global savings glut that poured surplus savings from the rest of the world into the US. But then the President appears to hope that loose monetary policy and continued American consumption funded by China will get him out of his own political problems with the economy. It is especially striking that the President makes little mention of the housing bubble, as if it was only the bust that was the problem.
The President continues to say he inherited this crisis. While true, he did not inherit the same individuals — Tim Geithner and Ben Bernanke — who were at the center of creating the crisis. All Obama needs to do is find a position for Hank Paulson and he will have completely re-assembled the Bush financial team.
Without real reform — fixing Fannie and Freddie, scaling back the massive subsidies for leverage in our tax code, loose monetary policy – it will only be a matter of time before the next crisis hits. If we implement the President’s plan, we will, however, guarantee that the next crisis will be even larger and severe than the current one.
Filed under: Finance, Banking & Monetary Policy; Regulatory Studies
Does the Left Know We Had a Housing Bubble?
Over the last week, speaking at a variety of events, I heard three different representatives of the Left; first a Democrat US Senator, then a senior member of the Obama Administration, and finally a “consumer” advocate, all repeat the same narrative: all was fine in the housing market until predatory lenders forced hard-working honest families into foreclosure, which reduced house prices, bringing the economy to a crash. That’s correct, apparently the Left believes we all would still be seeing double-digit home price appreciation if it wasn’t for those evil lenders.
Undoubtedly foreclosures, especially those that result in houses that remain vacant for a considerable amount of time, have an adverse impact on surrounding property values. Many constitute a serious eye-sore and provide a haven for criminal activity. But did foreclosures really drive down prices, or were foreclosures first driven by price declines resulting from a bursting housing bubble? While causality is always difficult to establish with certainty, we do know that the rate of house price appreciation peaked and started declining about 18 months before the dramatic up-turn in mortgage delinquencies. If one prefers a more rigorous test, economists at the Boston Fed have directly tested if prices first drove foreclosures or whether foreclosures drove prices. Their results conclude that its was declining prices that matter, and that the price effect of foreclosures is minimal.
Why does any of this ultimately matter? Because if we craft policies to avoid the adverse impacts of the next property bubble based upon a narrative of “consumer protection” — as is being pushed by the Obama Administration, we will do little to avoid the creation of the next housing bubble and its damaging aftermath. Instead we should be focusing attention on those policies that contributed to the creation of the housing bubble: expansionary monetary policy and the Federal government’s blind pursuit of ever-expanding home-ownership rates at any cost.
What Fed Independence?
More than 250 economists have signed an “Open Letter to Congress and the Executive Branch” calling upon them to “defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.”
Allan Meltzer is not a signatory to the petition and he has explained why not. The Fed has frequently not shown independence in the past, and there is no reason to expect it to do so reliably in the future. Professor Meltzer has just completed a multi-volume history of the Fed and knows all-too-well of the Fed’s willingness to accommodate the policies of administrations from FDRs to Lyndon Johnson’s.
I would add that the Fed’s behavior under Chairman Bernanke breaks new ground in aligning the central bank’s policy with Treasury’s. Much of what the Fed has done, first under Bush/Paulson, and now under Obama/Geithner, involves credit allocation. Since that ultimately involves the provision of public money for private purpose, it is pre-eminently fiscal policy. Central bank independence is a fuzzy concept. If it means anything, however, it is that monetary policy is conducted independently of Treasury’s fiscal policy.
In short, it is not the critics of the Fed who threaten its independence, but the Fed’s own actions. Its intervention in the economy is unprecedented in size and scope. It is inevitable that those actions would lead to calls for further Congressional oversight and control. The Fed is a creature of Congress and ultimately answerable to that body.
The petition raises legitimate concerns about whether the Fed will be able to tighten monetary policy when the time comes, and exit from its interventions in credit markets. But it is precisely the Fed’s own recent actions that raise those problems. Critics of recent Fed policy actions have for some time complained that the Fed has no exit strategy. Apparently the critics are now going to be blamed for the Fed’s inability to extricate itself from its interventions.
Cross-posted at ThinkMarkets
Week in Review: No End to Spending and Regulation in Sight
Geithner to Propose Unprecedented Restrictions on Financial System
The Washington Post reports, “Treasury Secretary Timothy F. Geithner plans to propose today a sweeping expansion of federal authority over the financial system… The administration also will seek to impose uniform standards on all large financial firms, including banks, an unprecedented step that would place significant limits on the scope and risk of their activities.”
Calling Geithner’s plan another “jihad against the market,” Cato senior fellow Jerry Taylor blasts the administration’s proposal:
What President Obama is selling is the idea that government must be the final arbiter regarding how much risk-taking is appropriate in this allegedly free market economy. It is unclear, however, whether anybody short of God is in the position to intelligently make that call for every single actor in the market.
Cato senior fellow Gerald P. O’Driscoll reveals the real reason behind the proposal:
Federal agencies have long had extensive regulatory powers over commercial banks, but allowed the banking crisis to develop despite those powers. It was a failure of will, not an absence of authority. If the authority is extended over more institutions, there is no reason to believe we will have a different outcome. This power grab is designed to divert attention away from the manifest failure of, first, the Bush Administration, and now the Obama Administration to devise a credible plan to deal with the crisis.
A new paper from Cato scholar Jagadeesh Gokhale explains the roots of the current global financial crisis and critically examines the reasoning behind the U.S. Treasury and Federal Reserve’s actions to prop up the financial sector. Gokhale argues that recovery is likely to be slow with or without the government’s bailout actions.
In the new issue of the Cato Policy Report, Cato chairman emeritus William A. Niskanen explains how President Obama is taking classic steps toward turning this recession into a depression:
Four federal economic policies transformed the Hoover recession into the Great Depression: higher tariffs, stronger unions, higher marginal tax rates, and a lower money supply. President Obama, unfortunately, has endorsed some variant of the first three of these policies, and he will face a critical choice on monetary policy in a year or so.
Obama Defends His Massive Spending Plan
President Obama visited Capitol Hill on Wednesday to lobby Democratic lawmakers on his $3.6 trillion budget proposal. Both the House and Senate are expected to vote on the plan next week.
In a new bulletin, Cato scholar Chris Edwards argues, “Sadly, Obama’s first budget sets a course for more government bloat, more economic distortions, and ultimately lower standards of living for everyone who is not living off of federal hand-outs.”
On Cato’s blog, Edwards discusses Obama’s misguided theory on government spending:
Obama’s budget would drive government health care costs up, not down. But aside from that technicality, the economics of Obama’s theory don’t make any sense.
Obama’s budget calls for a massive influx of government jobs. Writing in National Review, Cato senior fellow Jim Powell explains why government jobs don’t cure depression:
If government jobs were the secret of success, then the Soviet Union wouldn’t have collapsed, because it had nothing but government jobs. Communist China, glutted with government jobs, would have generated more income per capita than Hong Kong where, at least before the Communist takeover, there were hardly any government jobs, but Hong Kong’s per capita income was about 20 times higher than that on the mainland.
Multiplying the number of government jobs did nothing then and does nothing now to revive the private sector that pays all the bills, in large part because of the depressing effect of taxes required to pay for government jobs.
Cato on YouTube
Cato Institute is reaching out to new audiences with our message of individual liberty, free markets and peace. Last year, we launched our first YouTube channel, which has garnered thousands of views and subscriptions. Here are a few highlights:
- Cato scholars offer ways to downsize the federal government
- The Supreme Court takes a massive step backward on private property rights
- Jim Powell explains the adverse effects of the New Deal on C-SPAN
- Juan Carlos Hidalgo discusses drug war violence in Mexico on BBC
Filed under: Cato Publications; Finance, Banking & Monetary Policy; General
The Fed Is Now Scared
Bloomberg News (March 25, 2009) reported a speech by San Francisco Fed president Janet Yellen in which she called for authority for the central bank to issue its own debt. The request must have most people perplexed, especially since her rationale was delivered in Fed-speak. “Issuing such debt would reduce the volume of reserves in the financial system and push up the funds rate without shrinking the total size of our balance sheet,” Yellen said.
Actually, Yellen, who is also an economist, is addressing a very serious issue. It is one that critics of current Fed policy have been raising for some time.
The Fed is loading up its balance sheet with illiquid assets, including many dubious assets taken in as collateral for loans of money and Treasury securities to financial institutions. In the process, the Fed has an ever diminishing supply of highly liquid (and safe) Treasury securities on its own balance sheet.
Critics like economic historian Anna J. Schwartz and former Fed attorney Walker F. Todd have pointed out that the Fed will have a technical problem if it wants to start sopping up all the liquidity it has created. In a 2008 paper in International Finance, Schwartz and Todd wrote that “it is fair to ask what the Fed intends to do if it decided that it would tighten monetary policy by raising interest rates.” Without a sufficient supply of highly liquid assets to sell in the markets, the Fed would need to dispose of its illiquid assets at losses. That would possibly drive up interest rates more than desired.
Yellen’s call for the power to issue Fed debt signals a number of things. First, the Fed, contrary to recent happy talk from other officials, is worried about inflation. Second, its critics are correct that the Fed has painted itself into a corner by taking illiquid assets onto its balance sheet. Third, the Fed wants to hold those dubious assets to maturity (hence Yellen’s point about not “shrinking the total size of our balance sheet”).
Yellen’s trial balloon drew a “no comment” from the Fed’s Washington headquarters. The issue will not go away.
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