Entries Tagged as 'Federal Reserve'

Inflation Hawks: Mugged by Reality, Again

David Frum October 4th, 2011 at 7:24 am 55 Comments

Remember how the Fed’s easy money stance was supposed to drive commodity prices higher and higher?


S&P GSCI Index dropped 24% since April, signalling a bear market

4 Oct, 2011, 0506 hrs IST, Bloomberg

LONDON: Commodities fell to a 10-month low as signs of a contraction in European manufacturing signalled slowing demand for raw materials.

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The Hobgoblin of Little Minds

David Frum September 21st, 2011 at 10:29 am 33 Comments

At the end of the 1980s, the US was hit by a severe financial shock: the Savings & Loan crisis. I’ll spare you the antique details of the crisis, but in 1990 the US found itself looking at perhaps $200 billion in federally insured bad loans by the failed S&L industry. The economy slipped into a recession, nothing like so severe as the present-day recession, but bad enough.

Soon afterward, Saddam Hussein invaded Kuwait, shocking global oil prices.

Responding to the crisis, the Federal Reserve rapidly and repeatedly lowered interest rates. It cut the Federal Funds rate 18 times between 1990 and 1992, reducing it from 8% to 3%. These bold monetary actions failed however to produce recovery on a timetable to gain re-election for President George HW Bush.

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Nominal Growth Targeting …

David Frum September 13th, 2011 at 11:16 am 7 Comments

… sounds technical doesn’t it? But those dry words represent a direct challenge to the GOP’s current deflationary orthodoxy. Bravo to NRO for offering space to an economist to make the case.

It’s time for conservative politicians to be bold and serious about monetary policy and not simply use rhetoric to capitalize on a popular view of the conservative base.

Perry’s Anti-Bernanke Posse

August 16th, 2011 at 12:54 pm 58 Comments

Rick Perry hasn’t been running for president for a full week and he has already made a significant gaffe. ThinkProgress has caught video of Perry saying that Ben Bernanke’s efforts at monetary stimulus are “almost treasonous” and that he would treat Bernanke “pretty ugly down in Texas.”

The comment is wrong from a policy standpoint and the accusation of treason is uncalled for, but the unfortunate truth is that Perry is accurately expressing the emotional sentiments of the conservative movement.

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Economists vs. Economic Commentators

David Frum August 4th, 2011 at 3:19 pm 20 Comments

Vince Reinhart is a former director of the monetary division of the Federal Reserve. Now he’s a senior fellow at the American Enterprise Institute. He explains in this video that the debt problem is long term, not immediate; that tax increases have to be considered part of the policy mix; and that the congressional debt-ceiling deal is bad news:

It’s a reminder of how far apart actual conservative economists have drifted from the most popular conservative economic commentators.

Bernanke Gives Some Good News

David Frum July 13th, 2011 at 12:14 pm 20 Comments

Some good news in Ben Bernanke’s testimony today:

On the positive side, household debt burdens are declining, delinquency rates on credit card and auto loans are down significantly, and the number of homeowners missing a mortgage payment for the first time is decreasing.

Continuing on the brighter side:

Two bright spots in the recovery have been exports and business investment in equipment and software. Demand for U.S.-made capital goods from both domestic and foreign firms has supported manufacturing production throughout the recovery thus far. Both equipment and software outlays and exports increased solidly in the first quarter, and the data on new orders received by U.S. producers suggest that the trend continued in recent months. Corporate profits have been strong, and larger nonfinancial corporations with access to capital markets have been able to refinance existing debt and lock in funding at lower yields. Borrowing conditions for businesses generally have continued to ease, although, as mentioned, the availability of credit appears to remain relatively limited for some small firms.

How America’s First Central Bank Was Killed

July 3rd, 2011 at 12:15 am 57 Comments

This year is the 200th anniversary of a political fight that terminated the Bank of the United States, the nation’s long-ago central bank. Amid current political pressures to audit and abolish the Fed, this Independence Day weekend is a good time to look back at the now largely forgotten episode that put an end to the Fed’s early precursor.

The key figure in this episode is now also largely forgotten. He was George Clinton (1739-1812), fourth U.S. vice president and, before that, first governor of New York state. Clinton was uncle and political mentor to the later governor DeWitt Clinton (about whom I wrote for FrumForum a year ago) but is not related to either Bill Clinton or the George Clinton of Funkadelic music fame.

In early 1811, Congress was considering whether to renew the soon-to-expire 20-year charter of the Bank of the United States. The House of Representatives had defeated a bill authorizing renewal, by a razor-thin 65-64 vote. The matter would be taken up again in the House if the Senate voted for renewal, but that body deadlocked 17 to 17.

Clinton, presiding over the Senate, cast the tie-breaking vote, against the central bank — and also against the policy of President James Madison, who supported the renewal. The vice president was “going rogue,” making a particularly strong show of independence even for an era marked by chilly relations between presidents and VPs.

Central banking had been a contentious issue in American politics for two decades. The Bank of the United States was chartered by Congress in 1791 at the behest of Alexander Hamilton, then treasury secretary, over the objections of Thomas Jefferson, then secretary of state. This rift fed into the nascent two-party system of Hamilton’s Federalists and Jefferson’s Democratic-Republicans (later known just as Democrats).

To the Jeffersonians, a central bank was a dangerous concentration of federal power, and something not authorized by the Constitution. To the Hamiltonians, a central bank was needed to modernize government finances and the money supply, and was justified by implication of the Constitution’s wording about government financial duties.

Clinton, by squashing the Bank of the United States’ renewal in 1811, was holding to the old-line Democratic-Republican hostility to central banking. It was a position that Madison, persuaded by Treasury Secretary Albert Gallatin, no long held. The central bank had proven useful for government borrowing and transferring of funds. And contrary to fears of a monopoly, banks and financial markets were proliferating.

Clinton long had an independent streak. As governor, he had been a staunch defender of New York’s prerogatives against encroachments by the federal government. As vice president, he was an outsider in the administrations of Jefferson and Madison. At age 71 and in declining health, he saw fit to vote his antipathy to central banking.

That decision, though, had terrible consequences (which Clinton, dying in office the next spring, did not live to see). When the U.S. went to war with Great Britain over a range of issues in June of 1812, it lacked a central bank to help fund the war effort. This placed the U.S. in financial straits that not only almost caused it to lose the war but also prolonged the fighting, as the British, aware of America’s financial condition, stalled on peace negotiations. (Consider that when you hear Ron Paul say that abolishing the Fed will keep the U.S. out of “unnecessary wars.”)

The federal government’s desperation for funds was such that it even pulled troops away from the strategic St. Lawrence Valley in upstate New York — and into disadvantageous positions further west — to secure a loan from a financier named David Parish, who wanted to protect the area’s cross-border trade with the British, an episode recounted in historian Alan Taylor’s recent book The Civil War of 1812.

The war ended in 1815 after the U.S. had scrapped together enough money to achieve a military stalemate (while Britain was preoccupied with the Napoleonic Wars). The following year, Madison signed a bill granting a 20-year charter to the Second Bank of the United States. The new central bank had legislative supporters including Henry Clay and John Calhoun, prominent opponents of the first one.

In the early 1830s, President Andrew Jackson launched a campaign against the Second Bank, ushering in further calamity. But that’s a story for another day.

Debt Debate: What Would Hamilton Do?

April 19th, 2011 at 1:06 pm 39 Comments

To get some perspective on current political and economic debates, cialis I attempted to contact the spirit of Alexander Hamilton by resetting the roaming function on my phone near his tombstone at Trinity Church in lower Manhattan. The answers below are his words alone.

* * *


FrumForum: In the 1790s, as the nation’s first treasury secretary, you consolidated state debts into a national debt and ensured the U.S. would pay its Revolution-era commitments. What do you think of S&P’s negative outlook on treasuries now?

Hamilton: When the credit of a country is in any degree questionable, it never fails to give an extravagant premium, in one shape or another, upon all the loans it has occasion to make. Nor does the evil end here; the same disadvantage must be sustained upon whatever is to be bought on terms of future payment.

FF: Your plan included imposition of new taxes. Isn’t that Big Government?

Hamilton: The creation of debt should always be accompanied with the means of extinguishment.

FF: Back in your day, though, there were no income taxes. The federal government raised money from tariffs and excise taxes. Should we shift toward consumption taxes now?

Hamilton: It is a signal advantage of taxes on articles of consumption that they contain in their own nature a security against excess. They prescribe their own limit; which cannot be exceeded without defeating the end proposed, that is, an extension of the revenue.

FF: Speaking of which, you created revenue cutters, what later became the Coast Guard, to collect fees from ships. What were your instructions to the officers?

Hamilton: They will always keep in mind that their countrymen are freemen, and, as such, are impatient of everything that bears the least mark of a domineering spirit.  They will, therefore, refrain, with the most guarded circumspection, from whatever has the semblance of haughtiness, rudeness, or insult.

FF: Sounds like good advice for the TSA, not to mention the IRS. But if you’re such a liberty-minded guy, how could you have created a central bank, a predecessor to the Fed, when many conservatives and libertarians these days want to end the Fed?

Hamilton: It is a fact, well understood, that public banks have found admission and patronage among the principal and most enlightened commercial nations. … And it is a circumstance which cannot but have considerable weight, in a candid estimate of their tendency, that after an experience of centuries, there exists not a question about their utility in the countries in which they have been so long established. Theorists and men of business unite in the acknowledgment of it.

FF: But central banking is not specifically mentioned in the Constitution, and neither are a lot of other things the federal government does. What do you — a framer of the Constitution — think about that?

Hamilton: If the end be clearly comprehended within any of the specified powers, and if the measure have an obvious relation to that end, and is not forbidden by any particular provision of the Constitution, it may safely be deemed to come within the compass of the national authority.

FF: Many Tea Partiers these days are opposed to compromise. What’s your view?

Hamilton: If mankind were to resolve to agree in no institution of government, until every part of it had been adjusted to the most exact standard of perfection, society would soon become a general scene of anarchy, and the world a desert.

Pawlenty Jumps on the Anti-Fed Bandwagon

March 30th, 2011 at 3:48 pm 46 Comments

Tim Pawlenty is receiving a lot of criticism for comments he made about monetary policy on Morning Joe, when he argued that the injection of “fiat money” into the economy has weakened it.  This isn’t the worst thing he’s said; that honor goes to his Larry Kudlow interview on CNBC where Pawlenty claimed that while doesn’t want to go back on the gold standard, he does think the Fed should tie itself to a basket of commodities. (Click here to watch.)

At the 5:00 mark, Kudlow asks Pawlenty whether or not the dollar should be relinked to gold. Pawlenty at first seems to push back by arguing that “Bretton Woods ended for a reason,” but then he comes out in favor of the commodities standard:

Attaching it [the dollar] only to gold is too narrow… but having some correlation or at least some consideration of a larger basket of commodities I think is worth considering.

As we’ve reported on FrumForum before, a true “basket of commodities” standard of the sort that Rep. Paul Ryan and now Gov. Tim Pawlenty are proposing would cause many of the same problems that the original gold standard had: you would have no monetary flexibility. It would also create new problems since commodity prices are currently being driven up by factors beyond America’s control such as Chinese industrialization and Russian droughts.

Initially, Pawlenty’s “fiat currency” comments on MSNBC and Hannity seemed to just be a clumsy way for him to critique the Fed’s efforts at quantitative easing.  In his interview with Kudlow, however, Pawlenty has gone further, to endorse the doctrine that the Fed should tie the dollar to hard commodities that it has no control over. Does Pawlenty truly believe this? At this point, who knows? At this point, Pawlenty’s campaign seems an elaborate attempt to create a contrast in which Mitt Romney seems the conviction candidate.

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The Trouble with Gold Bugs

David Frum March 16th, 2011 at 3:23 pm 89 Comments

… is splendidly summed up in today’s House testimony by Lewis Lehrman.

A dollar convertible to gold would provide the necessary Federal Reserve discipline to secure the long term value of middle income savings, to backstop the drive for a balanced budget.

Well guess what: The dollar is convertible to gold. Any time of the day or night. As I write, gold can be purchased at 1397.20 per ounce.

What Lehrman wants is not for the dollar to be convertible into gold – but for the dollar to be convertible into gold at a fixed price. My question: If this is a good idea, why not extend the policy? We could say that the dollar be forever convertible into oil at $100 a barrel, that it be forever convertible into copper at $4 a pound. Ditto for wheat, soybeans, etc. Can you imagine what they’d say if Nancy Pelosi proposed such an idea? But if it’s socialism for the government to fix the price of copper, how is it libertarianism for the government to fix the price of gold?