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Comment by potatolicious | Hacker News Reader

> "Mr. Bernanke has a lot of money, as do the other bankers on the committee and the people who selected them. So they’ve decided to let millions and millions of people be unemployed and the rest of us experience the resulting recession rather than risk the chance that some of their money might be worth a little less."

Okay, I was with you until this part - that's a pretty serious claim to make without any substantiating evidence, or even something that kind of looks like evidence.

This seems like a gross oversimplification of a complex problem to me, and like most other gross oversimplifications of the recession, seems to just pin the blame on "greedy bankers".

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I'm not trying to justify Aaron's economically illiterate conspiracy theorizing, but I would like to reiterate some of what I first emailed Aaron a few years ago when he first started talking about this (e.g. http://www.aaronsw.com/weblog/predatorstate ).

It's true to a degree that bankers don't aim for zero unemployment - i.e. implicitly they "let millions and millions of people be unemployed" - because to do so would create inflationary effects. Such an economy would be overheating. In an economy the size of the US, you would expect there to be a few million people unemployed at any given moment, simply because of turnover.

But this is pretty basic stuff. See e.g.:

http://www.investinganswers.com/term/unemployment-rate-809

http://en.wikipedia.org/wiki/NAIRU

It is however true that the Fed has a rather ridiculously overloaded mandate. It has basically one lever - the interest rate - with which it is supposed to target multiple goals - "maximum employment, stable prices, and moderate long-term interest rates". If you think about this for a moment, you'll realize it's not possible.

In my country equivalent of FED has only one goal: Keep inflation moderate and manageable. It works out pretty well.

And "my country" would be _______ ?

Poland

I was a bit imprecise. Not equivalent of whole FED but equivalent of part of FED that makes decisions about monetary policy.

http://en.wikipedia.org/wiki/Monetary_Policy_Council

In Poland monetary policy is understood as keeping prices stable not as attaining a set of objectives oriented towards the growth and stability of the economy.

So in your country their could be a massive depression with everybody out of work and your FED won't lower interest rates?

I don't know about his country, but this is done also in my country, Switzerland. There isn't much growth, but unemployment is usually lower than 4% I think.

I think they don't try to shorten recessions, but they intervene in case of crashes and bursting bubbles in order to keep the financial markets functioning.

I'm not sure there is much evidence that lowering interest rates help the economy to come out of a recession. I studied economics almost 20 years ago and then the prevailing opinion of economists was that you can't know when a recession will end, so lowering interest rates to spur growth is likely to just cause inflation after the recession ends.

Anyway, if the central bank targets inflation, it also has lower interest rates in a slow economy that doesn't risk overheating.

If the inflation was kept under control (not too low, not too high) then they would not do anything other then usual.

They of course monitor unemployment but only because unemployment rate (which is currently 12.7%) can influence future behavior of inflation rate.

Just ask yourself this question:

  If I have $1M and I can decide between two options
  a) tomorrow my money is worth $2M
  b) tomorrow my money is worth $500k

Which option would you choose? These bankers are human beings. They are naturally and understandably biased. Not only are they making these decisions for themselves, but they are making them for all their friends, family, and business associates -- all of whom are also millionaires and billionaires.

I don't see it as much a conspiracy theory as an understanding of human nature.

Originally, the fed was created by a secret committee of bankers on a remote island. It was rushed through congress quietly -- I know, because I read the decades old NY Times article covering the legislation at the Will Rogers Museum.

Then, if you watch the recent Moore film, you'll see that the current bail out was voted down in congress, then secret meetings led by many of these bankers, GS and the like, prompted a revote and they rushed it through again -- when it passed.

What Aaron said is pretty accurate. The bankers aren't looking out for main street and the jobs won't be back for a while.

I've been trying to sell a house now for almost a year and many people want it and none of them can get a loan -- they've tried. They have jobs. They have income and the ability to repay the loan, but the banks just aren't giving out any money. Contrast that to 4 years ago when you didn't even have to have a job at all or verify income to get a million dollar loan -- I know, because it was my job to build information systems to help the subprime match makers connect home buyers with the banks who wanted to give them the loans.

When I realized how dirty it all was -- I quit and started my own company and I'm very glad I did.

But it's really more like his choices are:

a) His $1 million earns ~3% interest and depreciates by 2% per year, or

b) His $1 million earns ~4% interest and depreciates by 3% per year.

You're arguing that these guys are promoting multi-trillion dollar swings in the country's wealth in order to earn a couple more basis points on their investments. If you're going to posit a Greedy Ben Bernanke, why is he being so slow and cautious? He can probably make, at most, 1% per year extra by manipulating the value of the dollar. Or he could take a suitcase full of cash.

Additionally, he probably doesn't even know which choice will make him money.

Most likely his money is managed in a blind trust, which means he has no control or knowledge over how it is invested. For all he knows, inflation will help his portfolio. In the most likely event, his money is invested in a mix of equities, stable funds and bonds, and all his money does is track the general health of the economy (with a smaller upside/downside due to hedging and diversification).

I understand that legally this is the way it's supposed to be, but do you really expect us to believe that Bernanke doesn't understand what's in his portfolio? Come on...

You're also dismissing the social wins aspect of this: you definitely can't argue that Bernanke doesn't know the way his friends are betting, even if he's "blind" to his own portfolio. Bernanke doesn't have to win directly off this for there still to be a possibility of him making corrupt decisions that help both him and his social network.

I understand that legally this is the way it's supposed to be, but do you really expect us to believe that Bernanke doesn't understand what's in his portfolio? Come on...

Bernake doesn't know what's in his portfolio, because his money managers don't tell him. That's why many agency heads are required to put their money into a blind trust. If you have evidence to the contrary, by all means notify the proper agency (I think OTS, not really sure).

As for Bernake's friends, I expect most of them don't tell him (or anyone else) how they are betting. If I tell you my trading strategy, you can turn around and take my money.

You're acting like Bernankes friends are sitting around at a poker table, when in fact they are the house and we are all playing blackjack.

Agreed. Aaron's claim is making money in a very indirect way. Making money in the market is hard enough through direct means (purchase a security watch it go up). I would say it would be even harder to purchase something then move the inflation lever up or down in hopes to manipulate their personal wealth would be much much harder. Plus that also means that they can agree on a set of securities they wish to target which I would say is less likely than a cold day in hell. Not to mention the amount of money they lost and haven't gotten back is pale in comparison holding inflation at 3% instead of 4%.

What I would argue is that Bankers and Wallstreet just want it to go back to what it was. They're trying as hard as they can trying to build a time machine to go back before everything fell apart, and resisting all attempts at changing for the better. They just want this to all go away. So given the choice they want that lever to make everything as it was before which is impossible.

I agree. Although Aaron does offer support for the idea that Bernanke is choosing unemployment over inflation [1], he doesn't support the idea that the bankers are motivated by selfishness. (For example, they may be motivated by the fact that inflation would make the dollar an unattractive investment vehicle to other countries.)

[1] Via quoting from the Economist: “Mr Bernanke does not want to risk a de-anchoring of inflation expectations. He is willing to accept 10% or greater unemployment and the resulting economic and political fall-out in order to avoid that risk.”

> ... he doesn't support the idea that the bankers are motivated by selfishness. ...

Isn't that assumption always taken by default when considering nearly all market actions? That actors in the market are primarily motivated by selfish goals?

Unless that assumption would lay the blame for a catastrophe on wealthy people and require changes that would make them less wealthy, in which case we cannot take selfishness for granted and have to assume their motivations are altruistic (if misguided). You really need to be up-to-date on modern market ideology.

Modern market ideology does tend to assume people controlling the government and various agencies (for instance, Bernake) are motivated by selfishness.

It also assumes that the home-borrowers, politicians, realtors and bankers who created the housing bubble were motivated by selfishness, as were the hedge fund managers and bankers who helped pop the bubble.

Those market actors also only have limited rationality (and not perfect foresight), and skewed incentives (-> principal agent problems).

That needn't hinder one from constructing a conspiracy theory, though.

I don't think that this is a conspiracy theory. Just observation (fairly obvious, although I am not sure if right in that case) that selfishness can sometimes lead to actions that harm economy and the people.

Greed is (not always) good.

I agree. Though I would be cautious stating that someone wanted a recession _and_ effected [sic] it.

> Isn't that assumption always taken by default when considering nearly all market actions?

Yes, and bankers are generally motivated by self-interest when undertaking market actions. However, we are not talking about a market action. The question is what motivates Ben Bernanke's decisions as the head of the Fed?

Is he a selfish kleptocrat trying to enrich himself and his buddies, or is he providing prudent guidance to the country and economy as a whole? Personally, I disapprove of his role and distrust the Fed's entirely, so I cannot provide a reasonable answer here.

> The question is what motivates Ben Bernanke's decisions as the head of the Fed?

He is still Ben Bernanke, right? Does the hat he wears change him? Assumption that people undertaking government position will forget about what their life was all about up to that point seems far fetched.

I agree. I "work for a living" (whatever that means, though in the context used here it's as opposed to being a "greedy banker"), and I can sympathize with the plight of the unemployed, but I've also made sure I had sufficient savings as a rainy day fund and am also prepared to reduce my living expenses if necessary.

I think that I have every reason to be concerned that my little nest egg might be devalued. More apropos to the community here, this could also mean a shorter runway for a bootstrapped startup; I don't see how founders would be pleased by such a move.

More relevant to the general population: when your nest egg's value is anything but safe, you are going to spend your money as soon as you get it - this has more ill effects than I can enumerate

This reminds me of my grandfather's stories during the Chinese Civil War (or shortly after the capitulation of the Nationalists anyway), where he'd get his pay and immediately bike at lightning speed to the market to trade it for sustenance.

Of course, the only thing that fixed that was a complete currency reset:

http://en.wikipedia.org/wiki/New_Taiwan_dollar

I'm not sure if the US would really be better off with that.

The same thing happened in Argentina and the same thing could happen in the U.S. Countless fiat currencies in history have experienced the same fate. The only solution I have ever seen in my research is to return to a commodity backed currency.

If there are other solutions, I don't know of them, but would like to.

Currencies backed by anything are a terrible idea. Most economists now believe that deflation caused by a gold-backed currency was one of the primary causes of the Great Depression. Imagine how much worse it will be with, say, an oil-backed currency. What would 2007 have done to our economy?

Central fiat banking is the best known solution to the currency problem. This solution gets hated on by a lot of people who don't know any better, but think they do. The central requirement is that the currency-makers be independent of just about everyone, so that nobody can debase the integrity of the currency for political reasons. This angers everyone who thinks they know better than the central bank, but the anger of the average anti-establishment type is fickle and transient. It also angers the politicans, who are more dangerous--the examples of Argentina and Taiwan given here demonstrate not the dangers of fiat currencies, but rather that any currency should be kept far, far away from politicians.

> The central requirement is that the currency-makers be independent of just about everyone

Thus ignoring our entire system of checks and balances. Do you not see the danger, here?

> This angers everyone who thinks they know better than the central bank

AKA, every market participant.

> but rather that any currency should be kept far, far away from politicians.

In what sense are central bankers not politicians? They are not elected, that's for sure. However, they exercise a large amount of control over our economy and very much influence official political action. In a sense, they are very much a separate executive branch of our political system.

There is no pre-existing "system of checks and balances" when it comes to banking. But let's pretend there is.

As an analogy, consider that we have managed to get on with a politically independent Supreme Court, with their least proud moment (Dred Scott) being when they decided to ignore their charter and bow to the will of the people.

I have no problem trusting independent bodies with things, so long as they are well-chosen and truly independent. History shows that this is a much better idea then trusting either the econo-politically elite or the demos.

> I have no problem trusting independent bodies with things, so long as they are well-chosen and truly independent.

Right, and a well-chosen king rules better than a representative democracy. The problem is, how do we choose a king well? Likewise, how do we guarantee the Fed is well chosen and truly independent? I submit that we can't.

> History shows that this is a much better idea then trusting either the econo-politically elite or the demos.

Care to elaborate?

Thus ignoring our entire system of checks and balances. Do you not see the danger, here?

Except that we have checks and balances. The chief central banker must be appointed and confirmed and reconfirmed on a regular basis. This in itself provides a check and balance very similar to the one where the Supreme Court Justices must be appointed and affirmed by the other two branches, but are then almost entirely independent afterwards.

Similarly, the other two branches could pass legislation affecting the other levers of the economy if the Fed is doing poorly or even disbanding and replacing the Fed if it truly must. Doing something like this would be incredibly difficult, but this is part of the point. The Fed is meant to be mostly independent.

There are checks and balances to reign in the Fed in the extremely unlikely event that it goes out of control, and the rest of the time it is meant to be independent and sheltered from most of the ups and downs of the rest of the political process.

> you are going to spend your money as soon as you get it - this has more ill effects than I can enumerate

You are referring to hyperinflation? When money can loose significant value overnight?

Or maybe you know what bad things are caused by high (but reasonable) inflation?

Most US citizens not only spend all the money they have just earned but they spend money they are yet to earn, and their economy was rolling just fine.

It sounds like you are describing hyperinflation of the kind experienced in Germany in 1922 and 1923. It can cause chaos where people have to spend money as fast as they can get it or they lose value and in extreme cases it becomes cheaper to burn money than to buy firewood with the money.

A more moderate level of inflation though will not cause such problems and a modest and predictable level of inflation can be beneficial to economies.

they would be pleased because loosing the funds for dragging their clientles company for a few more months would be replaced by having a profit faster.

I think the article is misdirected. A few years ago Japan increased their money supply by 30% to dig themselves out of their depression and it failed to work. So increasing the money supply I doubt will work any better here in the U.S. All those people now being foreclosed on should have had their loan applications disqualified. That responsibility falls to Washington to regulate, not the Federal Reserve, and the biggest scream that "you can't do that" would have been Washington, not the Federal Reserve I believe.

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