Comment by hogFeast | Hacker News Reader

Comment by hogFeast | Hacker News Reader

There is already a book that does this (although I would definitely recommend doing what you are doing): Russell Napier's Anatomy of the Bear.

Tangentially, it is kind of interesting that very few people in markets use this kind of historical information to learn more about markets. Russell Napier runs a library in Edinburgh that is composed solely of economic and financial history books. You can have all the technical information in the world, it won't help you avoid the impact of human psychology. I suppose this is why financial cycles happen, the old guys retire, the new guys who have only known a bull market get into it...same mistakes over and over.

To give you a concrete example, I did my thesis on US monetary policy in the 50/60s. The understanding of this period within economics is based almost entirely on the view that economists have of themselves today. If you read the minutes, you see that the Fed understood why inflation was rising in the late 60s but were unable to do anything about it. This grey area of political independence is, of course, totally forgotten today (when you have a former Fed chair as Treasury Secretary, alarm bells should be going off...but, of course, this is all long forgotten).

I took a fabulous course in grad school on Monetary Theory and Policy and at one point the class was discussing how laughably bad the policies of (I think) Arthur Burns were. The professor scolded us pointing out that all the stuff we were being taught had to be learned somehow and what we were describing as laughably bad was this learning.

Right, that is exactly the wrong thing to take from it, that is exactly the kind of misinterpretation of history that people still have (generally speaking, you cannot view history in terms of the present, economists think you can do it because economics is a science...it isn't).

The reason why Burns' policies were poor was because he wasn't making policy within a context that makes sense today. From the mid-60s onwards (before inflation took off), monetary policy was formed politically. The economy used to cycle around elections for this reason. Burns really took this to its logical conclusion...and to be totally clear, a lot of the mistakes that Burns made were made in other countries. Burns was actually fairly hawkish, compared to Miller, but the problem was (partly for reasons of political expediency) people believed that wage restraint policies would be effective.

To loop back, the lesson of the 60-70s is that monetary policy should be free of political influence. Look at what is happening now. Has the lesson been "learned"? And, more importantly, can it ever be "learned"?

there are at least three books on this period,

Lefevre, E. (2004). Reminiscences of a stock operator (Vol. 175). John Wiley & Sons.

Kramer, C. (2000). " Devil Take the Hindmost: A History of Financial Speculation" by Edward Chancellor (Book Review). Finance and Development, 37(1), 53.

Mackay, C. (2012). Extraordinary popular delusions and the madness of crowds. Simon and Schuster.

You don't understand...there are thousands of books on this period (for some reason, only one of the books you mention are about this period...Mackay was written several decades before the 20s, Chancellor is a general history, Lefevre is interesting but not really going to give you the information you need as it is a personal story).

The book that I cite is identical to the OP. The author goes through newspapers from the period leading up to 1929 (and iirc, through to the late 30s).

> when you have a former Fed chair as Treasury Secretary, alarm bells should be going off...but, of course, this is all long forgotten

Can you elaborate on this point? I would think a cabinet member going to the fed and not coming from the fed would be more alarming. What am I missing?

What is the difference? The reason why it is alarming is because there is no political separation. It doesn't really matter which way it goes.

This happened in the 70s. Nixon politicized the role with Burns (who came from the CEA), then Carter appointed Miller (who went onto become Treasury Secretary). And btw, Miller was (with hindsight) one of the worst Fed chairs of all-time.

Tbf, Volcker came from Treasury, Geithner went into Treasury (after FRBNY) but, in both cases, they operated with Presidents who respected the distinction in functions. This distinction weakened significantly under Trump, and is now non-existent.

Is the big deal primarily that the Fed needs to be able to spike rates (like Volcker) to get rid of inflation and close a business cycle, but that tanks asset prices and forces Zombie businesses to finally die, which is politically toxic, so it doesn't happen if there is too much political control of the Fed?

Correct. In 1957 or 58 (I can't remember which), the Fed increased interest rates to remove excess out of the economy. Economy went into a fairly mild recession. The Fed gets blamed for causing the recession (the Fed Chair at the time said the Fed should to take away the punch bowl...that stopped happening). Nixon loses to JFK (remember he was Eisenhower's VP, so Nixon blamed the Fed when he lost). And the cycle that led to the inflation of the 70s (where monetary and fiscal policy is timed to the election cycle) begins, tacit political involvement).

Also, before 1951 (and for a period of years after, although the formal break was 1951), the Fed wasn't functionally independent from govt. Because the war debt was so large, the Treasury used the Fed to press interest rates down so the debt could be paid down (it continued after 1951 because the debt was still really huge, note the similarity with your hypothetical). So the period at the end of the 50s was the first real test of Fed independence.

Again, I don't think people today understand that Fed independence is clear legally but has been more flexible in practice. Why? Because setting interest rates is inherently political. And there is an asymmetry: the incentive is always to be loose. The lesson is that there is no real way to get around political control, because the temptation is too great. I also think that policymakers should rely more heavily on macroprudential policy to take the heat out of markets (this is happening in the UK) because normal monetary policy is so asymmetric.

How do you see things playing out now that we're near 0 interest rates and in some cases negative? Will governments continue to be loose via negative interest rates, through some other mechanism, or will they be forced to tighten policy?

In theory as you approach zero smaller changes produce bigger results in an aysmptotic fashion, but in reality lenders have margin to think about.

Maybe the zero rates will take into account lenders margin, and once that is taken into effect the rates will reflect the asymptotic curve.

Do you have a link to the fed's minutes or to your thesis?

You can get the Fed minutes (iirc) back to the 80s on the main website. To get earlier ones (they go back all the way iirc), you can get them from ALFRED (there is tons of interesting data on there).

ohhh good rec

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