A famous libertarian economic thinker, and memory says it was the late Walter Williams, was once presented on a talk show with the idea of a higher minimum wage. The suggestion was something like $7.25/hour to $10. In a paraphrase of Williams, he quizzically asked, “Why are you being so stingy? Why not raise the minimum wage to $100?”
Which brings us to the Fed’s decision last week to ‘reduce’ the Fed funds rate 50 basis points to 4.75. It was difficult to not think of Williams incredulously asking the Fed’s well-populated cheering section “why not go to zero?”
All semblance of reason goes out the window when it comes to the Fed. To understand why, a brief digression is required.
Think back to several weeks ago, and Kamala Harris’s professed plan to attack “price gougers” as a way to bring down grocery prices. The negative response was swift and bipartisan. Left and right were quick to point out the obvious about artificially decreed prices resulting in shortages of the goods and services made “cheaper” by government decree. It’s worth adding that there’s no such thing as price controls, there’s just scarcity. Settled science.
Consider all this through the prism of borrowing. It’s easily forgotten that no one borrows dollars, rather they borrow what dollars can be exchanged for. In the borrowing equation, someone must be willing to save or not invest so that someone can borrow. Yes, there’s an opportunity cost. When those with title to money don’t invest what they haven’t spent, they’re potentially missing out on the genius of compound returns over time that can be had in the stock market.
If those same savers are a bit more risk averse, and don’t want equity exposure, it should be noted that in lending out their excess to financial intermediaries like banks, they seek compensation for having foregone consumption. An interest rate is but a return, albeit a smaller one that compensates those who save. Borrowing mirrors saving. Get it?
All of which explains why the Fed’s 50 basis point cut, let alone the Fed’s occasional tendency to go zero, makes exponentially less sense than Kamala Harris’s promise to shrink grocery prices by going after the “gougers.” In Harris’s case, she was mindlessly talking price controls for a narrow number of market goods. When the Fed acts, it’s decreeing lower prices for the money exchangeable for everything.
Where’s Walter Williams? Where are the libertarians more broadly? The answer, sadly, is that they’ve seemingly joined forces with the various other economic religions in shielding the sainted Federal Reserve from the same iron laws of economics that they apply to every would-be price controller not the Fed.
At the libertarian Cato Institute, and in response to the Fed’s alleged rate cuts, chief Fed watcher Norbert Michel’s main expressed objection to Fed’s rate decision is that he wants the central bank to follow rules, that in particular “Congress could require the Fed to follow a rule and give it the ability to deviate from that rule, provided they explain exactly why (and what they’re doing) to Congress.” Ok, so if the Fed just clears with Congress how it would aim to control the most important price in the world other than the dollar, all is well? How about we include a President Harris or Trump in the rulemaking?
Michel added that one of his Cato colleagues (Jai Kedia) had previously noted that “at least one standard policy rule suggests the Fed should have already cut its target.” Oh, well, say no more. Since economist-constructed models explain what the price of borrowing should be, forget the markets. Right?
The sad thing is that this is what “economics” has come to. Economists all seem to know that price controls don’t work, but when the world’s biggest employer of economists employs price controls, they’re like the drunk doctor at the party grabbing women where they shouldn’t under the guise of being a doctor. No doubt credit is solely produced in the private sector, and the price of it is a consequence of infinite private decisions made every millisecond, but we’re economists, trust us.
Except that for every buyer there’s a seller. From this statement of the obvious it can similarly be concluded that there’s no way of knowing whether the Fed is too “tight” or “loose.” From there the better, more comforting conclusion is that if economists and those who play them are mindlessly chattering about the right cost of borrowing, and the Fed is subsequently setting a price for economists to chatter about more, then it must be true that the Fed sets nothing at all.
