Wednesday, September 23, 2015

"Are the bankers evil or stupid?" HOW ABOUT BOTH - the argument for higher rates: are the bankers evil or stupid? Yes:

An unexpected rise in the inflation rate is clearly harmful to banks' bottom line. This will lead to a rise in long-term interest rates and loss in the value of their outstanding debt. This is very bad news for them.

While we (the three of us) can agree that such a jump in inflation is highly unlikely in the current economic situation, it is not zero. Furthermore, a stronger economy increases this risk. If we assume that the banks care little about lower unemployment (they may not be bothered by lower unemployment, but high unemployment is not something they wake up every morning worrying about), then they are faced with a trade-off between a greater risk of something they really fear and something to which they are largely indifferent. It shouldn't be surprising that they want to the Fed to act to ensure the event they really fear (higher inflation) does not happen. Hence the push to raise interest rates.

I truly am stunned that K-dog doesn't get this.

We learned it in first year Intro Macro.

From a textbook by Greg Mankiw for the love of Christ!!!

Anyway, there is a second point to make, one more sociological and less first-year-microeconomics-y:

I suspect also there is a strong desire to head off any idea that the government can shape the economy in important ways. There is enormous value for the rich to believe that they got where they are through their talent and hard work and that those facing difficult economic times lack these qualities.

Any government intervention in the economy is Keynesian socialism for these guys.

Any intervention in the economy, that is, other than cutting taxes, banning unions, abolishing the minimum wage, eliminating laws and defunding regulators. Oh and establishing charter schools and closing universities and demanding forced transvaginal ultrasounds.

As an addendum, the academics need to remember that the Fed is forever associated in everyone's mind with fractional reserve banking, which is one of the perennial bugaboos of the John Birch Society and young-earth economists.

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