A Lying Bureaucrat is Often A Frightened One

The Minority Report ^ | 16 Dec 2008 | .cnI redruM

[.cnI redruM]

It doesn’t require a PhD in Male Bovine Scatology to detect the foul odor wafting from the following pronouncement by Professor William Ford.

“This is really a great communications challenge,” said William Ford, a former Atlanta Fed chief who’s now at Middle Tennessee State University in Murfreesboro. “It is going to take some educational effort to elaborate on how these policy options would work” because “people don’t know how to interpret what they are talking about.”

When it comes to the policies employed thus far to combat our current economic downturn, people don’t have to interpret very much. The policies have failed, and the people now in charge are left holding broken policy levers. This will invariably frighten the bureaucrat holding said broken policy lever and the frightened bureaucrat will do what comes natural to public officialdom. He will spin, misinform, prevaricate, lie, dissemble and ultimately b***-s***.

The SOP Fed reaction to a credit crisis has been to lower interest rates on Federal Funds. This endeavors to accelerate the so-called velocity of money. A dollar bill that is spent more often gets shared more often and hopefully reaches the desperate, impoverished soul who needs it most badly.

However, the devil ensconced in the unintended consequences of such a policy has long been visible to far-sighted observers. When Copernicus took a break from attempting to stave off agricultural disaster, by studying the motion celestial bodies, in hopes of reforming the broken Julian calendar, he also turned a gimlet eye towards the foundering economics of Poland in The High Middle Ages. This led him to render unto Caesar the following observation.

Money can lose its value through excessive abundance, if so much silver is coined as to heighten people's demand for silver bullion. For in this way, the coinage's estimation vanishes when it cannot buy as much silver as the money itself contains […]. The solution is to mint no more coinage until it recovers its par value.

Milton Friedman later translated Copernican Theory into modern algebra and described the equation of state for exchanges in a modern economy. In essence, Friedman theorized that the volume of money dotted with the velocity of transactions could define a notional momentum of currency. In keeping with the analogy to Newtonian Mechanics, this momentum would have to be conserved.

Thus, we define it as equivalent to some force. This economic force of money would do work in some definable space. Friedman chose to define the space as the aggregate set of economic transactions and work performed as the total value acquired during the movement of currency. Hence the momentum of currency was set equal to the force of money integrated over the sum of the transactions conducted.

Regrettably, both Friedman and the modern Fed Chairmen Bernanke and Greenspan, seem oblivious to the deleterious impact of friction athwart any mechanical system. To extend the analogy between economic exchange and Newtonian Mechanics further, we introduce a frictional force that retards the momentum of exchange.

Given the propensity for Neo-Classical economists to call upon perfect information as a precondition to optimal economic efficiency, we can define this frictional force athwart transactions as uncertainty. Actuaries routinely map uncertainty to cost and Nationwide or Gieco then sends us our bills. We can do likewise, and measure our uncertainty in terms of the cost to insure the credit necessary to execute a given transaction.

Wall Street analysts refer to this as the credit spread. Credit spreads are tracked in terms of the amount of money required up front to insure $10K worth of a given loan or debt interest. The higher a debt insurance price gets, the less of a finite pile of money can be leant from. This, in turn, brings us the asymptotic case where the accelerant is applied to the velocity of money to the maximum extent possible, but the velocity of money gets damped by friction and won’t obey the Fed and speed up.

The currently observed solution to this case is what FT Alphaville Blog describes as “The Roach Motel Bank.” This derogatory term describes a bank where Federal Rate cuts go in, but the credit spreads just widen, and therefore, no cheap loans go out of the bank to needy businesses and consumers. Bank of America economist Peter Kretzmer described how things work out for policy makers at this “Roach Motel” point of equilibrium.

As the crisis has unfolded, recent releases have indicated that the psychological impact of the recent financial market disruption, including the declines in asset values, is the greatest in more than a half century. For example, this morning’s consumer confidence numbers were well below even the most pessimistic estimates of market participants. In this environment, incrementalism by the Fed is not an appropriate response.

And yet the tendency of policy-makers is to do the best they can with what they believe they have. Rate cuts are what they have, so those who tinker in the boiler room of our national economy attempt to accelerate the velocity of money in accordance with an economic variant of Admiral Farragut’s Law: “Damn the CDS Spreads; full speed ahead!”

So this reduces our public spokesmen to disinformation, in the face of highly probable bungling and failure. They worry about what the people will think and seek to stave off panic. In their less noble moments, they look for just the right verbal formulation that will save their own over-credentialed, under-performing rectal orifices. And that brings us to the nub of Professor Ford’s “communication problem”.

Thus the scared bureaucrats lie for the same reason a defeated tank battalion pops smoke. They hope to cover the consequent retreat, from failed solutions, until another set of weapons can be brought to bear on the enemy. Meanwhile, the rest of us get to live in the aftermath of our foolish and disingenuous selection of policies. Merry Christmas America!

[.cnI redruM]

I think the only communication problem occuring is that no one believes either the Fed Chair or The Secretary of The Treasury