An Economic Concern

[agaglio]

So even though the interest rates were not that low, you think the Fed should have determined that there was overspeculation in the stock market and raised interest rates for that reason. In other words, your contention is that the Federal Reserve's policy on money supply and interest rates should be based upon whether it thinks there is overspeculation in the stock markets.

No, I think the job of the Federal Reserve would be to notice that the economy is running away, and adjust interest rates/the money supply to counter it. Yes, I think the Federal Reserve should have noticed the economy was running away (over speculation), and adjusted for it. Of course, it was too primitive and could not sense it like it should have. Banks could simply do this much more efficiently by themselves. They would realize that they don't have the money to lend out so they couldn't possible keep lending the way the Federal Reserve forced them to.

I disagree that is a proper function of the Fed. I don't believe the Fed has ever viewed that as its function, nor should it. The Fed's job is to control the money supply based upon whether there is a concern for inflation. The Fed's job is not to speculate whether stocks (or any other asset) are valued appropriately.

Congressional oversight of the Federal Reserve and monetary policy is important because:

* Monetary policy can dominate fiscal policy in certain circumstances.
* Inflation is determined by monetary policy.
* The Federal Reserve influences interest rates.
* The Federal Reserve stabilizes the financial system.

The Importance of the Federal Reserve

Its job is to speculate that the economy is not running away. Over speculation is a symptom and a cause of this.

I could just imagine the response that would happen if the Fed announced today that it was going to crank up interest rates because it thought the stock market went up to much last year.

The stock market did not rise too much last year. Besides this, what they are worried about is an explosion of the economy. One way to tell if a blowout is eminent is through the activities of the stock market.

There is no logical basis for that assetion. Interest rates do not cause over speculation.

lol. If interest rates don't effect over speculation, then see if the following situation makes sense.
We are in an economic boom, and the interest rates are lowered to .01%. According to you, no more people would borrow money to invest it in the booming stock market then if the rates 10%.

Of course the lowered interest rates would cause more people to invest. If the economy is really booming, a 6% rate is not going to deter people from borrowing on credit the way an 18% rate would.

Easy to say in hindsight, I suppose.

And it would have been even easier for individual banks, with only a certain amount of money to loan out,to see.

To what rate do you suggest raising the rate would have made a difference, without at the same time throwing the economy into the dumpster?

I don't suggest setting a rate, I suggest letting banks set their own rate.

You are asserting a cause and effect where none has been demonstrated.

How else do you want me to prove that low interest rates leads to more people taking out loans. More people with money leads to more investment. I guess I just assumed that would be obvious.

I don't understand the contention that the Fed regulates interest rates to bolster or dissuade speculation in a particular asset market. I have never heard of that.

Neither have I, but I have heard of them regulating rates to control the growth of the economy, and therefore the growth of the stock market.

Then there would be no way at all to control the money supply or interest rates, which would not prevent the phenonma of speculation in any case.

That's laughable. As if the banks can't run themselves without the government? They have done it in the past with great success. A gold standard would take care of money supply quickly. The last thing you want to do is prevent speculation. You prevent over speculation.

I'm not trying to trick. I disagree with the contention that interest rates caused (or causes) overspeculation in the stock market.

To disagree would be to disagree with logic.

It is easy after a market correction and with the benefit of hindsight to determine that there was overspeculation. But that kind of prescience is not so clear at the time.

Which is reason number 1 that the government can't do it effectively.

In this decade, the stock market performance has been below average. So therefore according to your theory, interest rates should be decreased.

Nope, maybe development of technologies has been below average this year, or maybe it is a number of other unforeseeable factors. Decreasing interest rates is one thing you could do to try to bolster the economy.

What encouraged overspeculation in the stock market in 1929 was not interest rates, which were not historically low. Overspeculation is caused by greed, by folks believing that they can make money. What exacerbated overspeculation before the Great depresssion was the fact that you could buy stocks on a 10% margin.

What do you think caused the 10% margin to be possible? People could buy on a 10% margin and only had to pay a low interest rate on the money they borrowed.

The Federal Reserves policy of easy credit lead to the 10% margin. The low discount rate (how much banks pay to borrow money from the Federal Reserve), which which is low when interest rates are low, gave smaller banks even easier access to money. This allowed them to make reckless decisions, like offering a 10% margin. That's right, even the 10% margin was caused by the Fed.

The correction from this phenonma was not to increase interest rates (which would have a dubious effect on margin trading anyway) but to require greater margins.

Actually, a raise in interest rates would have a large effect on margin trading. The discount rate would be raised, banks couldn't get money as easily. Also, people would pay larger interest on the money they borrowed, further deterring people from buying on margin.

If you want to argue that overly restrictive money policy after the stock market collapse prolonged the great depression, I think there would be firmer ground for that contention, because I agree that Fed money policy does have an effect on the economy as a whole.

That is not what I'm arguing. And to say that the Federal Reserve board doesn't have an effect on the economy would be outright stupid.

 

[Iriemon]

No, I think the job of the Federal Reserve would be to notice that the economy is running away, and adjust interest rates/the money supply to counter it. Yes, I think the Federal Reserve should have noticed the economy was running away (over speculation), and adjusted for it. Of course, it was too primitive and could not sense it like it should have. Banks could simply do this much more efficiently by themselves. They would realize that they don't have the money to lend out so they couldn't possible keep lending the way the Federal Reserve forced them to.

I can agree that part of what the Fed's does is monitor the economy, and I agree that its interest rate policy can have a significant effect on the economy. The reason it does this is not to prevent overspeculation in an asset market, however, but concern for an unsustainable over expansion of the economy as a whole, particularly if a loose money supply (lower rates) has been in effect and the possible of inflation looms.

That is different than monitoring the stock market. The stock market is not necessarily a very good indicator of the economy as a whole.

The Importance of the Federal Reserve

Its job is to speculate that the economy is not running away. Over speculation is a symptom and a cause of this.

I checked your cite; I did not find the word "speculation" in it.

The stock market did not rise too much last year. Besides this, what they are worried about is an explosion of the economy. One way to tell if a blowout is eminent is through the activities of the stock market.

Not a particularly good one. Stocks sucked in the 70s yet we had a blowout in '81. Stocks doubled in the 5 years ending 1986 and again for the 5 years ending 1995, neither date immediately preceding any blowouts. Are there any studies the show a correlation between attributes of the stock market and a "blowout"?

lol. If interest rates don't effect over speculation, then see if the following situation makes sense. We are in an economic boom, and the interest rates are lowered to .01%. According to you, no more people would borrow money to invest it in the booming stock market then if the rates 10%.

I agree that more people would borrow money in your unrealistic scenario that would lead to hyperinflation. I disagree that this additionally borrowed money would necessarily end up disproportionately in stock market speculation. People and businesses borrow money for lots of things. Whether they put it in speculating in the stock market versus other things depends on many factors other than the interest rate itself.

The fault with your logic is the implicit assertion that easier credit means the money borrowed will go disproporately to a particular type of investment (ie the stock market); and vice versa. Not necessarily so.

I agree that lower rates will induce more overall borrowing throughout the economy, and that some portion of that additional borrowing will probably end up in some additional investing in stock markets. Similarly, an increase in rates will lend to less overall borrowing, and along with all other investments in the economy, would probably lead to less investments in the stock market, along with everything else that people borrow money for.

Of course the lowered interest rates would cause more people to invest. If the economy is really booming, a 6% rate is not going to deter people from borrowing on credit the way an 18% rate would.

I certainly agree that an 18% rate would cause people to stop borrowing money, but not just for investing in the stock market. For everything people and business borrow money for.

And it would have been even easier for individual banks, with only a certain amount of money to loan out,to see.

Why would you suppose that banks have greater insight that the Fed as to overspeculation? Where that true, banks would have stopped lending for stocks in 1929, realizing the overspeculation, which would have slowed it down. They did not, they lent more than ever because they too were making lots of money on it. Banks have no better vision on this than the Fed, and probably a lot less so.

I don't suggest setting a rate, I suggest letting banks set their own rate.

Banks don't set market rates. It is based on supply and demand if a bank sets its rate to 8% whenever one else is lending at 6%, what happens?

How else do you want me to prove that low interest rates leads to more people taking out loans. More people with money leads to more investment. I guess I just assumed that would be obvious.

The first sentence is obvious. And I agree it leads to more investment overall in the economy. Where it is not obvious to me is your conclusion from that that it leads to "over-speculation" in one particular asset market like stocks.

Neither have I, but I have heard of them regulating rates to control the growth of the economy, and therefore the growth of the stock market.

I agree the Fed considers the growth of the economy, but primarily in terms of inflation. This was an area where I agree there was bad policy. Prior to President Carter appointing Vokler to the Fed in 1979, Fed policy was exactly what you are contending: focus on the economy. And when the economy was doing sluggish, and unemployment was getting high, the Fed responded by lowering rates, which expanded the money supply. And the result was inflation.

Volker changed tack. He said the Fed would not focus on the economy primarily but on inflation. He tightened the money supply, rates skyrocketed, and we had a rescessions in 1980 and 82. But it worked. All chairman since have focused first on inflation, second on the economy. Which policy IMO is far better.

That's laughable. As if the banks can't run themselves without the government? They have done it in the past with great success. A gold standard would take care of money supply quickly. The last thing you want to do is prevent speculation. You prevent over speculation.

The Gold standard was and would be a disaster. You want to talk about depressions, put yourself on a commodity standard where you cannot expand the money supply and ease credit at a time the economy is going down the chute.

Iriemon: I'm not trying to trick. I disagree with the contention that interest rates caused (or causes) overspeculation in the stock market.

To disagree would be to disagree with logic.

Ha, I disgree with that. You have not established logically a cause and effect relationship between overspeculation and interest rates other than to state it as a conclusion.

Iriemon It is easy after a market correction and with the benefit of hindsight to determine that there was overspeculation. But that kind of prescience is not so clear at the time.

Which is reason number 1 that the government can't do it effectively.

Nor can anyone else. To the Fed policy is: Don't try to do it. Makes sense to me.

Iriemon: In this decade, the stock market performance has been below average. So therefore according to your theory, interest rates should be decreased.

Nope, maybe development of technologies has been below average this year, or maybe it is a number of other unforeseeable factors. Decreasing interest rates is one thing you could do to try to bolster the economy.

Ah, so at least you are agreeing that stock market performance is affected by a number of other unforeseeable factors -- which have nothing to do with interest rates.

But I was wondering why you did not respond to this:

Yet at the same time, there arguably has been overspeculation in the real estate market. So should the Fed lower rates to encourage speculation in the stock market? Or raise rates to discourage speculation in the real estate market?

What do you think caused the 10% margin to be possible? People could buy on a 10% margin and only had to pay a low interest rate on the money they borrowed.

The Federal Reserves policy of easy credit lead to the 10% margin. The low discount rate (how much banks pay to borrow money from the Federal Reserve), which which is low when interest rates are low, gave smaller banks even easier access to money. This allowed them to make reckless decisions, like offering a 10% margin. That's right, even the 10% margin was caused by the Fed.

Laws and regulation establish margin requirements, not interest rates. It was not easy credit or low interest rates that led to a 10% margin. Stock market margin reguirements are set by law, not by prevailing interest rates. The requirements are set by a combination of FRB, NYSE, NSD and other regulatory bodies.

Margins requirements were not lower in the 50s, 60s, and 00s when credit was easier and rates were lower.

Invest FAQ: Regulation: Margin Requirements

Actually, a raise in interest rates would have a large effect on margin trading. The discount rate would be raised, banks couldn't get money as easily. Also, people would pay larger interest on the money they borrowed, further deterring people from buying on margin.

Banks could get money, it just costs more. I agree that would lead to a decrease in overall borrowing and investing.

That is not what I'm arguing. And to say that the Federal Reserve board doesn't have an effect on the economy would be outright stupid.

Nor have I or would I contend such a thing. Monetary policy is a big factor in economic growth and inflation. Which is why its a good idea not to let Congress (or gold suppliers) have such control.

 

[agaglio]

I can agree that part of what the Fed's does is monitor the economy, and I agree that its interest rate policy can have a significant effect on the economy. The reason it does this is not to prevent overspeculation in an asset market, however, but concern for an unsustainable over expansion of the economy as a whole, particularly if a loose money supply (lower rates) has been in effect and the possible of inflation looms.

Part of over expansion of the economy is over speculation.

That is different than monitoring the stock market. The stock market is not necessarily a very good indicator of the economy as a whole.

If there is over expansion of the economy, there is over speculation in the stock market.

checked your cite; I did not find the word "speculation" in it.

I didn't say it was in there. I said that its job is to stop the economy from ballooning, and over speculation is part of the ballooning.

Not a particularly good one. Stocks sucked in the 70s yet we had a blowout in '81. Stocks doubled in the 5 years ending 1986 and again for the 5 years ending 1995, neither date immediately preceding any blowouts. Are there any studies the show a correlation between attributes of the stock market and a "blowout"?

1981 was not a blowout like 1929. And, as I have already said, the stock market can grow for other reasons. Banks functioning on a gold standard could differentiate between false growth and real growth because they don't allow loans to be taken out too easily.

I agree that more people would borrow money in your unrealistic scenario that would lead to hyperinflation.

Yes, it's unrealistic. I created it because you didn't understand that lowering interest rates lead to more loans.

I disagree that this additionally borrowed money would necessarily end up disproportionately in stock market speculation.

When the stock market is booming and clearly a place for easy money, a lot of it sure would end up in the stock market.

The fault with your logic is the implicit assertion that easier credit means the money borrowed will go disproporately to a particular type of investment (ie the stock market)

The stock market was booming. Investment is going to flow to where money can be made faster and cheaper than any where else. This is what you're referring to when you say "disproportionately".

I agree that lower rates will induce more overall borrowing throughout the economy, and that some portion of that additional borrowing will probably end up in some additional investing in stock markets.

So you're saying that the Federal Reserves interest rate lead to the ballooning of the economy and therefore stock market.

I certainly agree that an 18% rate would cause people to stop borrowing money, but not just for investing in the stock market. For everything people and business borrow money for.

Of course it's not all invested into the stock market. Some of it is, some of it isn't.

Why would you suppose that banks have greater insight that the Fed as to overspeculation? Where that true, banks would have stopped lending for stocks in 1929, realizing the overspeculation, which would have slowed it down.

They couldn't see it in 1929 because, money was not based on a standard and they couldn't control the interest rates. If the Fed didn't exist, the excessive borrowing that occurred in the 20s wouldn't have been possible because banks would have run out of money and been unable to lend so much money. But the government destroyed the banks' ability to see by allowing them to borrow money so cheaply. The banks, with an unlimited supply of money, (because the fed lent it to them so cheaply) were no longer forced to come to terms that so much money was being borrowed. This is all due to the government's low discount rate/interest rate.

They did not, they lent more than ever because they too were making lots of money on it.

Their power to keep lending came from the government. They could not keep lending if money was based on a gold standard and banks could set their own interest rates.

Banks don't set market rates. It is based on supply and demand if a bank sets its rate to 8% whenever one else is lending at 6%, what happens?

It goes out of business. Therefore, without the fed, banks would compete, each lowering their rates as much as possible while making a profit. But, each bank only has so much money. When they start to run out of money, they must raise their rates to discourage people from taking out money. The raising of each individual bank's rate could react to the economies growth faster than the fed will ever be able to.

The first sentence is obvious. And I agree it leads to more investment overall in the economy. Where it is not obvious to me is your conclusion from that that it leads to "over-speculation" in one particular asset market like stocks.

It does lead to more overall investment in the economy, but the stock market was booming, leading more and more people to invest in it rather than any other place. It snowballed. As it did better and better more and more people chose to invest in it, making it grow faster, attracting more. The nearly unlimited supply of credit caused by the fed allowed this to happen.

The Gold standard was and would be a disaster.

Really, when?

You want to talk about depressions, put yourself on a commodity standard where you cannot expand the money supply and ease credit at a time the economy is going down the chute.

It would be impossible for the economy to go down the chute. There would be no need to expand the money supply.

Ah, so at least you are agreeing that stock market performance is affected by a number of other unforeseeable factors -- which have nothing to do with interest rates.

Yes, but "unforeseeable factors" could not have caused the explosion that occurred in 1929. Only a refusal to adjust rates despite the ballooning economy could have done such a thing.

But I was wondering why you did not respond to this:

I had already answered a similar question.

Yet at the same time, there arguably has been overspeculation in the real estate market. So should the Fed lower rates to encourage speculation in the stock market? Or raise rates to discourage speculation in the real estate market?

Another reason why it is a bad idea to set a standard rate. And once again I say, don't let the Fed control rates at all. A bank could decide whether speculation in the real estate market was reliable, and adjust its rates accordingly.

Laws and regulation establish margin requirements, not interest rates. It was not easy credit or low interest rates that led to a 10% margin.

Those laws weren't around in 1929. I just proved that it was interest rates and the discount rate that allowed 10% margin. Your statement that it wasn't doesn't prove anything.

Stock market margin reguirements are set by law, not by prevailing interest rates.

They weren't in 1929. You assert that the low buying margin is what caused the depression. We both assert that the government controls the margin (we just disagree as to how). So therefore, you agree that it was the government's fault which was my primary assertion.

Margins requirements were not lower in the 50s, 60s, and 00s when credit was easier and rates were lower.

Margins were specifically controlled.

Banks could get money, it just costs more.

Therefore more would not borrow it.

Which is why its a good idea not to let Congress (or gold suppliers) have such control.

If it were based on a gold standard, no one would have control.


Well, I have now proved to you that the government was behind the great depression. What's next?

 

[Iriemon]

Part of over expansion of the economy is over speculation.

If there is over expansion of the economy, there is over speculation in the stock market.

Basis for that claim?

I didn't say it was in there. I said that its job is to stop the economy from ballooning, and over speculation is part of the ballooning.

How do you define an economy ballooning?

1981 was not a blowout like 1929. And, as I have already said, the stock market can grow for other reasons. Banks functioning on a gold standard could differentiate between false growth and real growth because they don't allow loans to be taken out too easily.

What is "false growth?"

Your point is with a fixed money supply banks wouldn't have much to loan. Sounds like a recipe for stifling economic growth.

The stock market was booming. Investment is going to flow to where money can be made faster and cheaper than any where else. This is what you're referring to when you say "disproportionately".

That was true in 1929. No true other times. Because, as you said, the stock market booms for reasons that have nothing to do with interest rates.

So you're saying that the Federal Reserves interest rate lead to the ballooning of the economy and therefore stock market.

I don't know what ballooning means. Growing? There have been many periods were the economy grew but the stock markets did not.

They couldn't see it in 1929 because, money was not based on a standard and they couldn't control the interest rates. If the Fed didn't exist, the excessive borrowing that occurred in the 20s wouldn't have been possible because banks would have run out of money and been unable to lend so much money. But the government destroyed the banks' ability to see by allowing them to borrow money so cheaply. The banks, with an unlimited supply of money, (because the fed lent it to them so cheaply) were no longer forced to come to terms that so much money was being borrowed. This is all due to the government's low discount rate/interest rate.

I'm pretty sure the US was on a gold standard in 1929.

Money was not cheap in 1929. It was cheaper in the 50s 60s and 00s. No overspeculation in the stock market.

Their power to keep lending came from the government. They could not keep lending if money was based on a gold standard and banks could set their own interest rates.

There was a gold standard in 1929.

It goes out of business. Therefore, without the fed, banks would compete, each lowering their rates as much as possible while making a profit. But, each bank only has so much money. When they start to run out of money, they must raise their rates to discourage people from taking out money. The raising of each individual bank's rate could react to the economies growth faster than the fed will ever be able to.

Why can't the Fed restrict interest rates? Look at what happened in 79-81.

What happens when the economy is slupping and interests are high because there is not enough gold backed money to lend?

It does lead to more overall investment in the economy, but the stock market was booming, leading more and more people to invest in it rather than any other place. It snowballed. As it did better and better more and more people chose to invest in it, making it grow faster, attracting more. The nearly unlimited supply of credit caused by the fed allowed this to happen.

Sure. Folks were greedy, the could borrow on a 10% margin, and away they went. All asset markets have this kind of flow and ebb over time. Look at the real estate market.

Really, when?

1930-32. Adherence to the gold standard chocked off money supply at the exact time it needed to be expanded the most to combat the effects of the depression, which made the depression worse.

It would be impossible for the economy to go down the chute. There would be no need to expand the money supply.

Explain then how the economy went down the chute in 30-32, while on the gold standard.

Yes, but "unforeseeable factors" could not have caused the explosion that occurred in 1929. Only a refusal to adjust rates despite the ballooning economy could have done such a thing.

A margin requirement of 50% would have limited the amount that stocked could be leveraged, and thus the effect of a small decline would not be magnified by margin calls.

I had already answered a similar question.

Thus because the stock market was lukewarm, its OK for real estate to bubble, and the Fed was wrong to raise rates. Kind of goes against your theory of the Fed preventing overspeculation.

Another reason why it is a bad idea to set a standard rate. And once again I say, don't let the Fed control rates at all. A bank could decide whether speculation in the real estate market was reliable, and adjust its rates accordingly

.

You just agree that banks rates are controlled by the market. The match the market rate or go out of business.

Those laws weren't around in 1929. I just proved that it was interest rates and the discount rate that allowed 10% margin. Your statement that it wasn't doesn't prove anything.

Your "proof" was a conclusory assertion that interest rates sets margin requirements which proves nothing. It is not even logical.

On further research I agree there was no regulation on margins in 1929. Margins requirements were set by brokerage house, and varied widely.

They weren't in 1929. You assert that the low buying margin is what caused the depression. We both assert that the government controls the margin (we just disagree as to how). So therefore, you agree that it was the government's fault which was my primary assertion.

See above.

Therefore more would not borrow it.

That is usually the case.

If it were based on a gold standard, no one would have control.

Which is not a good thing. Except maybe gold producers, they'd have some control on the money supply.

Well, I have now proved to you that the government was behind the great depression. What's next?

I never disagreed with that. I disagreed it was the Government's interest rate policy that caused the market crash. I agree that Govt policy made the depression great: it was the Govt's gold policy standard that contributed to restricting the money supply that magnified the depression in the early 30s.

 

[agaglio]

Basis for that claim?

How can an economy be growing too fast, and expanding out of control while the stock market is sitting idly with no over speculation? My basis is logic.

How do you define an economy ballooning?

Growing out of control.

What is "false growth?"

Growing out of control.

Your point is with a fixed money supply banks wouldn't have much to loan. Sounds like a recipe for stifling economic growth.

I don't care what it sounds like to you. It is not a way of stifling the economy (though it may appear that way to someone who doesn't understand economics). It is a way to create an equilibrium in the economy. To allow growth but not over speculation.

That was true in 1929. No true other times. Because, as you said, the stock market booms for reasons that have nothing to do with interest rates.

I said that it is possible for it to boom from other causes, but it is also possible for it to grow out of control because of interest rates weren't raised. Besides, what is your point? Are you trying to prove that interest rates have no effect on the stock market?

I don't know what ballooning means. Growing? There have been many periods were the economy grew but the stock markets did not.

Yes, growing. You keep taking things out of context. Of course there have been times that the economy grew, but the stock market didn't. We're talking about the Great Depression.

'm pretty sure the US was on a gold standard in 1929.

And I'm pretty sure you don't understand what a gold standard is.

Money was not cheap in 1929. It was cheaper in the 50s 60s and 00s. No overspeculation in the stock market.

Once again, you take things out of context. Simply because money is cheap in a certain time period doesn't mean a depression is going to happen. You must noticed the entire decade of economic boom (roaring 20s) that occurred. A decade of growth that had never been matched in our history occurred, and still money was cheap. If there had been an entire decade of great boom throughout the 50s, and money was still cheap, a depression would have happened. You keep saying that I am asserting that low interest rates means a depression will happen. You refuse to look at the economic boom preceding the low interest rates/the policy of easy money.

There was a gold standard in 1929.

No there wasn't. A gold standard does not mean that your bill can simply be traded in for gold. It means that for every bill in existence, there is a supply of gold to back up its worth. That means that with a gold standard, the money supply could not be decreased or increased (other then the rate at which gold was mined which is typically about 2-3% a year). This was obviously not true in 1929. Stop making false assertions. You claim that it has been proved that gold standards don't work while at the same time you don't even know what a gold standard is.

Why can't the Fed restrict interest rates? Look at what happened in 79-81.

What happens when the economy is slupping and interests are high because there is not enough gold backed money to lend?

Because private banks can react to individual markets, and do it much faster than the Federal Reserve. There would be no reason for a depression. In a recession (most likely caused by a massive business failure), capital would simply be rerouted to other industries.

Sure. Folks were greedy, the could borrow on a 10% margin,

And that 10% margin was made possible by the government. Without government support (the lending of money), banks would not have been able to afford a 10% margin. It simply could not have been possible with out the Fed's easy credit attitude.

1930-32. Adherence to the gold standard chocked off money supply at the exact time it needed to be expanded the most to combat the effects of the depression, which made the depression worse.

There was no adherence to the gold standard. Also, when the government needed to keep credit available, they decreased it. Right after the economy explodes is not an ideal time to put in place any new economic system that would have negative short term affects. The gold standard does not help rebuild from a massive depression, it prevents them.

Thus because the stock market was lukewarm, its OK for real estate to bubble, and the Fed was wrong to raise rates. Kind of goes against your theory of the Fed preventing overspeculation.

Private banks would not allow real estate to bubble. As they ran out of money to lend, they would have to scrutinize who was taking out loans more and more.

You just agree that banks rates are controlled by the market. The match the market rate or go out of business.

That's right, I agree that they would go out of business if they kept a rate that was constantly higher than other banks despite how much money they had to lend. Its simple competition.

Your "proof" was a conclusory assertion that interest rates sets margin requirements which proves nothing. It is not even logical.

You are denying reality right now. The Federal Reserve made it possible for such low margins by providing banks with easy money. It simply COULD NOT HAVE BEEN POSSIBLE without all the cheap money. The banks would have RUN OUT OF MONEY if they attempted a 10% margin without the Federal Reserves help. How is that not logical? It proves that the government was behind the Great Depression, further proving my assertion that the government is responsible for every major depression. Depressions are not inherent in a free market.

On further research I agree there was no regulation on margins in 1929.

I had stated that earlier.

Which is not a good thing. Except maybe gold producers, they'd have some control on the money supply.

Gold miners would have very little control on the money supply. They would simply sell their gold, just like they do these days.

I never disagreed with that. I disagreed it was the Government's interest rate policy that caused the market crash.

So you agree that the government is behind all major depressions?

I agree that Govt policy made the depression great: it was the Govt's gold policy standard that contributed to restricting the money supply that magnified the depression in the early 30s.

The gold standard was not a real gold standard. The government should have allowed easy credit, but in all its great wisdom, it failed us again.

 

[Iriemon]

How can an economy be growing too fast, and expanding out of control while the stock market is sitting idly with no over speculation? My basis is logic.

When is an economy growing too fast, and expanding out of control? 3% real GDP? 4%? 5%?

I agree that a strong economy generally encourages a strong stock market, but it is not a very good correlation.

In 1982, there was a sharp rescession (real GDP fel 1.9%), yet the market (S&P) grew 21%.
In 1990, the economy grew 1.9%, but the market fell 3%.
In 2002, the economy grew 1.6%, the market fell 22%.

Growing out of control.

That's pretty vague, how do you know when the economy is growing out of control?

I don't care what it sounds like to you. It is not a way of stifling the economy (though it may appear that way to someone who doesn't understand economics). It is a way to create an equilibrium in the economy. To allow growth but not over speculation.

Money supply does have an effect on growth (though it may appear that way to someone who doesn't understand economics).

I said that it is possible for it to boom from other causes, but it is also possible for it to grow out of control because of interest rates weren't raised. Besides, what is your point? Are you trying to prove that interest rates have no effect on the stock market?

No, I would agree it has some effect. I disagree with the contention that it is a primary factor for why there are bulls and bears. And I was questioning whether it was the cause of the '29 crash.

Iriemon. I don't know what ballooning means. Growing?

Yes, growing. You keep taking things out of context. Of course there have been times that the economy grew, but the stock market didn't. We're talking about the Great Depression.

Sorry about taking it out of context. You are using vague words to describe a phenonema that makes it hard to understand what you are trying to say.

But OK, now you have defined it. A ballooning economy = growing economy.

You wrote in #28: "I said that its job is to stop the economy from ballooning, and over speculation is part of the ballooning."

So now you are saying that it is the Fed's job to stop the economy from growing?

And I'm pretty sure you don't understand what a gold standard is.

It may be I don't understand what you mean by a gold standard. Please explain.

Once again, you take things out of context. Simply because money is cheap in a certain time period doesn't mean a depression is going to happen. You must noticed the entire decade of economic boom (roaring 20s) that occurred. A decade of growth that had never been matched in our history occurred, and still money was cheap. If there had been an entire decade of great boom throughout the 50s, and money was still cheap, a depression would have happened. You keep saying that I am asserting that low interest rates means a depression will happen. You refuse to look at the economic boom preceding the low interest rates/the policy of easy money.

I don't think I ever claimed you asserted that low interest rates means a depression will happen, did I?

I have heard of the "Roaring 20s" of course, but I didn't know it was the greatest decade ever. According to this source, the economy grew 3.9% per year between Jan 1920 and Jul 29. http://www.somc.rochester.edu/Nov03/plosser1103.pdf [Table 1]. That is healthy growth, though no better than the 50s, where the economy grew 4.1% per annum or the 60s, when it grew 4.4% p.a. And money was relatively cheap in the 50s and 60s too.

Iriemon: There was a gold standard in 1929.

No there wasn't. A gold standard does not mean that your bill can simply be traded in for gold. It means that for every bill in existence, there is a supply of gold to back up its worth. That means that with a gold standard, the money supply could not be decreased or increased (other then the rate at which gold was mined which is typically about 2-3% a year). This was obviously not true in 1929. Stop making false assertions.

False assertions, eh? There's a lot of that going around.

The US Department of Treasury: United States Notes were redeemable in gold until 1933, when the United States abandoned the gold standard.

U.S. Treasury - FAQs: Legal Tender Status of currency

Encyclopedia Brittanica: Likewise, had the Federal Reserve not tightened in the fall of 1931, it is possible that there would have been a speculative attack on the dollar and the United States would have been forced to abandon the gold standard along with Great Britain.

Welcome to Encyclopædia Britannica's Guide to Black History

Economics.about.com: A true gold standard came to fruition in 1900 with the passage of the Gold Standard Act. The gold standard effectively came to an end in 1933 when President Franklin D. Roosevelt outlawed private gold ownership (except for the purposes of jewelery).

What Was The Gold Standard?

Answers.com: Meanwhile, in the United States the gold coin standard continued in full operation from 1879 until March 1933 except for a brief departure during the World War I embargo on gold exports.

gold standard: Definition and Much More from Answers.com

You claim that it has been proved that gold standards don't work while at the same time you don't even know what a gold standard is.

Apparently neither I nor the US treasury department.

Because private banks can react to individual markets, and do it much faster than the Federal Reserve. There would be no reason for a depression.

I see. And private banks canot react to individual markets to prevent a depression now because ....

In a recession (most likely caused by a massive business failure), capital would simply be rerouted to other industries.

You are proposing a system were recessions will be caused by massive business failures. That sounds like a big improvement. And to stop recessions, all the banks would have to do is simply rerout capital to other industries. Marvelous! Why didn't anyone ever thing of that before?

And that 10% margin was made possible by the government. Without government support (the lending of money), banks would not have been able to afford a 10% margin. It simply could not have been possible with out the Fed's easy credit attitude.

So you argued there was no govt regulation (and I agreed) but the 10% margin was made possible by the Govt. How? How does lending money make a margin requirement possible? A margin requirement just is how much you can borrow againt the asset.

What easy credit? You keep saying that. I have seen no evidence of this easy credit. In fact, you were blaming the Fed for not raising interest rates to stop speculation. In fact that is exactly what the Fed did, according to this source.

In 1928 and 1929, the Federal Reserve had raised interest rates in hopes of slowing the rapid rise in stock prices. These higher interest rates depressed interest-sensitive spending in areas such as construction and automobile purchases, which in turn reduced production.

Stock Market Crash of 1929

Some argue that the increase in interest rates help push the country into the depression.

There was no adherence to the gold standard. Also, when the government needed to keep credit available, they decreased it. Right after the economy explodes is not an ideal time to put in place any new economic system that would have negative short term affects. The gold standard does not help rebuild from a massive depression, it prevents them.

Do you have an example of an economy on the gold standard that did not have depressions?

Private banks would not allow real estate to bubble. As they ran out of money to lend, they would have to scrutinize who was taking out loans more and more.

It's not private banks you're saying would do this, your arguing that if the money supply is kept tight there there will be less loans. This is true. It also will keep the economy from balooning, I mean, growing.

You are denying reality right now. The Federal Reserve made it possible for such low margins by providing banks with easy money. It simply COULD NOT HAVE BEEN POSSIBLE without all the cheap money. The banks would have RUN OUT OF MONEY if they attempted a 10% margin without the Federal Reserves help. How is that not logical? It proves that the government was behind the Great Depression, further proving my assertion that the government is responsible for every major depression. Depressions are not inherent in a free market.

You mean a gold standard? No depressions in a gold standard? Nonesense

Gold miners would have very little control on the money supply. They would simply sell their gold, just like they do these days.

But if gold is the money, and you expanding the supply of gold, why isn't that expanding the money supply?

So you agree that the government is behind all major depressions?

I will agree that in hindsight we can say the govt of Fed should have done this or that to avoid it. But I don't blame the Govt for business cycles. They have always been regardless of what kind of monetary system there was.

In fact, compare the economic cycles since 1972 with back in the good old days when the money was tied to gold, and we had all those panics.

The gold standard was not a real gold standard. The government should have allowed easy credit, but in all its great wisdom, it failed us again.

LOL! How could the Govt have allowed easy credit when the dollar was pegged to gold standard and there wasn't enough money! I guess they couldn't crank up those mines fast enough.

And that is the system you want to put us back on? Don't hang me on that cross of gold. Williams Jennings Bryan.

 

[agaglio]

That's pretty vague, how do you know when the economy is growing out of control?

When growth becomes superficial.

Money supply does have an effect on growth (though it may appear that way to someone who doesn't understand economics).

Never did i say that money supply doesn't have an effect on growth.

But OK, now you have defined it. A ballooning economy = growing economy.

I should have provided a better definition, my fault. By ballooning economy, I meant an economy where a large portion of growth is superficial.

Apparently neither I nor the US treasury department.

Apparently not. When I speak of a gold standard (as most free market advocates define it), I speak of a monetary system where there is always enough gold in existence to account for every bill in existence. This way, the money supply is not controlled by the government and can not fluctuate.

I'm growing tired of repeating myself.

A gold standard does not mean that your bill can simply be traded in for gold. It means that for every bill in existence, there is a supply of gold to back up its worth. That means that with a gold standard, the money supply could not be decreased or increased (other then the rate at which gold was mined which is typically about 2-3% a year). This was obviously not true in 1929.

I see. And private banks canot react to individual markets to prevent a depression now because ....

Because their interest rate is controlled by the government.

You are proposing a system were recessions will be caused by massive business failures. That sounds like a big improvement.

I said that would be the only way a slight recession would be possible. :spin:

And to stop recessions, all the banks would have to do is simply rerout capital to other industries. Marvelous! Why didn't anyone ever thing of that before?

It has been thought of many times. :roll:

So you argued there was no govt regulation (and I agreed) but the 10% margin was made possible by the Govt. How?

I argued that there WAS government regulation. They regulated the money supply and the discount rate. It was made possible by the government because the government made the money available to the banks that set the margin. If the government hadn't lent them the money at such a low rate, a 10 percent margin would not have been possible. I keep repeating myself. You refuse to respond to this part of my argument. You simply ask the question again. What a tactic. Ill quote my earlier post for more clarity on the subject.

And that 10% margin was made possible by the government. Without government support (the lending of money), banks would not have been able to afford a 10% margin. It simply could not have been possible with out the Fed's easy credit attitude.

What easy credit? You keep saying that. I have seen no evidence of this easy credit.

Good god. This really proves your lack of knowledge in this argument. The low interest rates and discount rate are 2 pieces of obvious evidence.

In fact, you were blaming the Fed for not raising interest rates to stop speculation. In fact that is exactly what the Fed did, according to this source.

Yeah, they did it in 1929. A little late don't you think? I said they needed to raise them through out the 20s. The raised interest rates in 29 certainly added to the depth of the depression, just as your source says. It slowed production at a time it needed boosting.

Do you have an example of an economy on the gold standard that did not have depressions?

There have not been any pure free market economies, as far as I know.

You mean a gold standard? No depressions in a gold standard? Nonesense

haha. I just gave a reason and explained it. You refused to take my definition of gold standard as I stated it. Instead you replaced my definition with another and called out NONSENSE! I can't take this seriously.

In fact, compare the economic cycles since 1972 with back in the good old days when the money was tied to gold, and we had all those panics.

Once again, I gave you my definition and you utterly refused to accept it because you can't create a logical argument against it.

LOL! How could the Govt have allowed easy credit when the dollar was pegged to gold standard and there wasn't enough money! I guess they couldn't crank up those mines fast enough.

As I stated earlier, it is not a system for the reconstruction of a great depression, it simply prevents them.

I have refuted all of your arguments. You refuse to refute mine and simply ask the same questions over and over and over.

 

[Iriemon]

Originally posted by Iriemon. When is an economy growing too fast, and expanding out of control? 3% real GDP? 4%? 5%?

When growth becomes superficial.

When is an economy growing superficially? 3% real GDP? 4%? 5%?

I should have provided a better definition, my fault. By ballooning economy, I meant an economy where a large portion of growth is superficial.

OK, you've withdrawn your definition of "ballooning." How do you determine growth is superficial, in concrete terms (ie growth percentages) as opposed to a vague word.

Apparently not. When I speak of a gold standard (as most free market advocates define it), I speak of a monetary system where there is always enough gold in existence to account for every bill in existence. This way, the money supply is not controlled by the government and can not fluctuate.

I'm growing tired of repeating myself.

What is the difference between that and the gold standard the country was on in 1929 that contributed to the great depression. In 1929, there was a system where there was enough gold in existence to account for every bill in existence. That was the problem. People hoarded dollars in a deflationary economy, and there was not enough gold to meet the monetary shortfall. To keep the dollar pegged to the gold standard, the Fed raised interest raised in 1930-31 -- during the middle of a financial crisis, and the very worst time to do it.

There's that gold standard you so longingly want to return to.

Because their interest rate is controlled by the government.

False. Banks could charge whatever interest they wanted. Still can.

I said that would be the only way a slight recession would be possible. :spin:

Because banks could "simply rerout capital to other industries." Why don't they do that now?

I argued that there WAS government regulation. They regulated the money supply and the discount rate. It was made possible by the government because the government made the money available to the banks that set the margin. If the government hadn't lent them the money at such a low rate, a 10 percent margin would not have been possible.

1. What was this low rate.

2. Why couldn't brokers lend on a 10% margin with a higher rate? What does the interest rate have to do with margin? Margin is the amount of the asset. The interest rate is the rate charged for lending. One doesn't have anything to do with the other. If interest was higher, brokers could still lend on a 10% margin, just at higher interest.

Iriemon. What easy credit? You keep saying that. I have seen no evidence of this easy credit.

Good god. This really proves your lack of knowledge in this argument. The low interest rates and discount rate are 2 pieces of obvious evidence.

You mean the 5.5% rate? That is not easy credit.

Yeah, they did it in 1929. A little late don't you think? I said they needed to raise them through out the 20s. The raised interest rates in 29 certainly added to the depth of the depression, just as your source says. It slowed production at a time it needed boosting.

First you said the Fed should have raised interest rates to cool the market. The Fed did that, months before the crash, and now you are saying that contributed to the depression.

There have not been any pure free market economies, as far as I know.

Me neither. Though the stock market comes close.

haha. I just gave a reason and explained it. You refused to take my definition of gold standard as I stated it. Instead you replaced my definition with another and called out NONSENSE! I can't take this seriously.

Explain then your gold standard and why your proposal is different than the dollar being pegged to value in weight of gold, and why depressions would be impossible.

I have refuted all of your arguments. You refuse to refute mine and simply ask the same questions over and over and over.

That's funny, I have a different conclusion than yours.