Barry Ritholtz gets it right, then gets it wrong.

Barry Ritholtz put up a nice blog post calling Bullshit on Andrew Ross Sorkin's video that claimed Lehman's failure caused the crisis.

In the post Ritholtz correctly reminds us that there was criminality associated with the period leading up to the crash and those crimes were ignored by both the Bush and Obama Administrations (and they continue to be ignored by the Obama Administration).

Furthermore, Ritholtz points out that many of the main actors who were involved in that criminality or, who's actions either brought on the demise of their firms or contributed to the crash itself, were highly compensated despite their denials. People like Dick Fuld of Lehman, Jimmy Cayne of Bear Stearns, Stanley Neil of Merrill and Angelo Mozilo of Countrywide, to name just a few.

But what killed it for me was when I went back to re-read Ritholtz's piece only to click through to his Washington Post column where he "educates" us as to what really caused the crisis only to hear him invoke the same, lame, worn out excuse of artificially low interest rates. (Cue Peter Schiff.)

It amazes me that a smart guy like Ritholtz is so clueless to the fact that interest rate adjustments are, at best, neutral, but more likely in the case of low interst rates, deflationary as opposed to being iinflationary.

What's so hard to get? For every debtor there is a creditor and for every saver there is someone who spends more than his or her income. That means, all that happens when rates are raised or lowered is that income gets redistributed around the economy. That's it. There is no "commodity boom" that pushes foodstuffs to record highs.

Did commodity prices rise from 2002 to 2008? Yes.

Was it due to low interest rates? No.

The crisis was caused by wild speculation and lack of regulatory oversight.

Had we regulated properly and prohibited "large passives" from owning scarce resources, just as was recommended to Congress by Mike Masters in a 2008 hearing, the runnup in foodstuffs and oil and everything else never would have happened.

Let's put an end to this "artificially low interest rate" meme once and for all. Please, we should be way beyond that by now.

Warren Mosler: Financial "repressionists" painting fraud

Got this email from Warren Mosler today. As usual, he puts the entire profession of mainstream economics to shame.

Conclusion: The financial repressionists have it all backwards

So the idea is the govt. is 'pushing rates down' through qe and the like, thereby keeping rates below the rate of inflation, and that without this active 'financial repression' rates would otherwise be higher and not 'repressed.'

That is, the govt. is interfering with the 'free market' by said pushing of rates down, and this 'distortion' adversely affects all kinds of things, as happens with any interference in said 'free markets.'

Well, to begin with, interest rates are subject to market forces with fixed exchange rate regimes, like a gold standard, currency board arrangement, or other such 'peg' where the govt. by law exchanges the currency to some 'reserve' thing at a fixed rate. So today this would, at best, apply to HK, for example.

However, it does not apply to floating fx regimes, where the currency has no conversion features at the govt. of issue, like the $US, yen, pound, euro, etc. etc. etc. contrary to the claims of the repressionists.

Either way, the currency is a public monopoly, with taxation a coercive, non market 'interference'. And, of course, monopolists are 'price setters' rather than 'price takers'.
With a gold standard, for example, the govt. sets the price of gold and in theory allows all other price to express relative value as they continuously gravitate towards floating indifference levels.

This includes interest rates (the 'own rate' for the currency) which then fluctuate based on 'storage costs' of the object of conversion which includes govt. default risk with regard to conversion. The same holds for other fixed exchange rate arrangements.

With floating exchange rate policy, without govt. interference, the 'risk free rate' is permanently at 0%, as there is no conversion option, and therefore no conversion default risk. 

In this case, the only way rates can be supported at higher levels is by 'govt. interference'. This includes paying interest on reserve balances at the Fed, issuing Treasury Securities, and open market operations where the Fed buys and sells Treasury securities directly or via repurchase agreements and other such arrangements. All of these function as 'interest rate support' to keep rates higher than otherwise. 

So once again, and another 'who would have thought', it seems the mainstream has it entirely backwards. Yes, govt. is 'interfering' in the interest rate markets, but rather than engaging in 'repression' via 'pushing rates down' it's instead engaging in 'rentier support' by pushing rates up. 

So if these 'free market types' want to make the case that govt. isn't sufficiently interfering to push rates up to adequately support holders of various financial assets, fine. Bring it on! But more likely the realization of what they've actually be purporting should be embarrassing enough to cause them to back off for at least 3 or 4 minutes, don't you think?

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