What to replace Bernanke with

[jon_perez]

http://lesswrong.com/lw/3gv/statistical_prediction_rules_outperform_expert/


A parole board considers the release of a prisoner: Will he be violent again? A hiring officer considers a job candidate: Will she be a valuable asset to the company? A young couple considers marriage: Will they have a happy marriage?

The cached wisdom for making such high-stakes predictions is to have experts gather as much evidence as possible, weigh this evidence, and make a judgment. But 60 years of research has shown that in hundreds of cases, a simple formula called a statistical prediction rule (SPR) makes better predictions than leading experts do.

Decisions to raise, lower or maintain the interest rate are very well defined.

Plug in historical correlations of interest rates with unemployment and inflation figures into said Statistical Prediction Rule and voila, you should be able to replace the entire Board of Governors and Chairman with a $9.99 iPhone App that could easily outperform them.

:)

[hugolp]

Decisions to raise, lower or maintain the interest rate are very well defined.

They are not. A lot of people along history have claimed to have the definitive method to statistically determine the interest rates, starting by Fisher itself. He crongatulated the Fed for its great work during the roaring 20's because he believed in his statistical method and was completely surprised by the 1929 crash. He was so convinced that things were going to go fine that he kept investing and ruined his family.

Since then a lot of economists have made similar claims. Everytime the new method is the definitive one that is capable of statistically determine the interest rates. Everytime they are wrong. And it is because no statistical method can determine the rate of savings plus the demand for money of the people and determine the correct interest rate.

You have to think that interest rates are a price, the price of money. If someone came with the idea of statistically determine the price of bread all economists would call him crazy and say that no statistical method can substitute the price mechanism, because the price mechanism consists in the decisions of all the people. But when it comes to money, for a reason no one explains, some economists say they can determine its price, the interest rates, with statistical methods and not a lot of people calls them crazy. Its a really absurd situation.

I have yet to comprehend why so many apparently intelligent minds make an exception and promote monetary central planning with no good reason, only because its what the dogma teaches.


Plug in historical correlations of interest rates with unemployment and inflation figures into said Statistical Prediction Rule and voila, you should be able to replace the entire Board of Governors and Chairman with a $9.99 iPhone App that could easily outperform them.

:)

[japes]

...you should be able to replace the entire Board of Governors and Chairman with a $9.99 iPhone App that could easily outperform them.

I know Hugo is right but I still think an iPhone app could do a better job than the Board.

[StilesBC]

The World Cup betting champion octopus could do better than the FRB.

And yes, hugo is right. The interest rate is a price. Specifically, it represents the difference between one's ability to consume today vs. the ability to consume more in the future.

[Zippyjuan]

If the goal is the lowest possible unemployment rate, then you want interest rates to be zero or even negative. That encourages more borrowing and economic expansion. But you don't always want zero interest rates. That can also lead to higher inflation. When inflation gets higher, you need higher interest rates- like they did in the late 1970's early 80's. The cost of reducing inflation with the Fed prime rate as high as 25% was higher unemployment- but the inflation was finally brought down. Controlling inflation and unemployment can be conflicting goals and there is not a single interest rate which will take care of both.

[Acala]

If the goal is the lowest possible unemployment rate, then you want interest rates to be zero or even negative. That encourages more borrowing and economic expansion. But you don't always want zero interest rates. That can also lead to higher inflation. When inflation gets higher, you need higher interest rates- like they did in the late 1970's early 80's. The cost of reducing inflation with the Fed prime rate as high as 25% was higher unemployment- but the inflation was finally brought down. Controlling inflation and unemployment can be conflicting goals and there is not a single interest rate which will take care of both.

In a truly free market, there is NO involuntary unemployment beyond the temporary unemployment between jobs.

And interest rates should, like all other prices, be left to free exchange. Government price controls are always a failure.

[noxagol]

A goat.

[Zippyjuan]

In a truly free market, there is NO involuntary unemployment beyond the temporary unemployment between jobs.

And interest rates should, like all other prices, be left to free exchange. Government price controls are always a failure.
A truely free market assumes the free flow of capital and labor as well- people willing and able to move from where they presently live to find work someplace else. When you own a home or have kids in school or have strong family or friend connections in an area you are less willing to move to find a new job. If your factory job which paid you $20 an hour closes down, the only job available maybe at WalMart for $6 an hour. It is still a job. Would you take it to get back to work? The avilable jobs must include skills which the job seeker posseses as well. The teacher's aid laid off will probably not be elgible for that job running the nuclear power plant.

[hugolp]

If the goal is the lowest possible unemployment rate, then you want interest rates to be zero or even negative. That encourages more borrowing and economic expansion.

This is false.

I could give you the more long and correct answer, but speaking in your language: If interest rates are zero or even negative nobody has an incentive to lend the money out and therefore there will be less lending, stopping investment and economic growth.

[hugolp]

I know Hugo is right but I still think an iPhone app could do a better job than the Board.

Haha, I dont necesarely disagree with this. IF there has to be a central bank, some kind of rule to constantly and slowly increase the money supply will be much much better than a human led central bank. But in reality this is science fiction since no government would monopolize money to then not use it in his interest.

[Zippyjuan]

This is false.

I could give you the more long and correct answer, but speaking in your language: If interest rates are zero or even negative nobody has an incentive to lend the money out and therefore there will be less lending, stopping investment and economic growth.

Not necessarily. Banks no longer generate the majority of their income from interest on loans. They get most of their income from fees. Fees to create the loans. Late payment fees. It is not unusual for banks to have negative real interest rates (the rate charged minus the rate of inflation). I was actually referring to Central Bank interest rates- like they are now. Other loans would of course have positive interest rates though if the Fed rate is zero (as it basically is now) then other rates are also low.

[Zippyjuan]

Haha, I dont necesarely disagree with this. IF there has to be a central bank, some kind of rule to constantly and slowly increase the money supply will be much much better than a human led central bank. But in reality this is science fiction since no government would monopolize money to then not use it in his interest.

I agree that probably the best monetary policy would be a slow but consistant rate of growth in the money supply. Then you could not worry about interest rates though the use of interest rates is one of the tools the Fed can use to try to control the supply of money in circulation.

[jon_perez]

They are not.By "well-defined", I meant that the output of such a program to replace the board would be unambiguous.

At the conclusion of all the discussions (who knows maybe they just roll dice or throw darts?) by the Fed board, the end result is very simple: raise or lower fed-targeted rate by X basis points or keep it steady.

Thus a program to replace them would merely need to emit an X figure.

[axiomata]

Sowell had a good quote (http://rightwingnews.com/2011/01/interviewing-thomas-sowell-on-basic-economics/):


Now, in recent years we started to hear more people calling to get rid of the Federal Reserve. Good idea, bad idea? What are your thoughts?

Good idea.

Good idea? What do you think we should replace it with? What do you think we should do?

Well, it's like when you remove a cancer, what do you replace it with?

Applies to Bernanke as well.

[jon_perez]

If the goal is the lowest possible unemployment rate, then you want interest rates to be zero or even negative. That encourages more borrowing and economic expansion. But you don't always want zero interest rates. That can also lead to higher inflation. When inflation gets higher, you need higher interest rates- like they did in the late 1970's early 80's. The cost of reducing inflation with the Fed prime rate as high as 25% was higher unemployment- but the inflation was finally brought down. Controlling inflation and unemployment can be conflicting goals and there is not a single interest rate which will take care of both.That's correct. Therefore a Replace-the-Fed-Board program would have to satisfy certain constraints. For example: it could try to ensure that the inflation rate always has to be at least 500 basis points lower than the unemployment rate.

[jon_perez]

I agree that probably the best monetary policy would be a slow but consistant rate of growth in the money supply. Then you could not worry about interest rates though the use of interest rates is one of the tools the Fed can use to try to control the supply of money in circulation.Friedman argued that a constant 4% inflation of the money supply is as good as any. Okay then, I propose that inflating or deflating the money supply according to population growth or reduction would be at least as good as any policy then. :)

[sailingaway]

http://www.yeahboardshop.com/product_photos/large/xl_ToyMachineBlackSectBlowUpDollYeahBoardshop.jpg

Sigh, when I went looking for an appropriate image of something to replace Bernanke with, the comments were things like 'goat'.

Now you went and got all issue oriented.....

[DamianTV]

I was thinking of a dancing hula girl bobblehead. THe little piece of plastic would probably make better decisions. Like not getting involved.

[anaconda]

A truely free market assumes the free flow of capital and labor as well- people willing and able to move from where they presently live to find work someplace else. When you own a home or have kids in school or have strong family or friend connections in an area you are less willing to move to find a new job. If your factory job which paid you $20 an hour closes down, the only job available maybe at WalMart for $6 an hour. It is still a job. Would you take it to get back to work? The avilable jobs must include skills which the job seeker posseses as well. The teacher's aid laid off will probably not be elgible for that job running the nuclear power plant.

Also things like union contracts and menu costs can keep the real wage higher than a full market equilibrium wage. That's why a little inflation can help adjust the real wage downward without actually lowering the nominal wage. Hooray for inflation.

[anaconda]

I agree that probably the best monetary policy would be a slow but consistant rate of growth in the money supply. Then you could not worry about interest rates though the use of interest rates is one of the tools the Fed can use to try to control the supply of money in circulation.

It is my understanding that the Fed, through open market operations, adjusts the interest rate by expanding or contracting the money supply. When they say they are "lowering" the interest rate by one half of a per cent, this means they will buy treasury bills until the interest rate drops one half of one per cent...

[Marenco]

Buddy Leehttp://scoop.diamondgalleries.com/public/news_images/4/66871_154857_3.jpg

[AtomiC]

Bernanke should be replaced with... NOTHING!!!!!!

[Acala]

A truely free market assumes the free flow of capital and labor as well- people willing and able to move from where they presently live to find work someplace else. When you own a home or have kids in school or have strong family or friend connections in an area you are less willing to move to find a new job. If your factory job which paid you $20 an hour closes down, the only job available maybe at WalMart for $6 an hour. It is still a job. Would you take it to get back to work? The avilable jobs must include skills which the job seeker posseses as well. The teacher's aid laid off will probably not be elgible for that job running the nuclear power plant.

I never said the unemployed person would LIKE the job or feel that it was the job he deserved or was best-suited to do. All I said was that there is no INVOLUNTARY unemployment in a free market. The market may have a very different idea of what a person's labor is worth than they do such that they choose not to take the proffered job. So be it. But that is VOLUNTARY unemployment.

[Fox McCloud]

If the goal is the lowest possible unemployment rate, then you want interest rates to be zero or even negative. That encourages more borrowing and economic expansion.

Maybe short term, but medium to long term? If this policy is followed, it just sets the stage for investment in sectors of society where there isn't high enough demand to sustain, with the end result being that entire industry getting flattened back to realistic levels, which...well, results in high levels of unemployment for sustained periods of time (and even longer periods of time if the government attempts to continue directing resources to the formerly mentioned bubble).