The Flamboyant Absurdity of a ‘Late’ or ‘Behind the Curve’ Federal Reserve

Policy The Flamboyant Absurdity of a ‘Late’ or ‘Behind the Curve’ Federal Reserve John Tamny Contributor Opinions expressed by Forbes Contributors are their own. New! Follow this author to improve your content experience. Got it! Jun 26, 2022, 10:00am EDT | Share to Facebook Share to Twitter Share to Linkedin Back in 2008 it became popular among the thought-challenged in the media, politics and economic sectors to say that lending to potential homeowners became “predatory” in the years leading up to the correction.

If we ignore that over 90% of housing loans in the 2006-2008 range performed as is, it’s worth at least stopping to think about the ferocious stupidity that informed such a ludicrous viewpoint. Really, who among us would actively seek lending options in the hopes of crippling the borrower on the way to default? Arguably more important than the previous question is the simple truth that money is serious business. By that, money is serious in consideration of return and savings options that savers forgo if they actively try to lose money in “predatory” fashion.

If you’re still confused, consider the remarkable gains savers can enjoy via compound interest. Yet they were supposedly just throwing the money away in 2008? More realistically, savers in search of higher returns took risks. This is what they do in the real world that economists, journalists and politicians are only lightly in touch with.

It all rates thought in consideration of all the excitement about inflation at the moment. With the currency devaluation that is inflation, it plays a big role in the area of lending. That it does is one of those blinding glimpses of the obvious.

Figure that the lender offers funds up to the borrower in the hope of getting money loaned back, plus an interest rate (call it rent) for the time value of money given up when the loan was made. From there it’s easy to see what’s already easy: inflation logically harms the lender/borrower relationship. If the currency is being devalued, obviously the lender will achieve a lot or a little less back than agreed to.

Conversely, think of the borrower in the inflation situation. It’s popular to say the latter is the winner for paying back “cheaper” dollars, but as with most economic and market commentary, such a view is similarly foolish. Lest we forget, no one borrows money.

They borrow what money can be exchanged for. If the currency is in decline, the quality of the money borrowed is compromised as the borrower is able to command fewer goods and services than what was imagined at the time of the loan. Only in the minds of economists, politicians and business journalists are their winners on the matter of inflation.

In a saner universe that parallels that of the deep and not-so-deep in thought, the departure from a reasonably trusted standard of currency value harms everyone. MORE FOR YOU Biden’s Proposed IRS Bank Account Snooping Authority Runs Into State Resistance 2021 Diversity Green Card Lottery Winners To Be Shut Out Because Of Visa Deadline The Swamp Grew – Even Under President Donald Trump All of which brings us to commentary of the moment about inflation. Gary Cohn (former Goldman Sachs CEO and Trump NEC head) has said that the Fed was too late with its rate hikes, while all manner of economists and pundits have drooled about how the Fed was “behind the curve.

” Better yet, the hagiographers are out in force yet again claiming that Paul Volcker was brilliant for either “raising rates” or “allowing” the markets to raise rates to beat inflation. The experts are garishly wearing their simplicity on their sleeves. To see why, consider yet again the lender/borrower relationship.

If the currency is in decline, it’s no reach to say that lenders are going to charge more for the privilege as a way of accounting for the decline. Just the same, borrowers are to varying degrees going to rethink borrowing as is to account for the possibility that fewer resources will be attainable for money that’s in decline. It’s all basic market stuff.

Beyond basic. Yet we’re supposed to believe absent the Fed’s guiding hand, that the lenders and borrowers with actual skin in the game wouldn’t account for what the Fed apparently is late to? The question itself reveals just how impressively dense is the commentary. Translated, if there’s been real inflation, readers can rest assured that market actors were early to and well ahead of a curve that the Fed was apparently late to, and behind.

As for the Volcker mythology that just won’t die, if it really had been true that his rate hikes made money “tight,” (an impossibility given the global nature of credit), or if he just let the credit markets get “tight,” hopefully readers can see how superfluous he was either way. Indeed, if there was inflation in the late ‘70s and early ‘80s (there was), to presume as some do that lenders and borrowers weren’t going to adjust to this reality well ahead of the Fed is just not fit for serious conversation. No doubt some will say that all of this is a “new” kind of inflation that is rooted in too much economic growth, thus the importance of the Fed.

Ok, if you believe any of this, please go back to school. Or skip school. Because it’s not doing you any good.

Not only is economic growth the greatest enemy of rising prices, to pretend as some do that the Fed must step in to save us from our bad selves thoroughly vandalizes common sense. They, as in the “experts,” don’t know what they’re talking about. Follow me on Twitter .

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