CICEROSC

Greenspan and Interest Rates

19 posts in this topic

I saw the following article recently (written by "Doug Noland" in 1999 and posted at www.prudentbear.com at the link below) and I am trying to remember where I read this same phrase or something similar:

"And this brings us to the title of this speech: "Putting a Coin in the Fuse Box." This was a phrase I stumbled across a few years back while reading Ayn Rand’s Objectivist magazines from the early 1960’s. "Putting a Coin in the Fuse Box" was ascribed to Alan Greenspan by a fellow Rand colleague who stated that Greenspan firmly placed responsibility for the depression on the Federal Reserve. According to the 1960’s Greenspan, the Fed had repeatedly circumvented market forces with liquidity injections and, by accommodating credit and speculative excesses, perpetuated the fateful bubble. That is, the Fed circumvented natural market circuit breakers – the adjustments necessary for cleansing the system of building excesses and distortions. Instead of shutting off the source fueling these excesses before they became a risk to the entire system, the Fed allowed them to escalate until the great crash." {found here: Link }

I happen to agree with this analysis (as it applied the first Great Depression and the one I think is on the way) and I am wondering if someone can point me where the reference to this analogy in Greenspan's 60's work might be found. I don't believe it occurs in his article in "Capitalism the Unknown Ideal", and a general Google search didn't hit anything. In fact, I may be confusing this with the work of another economist, but if so I've forgotten the source. At any rate, I think it's a very useful analogy, and if anyone can help me find the source I will appreciate it.

Thanks in Advance.

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I happen to agree with this analysis (as it applied the first Great Depression and the one I think is on the way) and I am wondering if someone can point me where the reference to this analogy in Greenspan's 60's work might be found.  I don't believe it occurs in his article in "Capitalism the Unknown Ideal", and a general Google search didn't hit anything.  In fact, I may be confusing this with the work of another economist, but if so I've forgotten the source.  At any rate, I think it's a very useful analogy, and if anyone can help me find the source I will appreciate it.

It's in the same book, "Capitalism: The Unknown Ideal", but the article is by Nathaniel Branden and titled "Common Fallacies about Capitalism". It's on page 80, to be precise. It is Branden quoting Greenspan, as you say.

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I saw the following article recently (written by "Doug Noland" in 1999 and posted at www.prudentbear.com at the link below) and I am trying to remember where I read this same phrase or something similar:

"And this brings us to the title of this speech: "Putting a Coin in the Fuse Box." This was a phrase I stumbled across a few years back while reading Ayn Rand’s Objectivist magazines from the early 1960’s. "Putting a Coin in the Fuse Box" was ascribed to Alan Greenspan ... I am wondering if someone can point me where the reference to this analogy in Greenspan's 60's work might be found.  I don't believe it occurs in his article in "Capitalism the Unknown Ideal", and a general Google search didn't hit anything.  In fact, I may be confusing this with the work of another economist, but if so I've forgotten the source.  At any rate, I think it's a very useful analogy, and if anyone can help me find the source I will appreciate it.

Thanks in Advance.

This originally appeared in The Objectivist Newsletter VOL. 1 NO. 8 August, 1962, INTELLECTUAL AMMUNITION DEPARTMENT, in answer to the following question:

Are periodic depressions inevitable in a system of laissez-faire capitalism?

...To borrow an invaluable metaphor from Alan Greenspan: if under laissez faire , the banking system and the principles controlling the availability of funds act as a fuse that prevents a blowout in the economy--then the government, through the Federal Reserve System, put a penny in the fuse-box . The result was the explosion known as the Crash of 1929...

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Thanks for the responses.

I am curious whether or not there are others on the forum who are as interested and concerned about the "credit bubble" issue as I am.

Seems to me that it's inevitable that there is going to be a harsh readjustment soon, and Alan Greenspan and the Republicans are going to get the blame. (In my view the Republican Party is more to blame than Greenspan personally.)

This fusebox analogy is right on point, and it is something of a paradox why Greenspan uses words liked conundrum and baffled in talking about issues he was so clear on forty years ago.

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Thanks for the responses.

I am curious whether or not there are others on the forum who are as interested and concerned about the "credit bubble" issue as I am.

Seems to me that it's inevitable that there is going to be a harsh readjustment soon, and Alan Greenspan and the Republicans are going to get the blame. (In my view the Republican Party is more to blame than Greenspan personally.)

This fusebox analogy is right on point, and it is something of a paradox why Greenspan uses words liked conundrum and baffled in talking about issues he was so clear on forty years ago.

This seems like an interesting question for our Expert, Richard Salsman. I suspect he will disagree with you, but whether he does or doesn't, he always gives good reasons for his conclusions.

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I suspect he will disagree with you.....

You know Betsy I gather that you are right, given the lack of other comments on the forum (or on Objectivismonline.net) about this issue.

Having been a fan of Ayn Rand for 25+ years I am used to being in the minority, but I am kind of surprised that there don't seem to be more "hard money" enthusiasts posting here. Maybe they're all Libertarians and know better than to hang around here!

As for me, I am no gold-nut or Libertarian, but I've been interested in and following the Austrian economics critique of the banking system at mises.org. They don't tempt me at all with their isolationist / libertarian rants, but their credit bubble arguments seem valid to me. The quote from Doug Noland that I led this topic off with is part of a larger article that seems right on point with the current situation.

I suppose it wouldn't be much of a concern if I didn't also agree that the situation looks likely to lead to a major financial crisis, which will be pinned on the Republicans, and which would then presumably assist in a Democratic comeback (of course, so many other issues).

The Republicans digging themselves into a hole has arguable benefits, but I HATE the thought that this will be argued once again to be a failure of capitalism, when the failure derives directly from "placing the penny in the fusebox" as Greenspan said years ago.

Anyway, happy to be a minority within a minority!

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I agree with Noland--and read his "credit bubble bulletin" every week. It's good stuff, plus free (making it doubly good to me). Of course, Salsman probably will disagree with you here. He doesn't--despite all evidence to the contrary--believe in bubbles period. Go figure.

I'm curious, though, who else do you like besides Noland? I'm a big fan of Marc Faber (and recommend getting his newsletter if you invest enough to justify the $500 subscription) and of course Jim Rogers and Warren Buffett. I also read Stephen Roach regularly. (He has an interesting article out today that you might be interested in.)

As for the credit and property bubbles--and the future of the dollar--there's no doubt to me that they will burst and decline at some point in the future. The question is what will they decline against? Gold? Probably not dramatically. Oil? Maybe, but probably because we've passed Hubbert's Peak and not primarily because of a move against fiat currencies. My bet is that it will decline over the long term against a basket of commodities.

But the jury is still out on this one. And anyway I'm waiting till China has a hard landing before I put all my chips down. Good to hear another Objectivist is reading some good stuff though. :D

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I agree with Noland--and read his "credit bubble bulletin" every week. It's good stuff, plus free (making it doubly good to me).

Sounds like I need to subscribe -- I did not realize it was free - thanks for the tip.

Of course, Salsman probably will disagree with you here. He doesn't--despite all evidence to the contrary--believe in bubbles period. Go figure.

Actually I am not very familiar with Richard Salsman or his work other than to recognize his name as being associated with the board. I see from his list of articles at capmag.com that in 2003 he staked out a position that deflation was non-existent and would be beneficial if it occurred. That certainly puts him at odds with Noland.

One thing about the housing bubble that causes me some concern is that I gather we have lots of friends on this board from California and New York, and if what I read is correct, they need to be very concerned about this issue.

I'm curious, though, who else do you like besides Noland? I'm a big fan of Marc Faber (and recommend getting his newsletter if you invest enough to justify the $500 subscription) and of course Jim Rogers and Warren Buffett. I also read Stephen Roach regularly. (He has an interesting article out today that you might be interested in.)

I've read some of Faber, and seen his latest article posted here: http://www.safehaven.com/article-3242.htm I think that article is an excellent summary of the problem. I don't invest enough to justify purchasing his newsletter, however.

I generally find that I agree with James Grant and Jim Rogers, but I'm not sure about Warren Buffett. I am not familiar with Stephen Roach but will look him up. I am not a professional investor (I am a lawyer) and I generally keep up with the analysis on this issue by reading things like the housing bubble blog located here: http://thehousingbubble2.blogspot.com/ or the summary of articles at www.safehaven.com Also, I follow Robert Prechter's predictions, and thought I do not know how much stock to put in his Fibonacci analysis, I do agree with his psychological observations and his view that the problem ahead is deflation rather than inflation.

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Cicerosc,

On a slightly different subject, I have found Richard Salsman to be right on track. I have some of his lectures, and have read a lot of other things that he has written, very concise and very informative, but most of all, almost always on target.

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Cicerosc,

On a slightly different subject, I have found Richard Salsman to be right on track.  I have some of his lectures, and have read a lot of other things that he has written, very concise and very informative, but most of all, almost always on target.

Thanks for the comment.

Is there a better public collection of his work than that cited at the capmag.com site? Just glancing at his titles at the capmag list I can see that he's taking positions I would expect an objectivism-oriented commentator to take, so I am sure he is worth reading.

However, I don't see any titles directly pointed at "Austrian" theories, which I am using here as a shorthand for criticism of central banking as distorting the economy (the penny in fusebox analogy).

Do you happen to know if he's addressed these issues recently?

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Cicerosc,

I would go to Richard Salsman's web-site at intermarketforecasting.com. Most of the information there is for investors, but it does give you a glimpse of what he is stating. It also leads you to places where you can either read articles or buy his books.

In the new book "The Abolition of Antitrust" by Dr. Gary Hull, Richard Salsman writes a chapter called "The False Profits of Antitrust", which is very informative. As a matter of fact the whole book is very informative on the hows and whys of economics problems, tracing then back to their roots.

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Seems to me that it's inevitable that there is going to be a harsh readjustment soon, and Alan Greenspan and the Republicans are going to get the blame. (In my view the Republican Party is more to blame than Greenspan personally.)

If by readjustment you mean recession, I think that it is highly unlikely that a recession will occur in the next couple years if you assume that no major disaster will occur. Since the great depression every period between recessions has been longer than the last. The last one was ten years and the recession ended in sometime in 2002 I think. The lengthening of these growth periods is largely due to the increased effectiveness of Greenspan and the fed's efforts to manipulate interest rates.

Despite Greenspan's flaws I think he is definitely good at what he does. However, the question of whether or not monetarism is morally right as a proper role of the government is something I have wondered about. It seems to me that the answer would be no, but I do not yet fully understand the situation so I can’t come to a decisive conclusion. I would appreciate it if someone with more knowledge about Objectivism and monetarism could shed some light on this issue for me.

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However, the question of whether or not monetarism is morally right as a proper role of the government is something I have wondered about. It seems to me that the answer would be no, but I do not yet fully understand the situation so I can’t come to a decisive conclusion.

As a matter of principle a good way to approach these issues is to ask if a proposed action is consistent with or contrary to the reason and purpose of having a government in the first place. Since the protection of individual rights is the fundamental justification of a proper government then in what way would any government involvement in commerce serve that purpose? In a truly laissez-faire society the government protects individual rights through a military to defend against foreign invaders, a police force to protect against internal criminals, and a legal system for the protection of contracts and property rights. There is no moral justification for government involvement in the economy.

You might enjoy reading many of the essays reproduced in Ayn Rand's book Capitalism: The Unknown Ideal..

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"Putting a Coin in the Fuse Box" was ascribed to Alan Greenspan by a fellow Rand colleague who stated that Greenspan firmly placed responsibility for the depression on the Federal Reserve. According to the 1960’s Greenspan, the Fed had repeatedly circumvented market forces with liquidity injections and, by accommodating credit and speculative excesses, perpetuated the fateful bubble. That is, the Fed circumvented natural market circuit breakers – the adjustments necessary for cleansing the system of building excesses and distortions. Instead of shutting off the source fueling these excesses before they became a risk to the entire system, the Fed allowed them to escalate until the great crash."

Economist Richard Salsman (TIA, Jun-Aug 2004 & Jan 2005) says the Fed's destructiveness re the Gr Depress was small compared to the basic causes: huge tariffs (Smoot-Hawley), huge taxes at the end of the 1920s, and the outlawing of branch banking (which can spread losses). He also says the Roaring Twenties was an economy of real and rapidly rising productivity, not a "boom."

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Economist Richard Salsman (TIA, Jun-Aug 2004 & Jan 2005) says the Fed's destructiveness re the Gr Depress was small compared to the basic causes: huge tariffs (Smoot-Hawley), huge taxes at the end of the 1920s, and the outlawing of branch banking (which can spread losses). He also says the Roaring Twenties was an economy of real and rapidly rising productivity, not a "boom."

Ah yes, there is definitely a split of opinion here (if the summary of Greenspan's opinions that I quoted when I started this thread are accurate).

I am sorry to observe that the clanging of warning bells on the economy are mostly the province of the libertarians rather than Objectivists. I think on this point (free market economics and the need for sound money) the libertarians have managed to find their way to the correct position.

Anyone know of any Objectivist-oriented websites that collect information and views from the point of view of the penny-in-fusebox problem? If I don't find one soon I may have to take a stab at it myself ;-)

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Ive been trying to understand the Fed for a long time and I believe that Henry Hazlitt's excellent _Ecoomics In One Lesson_, which i recently re-read, helped me. Hazlitt identifies the long-range destructiveness of govt-controlled prices, prices split from productivity. And determining interest-rate prices is, I believe, the main function of the Fed. Productivity causes interest-rate prices to be at a certain level. This level may be too high or low for collectivists who want politically-directed investing to benefit certain groups. And interest-rate prices may be at an unwanted level because of prior govt economic intervention. So they use the Fed, in a complex way that I may not understand, to raise or lower the price of money loans (interest rates). These political, anti-economic, anti-market prices for loans will indirectly shift production into less than maximum profit channels. But it wont be obvious and collectivist can blame the non-existent capitalism and call for more political control of production. Etc.

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Seems to me the current goings-on on Wall Street are worth bumping this thread for those interested in the subject.

It also seems to me that we're seeing proof that the longer the penny stayed in the fuse-box (through artificially low interest rates) the more hell there has been (and will be) to pay in the credit markets and the economy as a whole.

And to see someone get exercised over the issue, I highly recommend what's turning into Jim Cramer's most famous video rant:

Starts out calm, but boy does the truth come out about half-way through.

I hope our many Objectivist friends in California are well-insulated from the turmoil in real estate out there, because the odds are certain that it's going to get worse before it gets better.

Also, just maybe, when the going gets REALLY bad, I hope Ayn Rand / and the former incarnation of Alan Greenspan will get some of the credit they are due for this economic observation back in the early 60's. Certainly Greenspan is coming in for a lot of blame for what he did with rates after 9/11, but he must have known what he was doing -- at least he DID know.

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Seems to me the current goings-on on Wall Street are worth bumping this thread for those interested in the subject.

The Fed is an evil institution. The government has no business being the central bank and setting interest rates and the amount of money in circulation, and those in control of that process become some of the most powerful men in the world. It's been said, I think accurately, that Greenspan took the job that Galt turned down (economic dictator).

It isn't simply that it irrationally controls the value of money, it's that it does so totally capriciously and creates worldwide chaos. But its existence lays at the foundation of infinite-spending government, so don't expect to see it disappear soon.

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