Monday, 21 September 2015

The FOMC Star Chamber

Q: Is this really what capitalism looks like?


A: No. This is what government price fixing looks like.

The FOMC Star Chamber
Guest post by Jeff Deist

Economists, bankers, fund managers, and investors around the world were absolutely fixated on the Federal Reserve’s anticipated announcement last week, with many fearing that a rate hike could trigger more shocks like the recent Black Monday selloff.

In a world of social media and 24-hour news cycles, it’s fair to say that Wednesday’s meeting of the Federal Open Market Committee (FOMC) in the Eccles Building, that band of bureaucrats meeting to decide the world’s interest rates, has been the most widely reported and discussed central-bank action in history.

But missing from the coverage of the resultant failure to lift interest rates off the floor is one fundamental point: that “monetary policy” and bureaucratic control over interest rates is not capitalism; it is outright centralised planning.

What else can we call the orchestration of a pivotal price signal in the worldwide economy by 12 bureaucrats (pus hangers-on) sitting in one room? If one accepts the Fed’s role in setting interest rates, than it’s hard to understand where and when to draw the line.

If alleged experts can determine the price of money, they why not set the prices of goods, services, and wages? Why can’t they determine the price of a bushel of wheat or an automobile? Why not just set the price of houses, since they seem to give them so much trouble?

When the former Soviet Union’s State Committee on Prices attempted exactly that, western capitalists scoffed. Yet centralised monetary planning is widely accepted as part and parcel of allegedly free and unhampered markets!

David Stockman explains that the Fed Funds Rate-- the overnight rate at which commercial banks trade reserves with each other for liquidity-- is the single most important price in the entire world economy:

As I always say, the money-market price, that is the Federal Funds Rate or Overnight Money or a short term treasury bill, is the most important price in all [the market] because that determines the cost of carry, the cost of speculation and gambling. 
    When you conduct a monetary policy that says to the speculators, to the gamblers, “come and get it,” you are guaranteed free money to carry your positions, whether you’re buying German Bondsor you’re buying the S&P 500 Stock Index or the whole array of yielding or price gaining assets that are available in the financial market.
    This monetary policy also sends the message that you can leverage and carry those positions for free and roll it day after day without worry, because the central bank has pegged your cost and production, and in a sense has pledged on its solemn honour that it will not change without many months of warning.
    And that’s what this whole thing [was] about — [the fear that the party might end—] changing the language and so forth.
    I think you have created a massive distortion in the very heart of … the financial system.

So while price fixing is illegal, when the Fed does it it’s called… capitalism.

Jeff DeistJeff Deist is president of the Mises Institute.
For many years he was an advisor to Ron Paul, and a tax attorney specialising in mergers and acquisitions for private equity clients.
A version of this post first appeared at the Mises Wire.

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