The American Federal Reserve has lifted interest rates about 15 times since June 2004. Our own Reserve Bank takes a similiarly dysfunctional ‘piano tuner’ approach. To see why this way of doing things is flawed and destabilizing read this post brought over from Catallaxy:
THE OVERPOWERING STUPIDITY OF THE WAY MONETARY POLICY IS RUN.
Most government policy until Hawke/Keating or thereabouts was pretty foolish. Nowadays apart from massive excessive thievery its pretty good. People seem to have a bit of a clue. The competition commision particularly.
But monetary policy has always stood out as being more foolish then even the worst of the others.
However they did towards the end of the Hawke era adopt one good idea that almost made up for all the myriad bad ones. And I remember this being explained very clearly by the endlessly boring Gareth Evans. I can’t remember how he worded it but he always words these things with startling perfection and STILL manages, through his delivery to send people into a sort of insulin shock.
But it was simply if you have positive growth you ought to be biased toward tight money so as to keep your powder dry for if growth slips to where it risks a recession. Pretty prosaic stuff but enough to avoid recessions.
However consider the foolishness of the following:
USING THE INTEREST RATE AS THE BALANCING MECHANISM.
You want to stabilise either total spending or the investment markets (these goals will converge over time).
Now controlling money is one step away from controlling total spending. But interest rates are an whole other step removed. Why attempt to stabilise the spending, by going for controlling a symptom two steps removed?
Then the other thing is the WAY they do it. Highly destabilizing piano tuner mode. Anyone who has ever competed in chair-balancing down the back of the class knows that when you are falling one way or the other you must move your legs fast and decisively. And it can never be predicted two moves ahead in which direction that move must be or the timing of it. Except for one thing. It is usually (but not always) in the opposite direction to the move immediately prior.
So interest rates should be moved quickly, often and decisively if you are foolish enough in the first place to use interest rates to balance things.
Even the drooling retard end of the class must know that you can only hope to keep one variable steady. And that variable is not interest rates. This glacial piano-tuning has to be destabilizing. If I was forced to balance things in this way I would use the stock market as a sort of daily default barometer. Then look at other items over the longer haul.
In the medium term I would go for stabilising investment assets markets since the avoidance of recessions means avoiding bubbles and then crashes in these assets…………….
Which brings me to more terminal stupidity. After the 90’s it can no longer be sustained that 0 or low consumer goods inflation is the correct goal. Like I say if you keep one thing stable you are forsaking the possibility of keeping all other things stable. And why on earth do consumer prices (CONSUMER PRICES OF ALL THINGS) need to be stable.
Its investment assets stability that will take away the need for recessions. So that ought to be the focus at least in transition to growth deflation. We go into recession when the collapse comes in the demand for those things that we borrow for. And that isn’t consumer goods for the most part.
Now this is all quite apart from the idea that even by their own lights policy will be so much better and easier to control the higher the RAR is.
The higher the reserves the faster will be the transmission of any policy moves by the bank. The higher the Reserve asset ratio the more inherently stable the system will be. And if the reserves stay at 100% for long enough then the system will be so stable that the central bank might largely be wound up.
See the elephant he is stable on his four legs. And the changing gusts of wind is something that he barely notices. But force him to balance on his trunk and those winds become very important.
Keynesian animal wind spirits won’t matter a stitch if we grow up and let that elephant down so that he stands on all fours.
But quite apart from fractional reserve banking almost every aspect of the way monetary policy is handled is just self-evidently foolish.
And for this I blame the long history of Keynesian macromancy confusing folks so that they cannot think straight about any of this stuff. And also the tendency for thieves, thugs, tax-eaters and counterfeiters to do things in such a confusing way as to be able to convince folks that their presence is necessary.
Whereas in reality if nine tenths of the non-defense non-justice tax-eaters dropped dead tommorrow the whole system would be vastly more sound and it would be like taking an invisible piano off our backs.