How We Can Control the Interest Rate
BROCKWAY, GEORGE P.
The Dismal Science HOW WE CAN CONTROL THE INTEREST RATE BY GEORGE P. BROCKWAY IN three recent contributions to this space I have argued that the conventional theories of inflation are...
...No, the big-time wheeler-dealers are "institutions," and institutions are churches and colleges and foundations and pension funds and insurance companies and mutual funds...
...that's why all the editorial writers in the land have been urging them to save...
...The real interest rate was greater than the prime itself had ever been (with one exception) before 1978...
...At 15 per cent inflation, an investor lending $1 million at 10 per cent 'loses' $50,000 a year...
...The foregoing, however, earthshaking as it is, would not be enough...
...Someone has to consume what the economy produces...
...There is a book out on how to defend against a drunk-driving charge by a trial lawyer who has had thousands of such cases and never lost a one...
...The Federal deficit soared, our foreign trade was savaged, and Latin America was saddled with loans at unpayable interest rates...
...It could require those who want to bring money into the country to go to the Treasury to buy dollars and to satisfy any taxes and regulations they had been fleeing from...
...The funny thing was, it didn't make others eager to become likenim...
...Sooner or later, he will stop lending at the low interest rate and invest the money himself in commodities or real estate...
...nevertheless, the national savings rate fell, and in spite of the subsequent Reaganomic tax cuts for the wealthy, the savings rate continued to fall...
...This, it will be noticed, is exactly contrary to the proposal of our new President, but he has never been quite clear in his mind what was and what was not voodoo economics...
...We could perhaps stop the flight if we wanted to, but it would be much easier to let the money go...
...The time to do the stopping is when the money wants to come back...
...The demand of nonproducing speculators for money would thus be greatly reduced, if not altogether stopped, and the Reserve Board, by increasing the money supply, could lower the interest rate for everyone else and take a step toward eliminating the Bankers' COLA...
...That is almost true...
...The unremitting search for loopholes in the income tax laws is sporadically countered by searches for ways to close them...
...That was not so nice either, and it was brought about by deliberate, coldblooded national policy...
...I have gone further: I have maintained that raising the interest rate (which I call the Bankers' COLA) is precisely what produces inflation in the first place...
...Although there is probably no way of keeping speculators from getting their hands on money if they want to, it would be quite easy to keep them from wanting to...
...Moderately compassionate believers should have been severely shaken by what else happened...
...What happened to the $50,000 loss Senator Proxmire talked about...
...I said it wasn' t going to be easy...
...the factories and even the computers remain...
...We might almost say with Pogo that we' ve met the enemy and they is us, for most of us are beneficial owners of pieces of one or more of the nameless, faceless institutions the market gossips gossip about...
...Our capital gains tax would cancel the commodities option and could be made to cancel the real estate option, but suppose the Senator's million-dollar lender is smart and doesn't lend at all, thus saving that $50,000 "loss...
...Moderately reflective true believers should have had their beliefs shaken just a bit...
...he was concerned about the Japanese...
...The fact that financial operatives set up shop in the Cayman Islands to escape inconvenient regulation indicates that a flight from the dollar has to be an actual flight...
...At this point Wall Street-wise types will explain that Volcker was concerned about more than Senator Proxmire's millionaire...
...a pretended flight won't do...
...As for the latter option, they might find consuming a million a little difficult, but it would be fun to try, and the economic result would at least be some priming of the pump...
...If there was anything more to it than fancy rhetoric, the 15 per cent inflation affected both investors...
...That's how former Reserve Board Chairman Paul A. Volcker got the prime interest rate up to 21.5 per cent in December 1980, while the Consumer Price Index was up only 13.5 per cent, leaving Senator Proxmire's investor with "real" interest of 8 per cent, which should have made him happy...
...Granted, some of them may not be above diddling their books a bit, and very likely the diddling is difficult to detect...
...but only doctrinaire true believers in laissez faire will blanch at that, and doctrinaire laissez faire is what got us into the mess we're in...
...Yet multinational corporations are taxed...
...A legitimate question now is, What do I propose we do...
...Of course not...
...To control inflation, the interest rate has got to be brought down—way down...
...The fact remains, though, that both millionaires have taken a loss in purchasing power, and that deliberate, cold-blooded national policy has forced the loss upon them...
...You cannot count on the lender being a complete idiot,' Proxmire said...
...Such control will certainly affect foreign trade...
...Using these levers, the Fed can control the supply pretty well...
...He needed their money to pay for the deficit, which was all of $40.2 billion in 1979 (or about a third of the Gramm-Rudman target President Bush is going to be unable to meet...
...For the archetypical speculators of our day are not beefy gents in flashy suits on the order of Betcha-million Gates or even aristocratic gentlemen with narrow ties on the order of J. ?. Morgan or even indescribables like Ivan Boesky...
...Of course, the millionaires have other choices...
...And all this was done to keep the real interest rate from falling below zero...
...Perfection is impossible, because perfection cannot act...
...It will be the same with whatever we propose...
...A negative "real" interest rate, in apparent defiance of the laws of mathematics, proves to be greater than zero...
...Nor was that the whole story...
...They were, in fact, remarkably successful in getting Democrats to make their arguments for them, as William Greider documents at excellent length in Secreti of the Temple...
...The economy was deliberately depressed to "save" it from the possibility—the mere possibility—of being depressed later...
...The flight can be controlled by controlling foreign exchange...
...No matter how ingenious the laws we enact, we can be certain that ingenious ways of avoiding them will be discovered...
...The bankers would resist, and their line of argument would be practically identical with the one they used in freeing themselves from most of the New Deal regulation...
...Under present law, the Treasury Department is responsible for control of foreign exchange...
...It is merely marks on paper...
...The flight would no longer be so attractive, or serve any purpose...
...All one has to do (as Felix Rohatyn and others have suggested in order to inhibit leveraged buyouts) is tax capital gains at 100 per cent on property held less than a year or two, then at 95 per cent on property held less than two or three years, and so on until the rategot down to thelevel of ordinary income...
...Perhaps we can count on the lender not being a complete idiot...
...Unless that candy is taken away from them, it will do little good to take it away from the old-time speculators who still exist...
...Seven and a half years ago ("Why Speculation Will Undo Reaganomics,' NL, September?, 1981), I wrote in these pages: "Unless one is ready to run the printing presses flat out, the only way to get money into productive hands is to see to it that little or none of it falls into speculative hands...
...The one who refused to lend wound up with $850,000 worth of purchasing power, while his neighbor wound up with $950,000...
...The Dismal Science HOW WE CAN CONTROL THE INTEREST RATE BY GEORGE P. BROCKWAY IN three recent contributions to this space I have argued that the conventional theories of inflation are wrong—that it is not caused by full or almost-full employment, and that it is not cured by raising the interest rate...
...If Volcker had not given the Japanese what they wanted, they wouldn't have bought our bonds, and Proxmire's millionaire would have sent his money abroad...
...The former option is what we had hoped they would do, anyhow...
...The number of people unemployed went from 6.1 million in 1979 to 10.7 million in 1983...
...Letit be admitted—nay, insisted—at the outset that there aren't any easy answers...
...Consequently, we'll have to take a deep breath and tax the capital gains even of charitable institutions...
...Would that be the end of the problem...
...Well, all that the Fed and other true believers in traditional economics have proposed (and put into practice) is raising the interest rate, usually by restricting the money supply...
...That's not nice, and it's nothing we can be proud of...
...But the savings rate continued to fall, corporate investment continued to fall, and industry after industry was allowed to fall before the Germans and Japanese, the Koreans and the Taiwanese...
...Legal avoidance happens with even the most uncomplicated statutes...
...but taxes are collected, and where taxes are collected money can be controlled...
...Still, the proper direction of policy is, I think, clear...
...To control the interest rate—to eliminate the Bankers' COLA—one must be able to control the money supply...
...They could take their money and invest it directly in productive enterprise, or they could live it up...
...So what can we do...
...but the interest rate—the cost of money—depends also on demand, and there is one demand for money that the Fed has so far refused to do much more than talk about...
...In the same years, 9.2 million more people were impoverished, and the median family income (in constant dollars) fell $2,305...
...The Federal Reserve Board tries to do that now (for reasons different from those I've advanced) by fiddling with the reserve requirements it imposes on the banks and with the interest it charges them for temporary loans...
...These institutions, our surrogates, write the computer programs that run the market, and they do it for capital gains...
...The argument, in short, is that any attempt to reduce the interest rate will cause a flight from the dollar, and that the flight cannot be stopped because the financial world is international, its denizens are multinational, and they communicate electronically, instantaneously and secretly...
...For example, Wisconsin's recently retired Senator William Proxmire "delivered a short lecture on inflation and interest rates...
...Faced with inconvenient regulation, finance will flee the dollar...
...IF that were merely a trade-off —suffering a lot of grief and getting back a little stability—it would be bad enough, for what was exchanged was the livelihood and prospects of millions of fellow citizens for the "reality" of usurious interest rates...
...To do this, money has to be withdrawn from speculation and made available to productive enterprise...
...But it would be only a step...
...He would be like the unfaithful servant in the parable, for at the end of a year he would have only his million dollars, while his neighbor, who wasn't so smart and lent his million at 10 per cent interest, would have $1,100,000...
Vol. 72 • March 1989 • No. 5
