How can the Fed Reserve Bank actually change interest rates?

it borrowed them from social security reserves and from selling a few bonds which didnt not go too well..

 

So folks with money parked in checking, savings, CD's and money market accounts are gaming the system and taking imprudent risks because their insured? That's a stretch and would require the same thinking that auto insurance encourages car accidents.

There is most certainly a moral hazard issue, but it's related to the implicit guarantee of large lending institutions by the federal government to the tune of hundreds of billions of dollars. Not the measly $250k that FDIC covers.

 

Depositor insurance does not insure shareholders or management. So I'm not sure how you contend that creates a moral hazard or excessive risk taking by banks.

I'm also not sure how it creates excessive risk taking by depositors. The deposits that are insured are in banks, which are low risk. If you take that money and buy high risk holdings like stock or gold, it is not insured.

 

There is a lot of science to it. I agree it is not perfect in its understanding, but science often isn't.

 

There is no science whatsoever in monetary policy. If it is not amenable to controlled and reproducible experimentation, it is not science, period. You just stay on your turf, lawyer, and leave the science to the scientists.

 

Science (from Latin scientia, meaning "knowledge") is a systematic enterprise that builds and organizes knowledge in the form of testable explanations and predictions about the universe.

http://en.wikipedia.org/wiki/Science

Sounds like science to me.

 

That's because you have no idea what TESTABLE means. How do you intend to TEST the explanations and predictions of monetary policy when you cannot conduct controlled and reproducible experiments? You do realize that without controlled experimentation, you cannot properly TEST an explanation or prediction, yes?

 

Regarding insurance (of any kind) altering behavior and creating moral hazard: where do you think the term moral hazard came from?! It started gaining popularity centuries ago when people within the insurance industry started using it widely, for the very reason I outlined in my previous post.

That insurance creates moral hazard is something that economists (Paul Krugman has written about it extensively) don't deny, and something that is supported by research.

In the case of deposit insurance, depositors have little incentive to monitor the risk-taking behavior of insured institutions (moral hazard on the part of depositors.) As a result, these companies can obtain deposits to finance risky operations without paying the higher interest rates that would reflect the higher risks - hence the moral hazard on the part of banks. So if these institutions do not bear the full costs of the risks they take (losing customers, for example) the risk isn't being internalized & is thus priced incorrectly by their own risk management department, by investors, by regulators, etc.

 

Actual science is indeed accurate in its understanding.

Example - thermodynamic system #1 & thermodynamic system #2 each being in thermal equilibrium with thermodynamic system #3 implies that thermodynamic system #1 is in equilibrium with thermodynamic system #2.

Example - energy can't be created or destroyed in an isolated system.

These two examples, in contrast to any two examples that you can come up with from monetary policy, or economics in general, have a few things in common: they are not affected exogenously, they apply all over the world, there have never been observations that have contradicted either of them repeatably.

You seem to be confusing the application of tools (mathematics) used in science with science. It's true that laws of science are expressed as a mathematical model, but the converse is not true - just because something is expressed as a mathematical model does not imply that it is science. Scientists are suppose to be able to conduct repeated experiments which eventually become laws and can help us predict future phenomena with a high degree of accuracy. Economists conduct a single experiment with a sample size of about 50 and can predict phenomena under very constrained circumstances over a very short period of time - and even that with a minuscule degree of accuracy.

 

Social sciences

Economics – analyzes the production, distribution, and consumption of goods and services. It aims to explain how economies work and how economic agents interact



Applied sciences

Applied sciences – application of scientific knowledge transferred into a physical environment.

Management

Management – getting people together to accomplish desired goals and objectives using available resources efficiently and effectively.

Accounting – process of communicating financial information about a business entity to users such as shareholders and managers.

Outline of management – getting people together to accomplish desired goals and objectives using available resources efficiently and effectively.

Business Strategy – field that deals with the major intended and emergent initiatives taken by general managers on behalf of owners, involving utilization of resources, to enhance the performance of firms in their external environments.

Finance – addresses the ways in which individuals, businesses and organizations raise, allocate and use monetary resources over time, taking into account the risks entailed in their projects.

Marketing – social and managerial processes by which products, services and value are exchanged in order to fulfil individuals' or group's needs and wants. These processes include, but are not limited to, advertising, promotion, distribution, and sales.

Organizational Behavior – field of study that investigates the impact that individuals, groups and structures have on behavior within an organization.

Operations – those ongoing recurring (cyclic) activities involved in the running of a business for the purpose of producing value for the stakeholders.



http://en.wikipedia.org/wiki/Outline_of_science

 

I think it's cute that your entire argument rests upon a Wikipedia article (not to say that wiki is useless - it can be very useful when sources are given.)

I don't think anyone here denies that economists use (or at least attempt to use) "scientific knowledge/methodology." But claiming to be scientific since you utilize methods borrowed from fields that have had success using those methods, even though they don’t work in your field, is just mimicry. There is nothing divine about the scientific method. It is only used because it delivers. If a field uses it & it never (or rarely) works, that field is not science.

We know empirically that scientific method [when used appropriately in the fields it was intended for] produces good results which yields relevant knowledge. Thus, "social sciences" are either not using it correctly or their fields are not appropriate for its application. In any case, this implies that these are not sciences at all.

An interesting article from a well known mainstream economist, Brad Delong:

One of the dirty secrets of economics is that there is no such thing as “economic theory.” There is simply no set of bedrock principles on which one can base calculations that illuminate real-world economic outcomes. We should bear in mind this constraint on economic knowledge as the global drive for fiscal austerity shifts into top gear.

Unlike economists, biologists, for example, know that every cell functions according to instructions for protein synthesis encoded in its DNA. Chemists begin with what the Heisenberg and Pauli principles, plus the three-dimensionality of space, tell us about stable electron configurations. Physicists start with the four fundamental forces of nature.

Economists have none of that. The “economic principles” underpinning their theories are a fraud – not fundamental truths but mere knobs that are twiddled and tuned so that the “right” conclusions come out of the analysis.

http://delong.typepad.com/sdj/2010/07/john-stuart-mill-vs-the-european-central-bank.html

 

no it doesn't, notice how universities across the planet categorize management science, economics and finance

Department of Management Science

http://www.stanford.edu/dept/MSandE/cgi-bin/index.php


The Oxford MSc in Financial Economics

http://www.sbs.ox.ac.uk/degrees/mfe/Pages/default.aspx

 

Your arguments get weaker & weaker each time you post.

The name of the degree given to graduates in those fields of study varies from school to school. Most schools give out Bachelor of Arts for Economics. Most schools give out degrees in "business administration" in which you can major in finance. Granted, there are some schools that give out Bachelor of Science for those same fields of study. Of course, this means absolutely nothing, as anyone who has went to university knows.

Also, I work in the field of quantitative finance. More precisely, I create models which are used to price & hedge derivative products. I come from a mathematics/physics background, as do many of my colleagues. There is not a single one of us that considers finance to be "science."

Are you ever going to make a serious argument?

 

basing an argument on opinion is what's weak



MASTER OF SCIENCE IN MANAGEMENT STUDIES

A Customizable, Advanced Master’s Degree for Students from Non-U.S. Business Schools. The Master of Science in Management Studies (MSMS) Program at MIT Sloan School of Management offers talented students from around the world the opportunity to enhance their expertise in a chosen management concentration

http://mitsloan.mit.edu/academic/msms/


MSF - Master of Science in Finance

The Texas Master of Science in Finance (MSF) Program at the McCombs School of Business provides a unique opportunity for students to receive graduate-level training to prepare for careers in finance, especially those requiring analytic rigor and quantitative skills.

http://www.mccombs.utexas.edu/msf



Master of Science in Economics

The Department of Economics at Texas A&M University has a long tradition of excellence in both teaching and research. In the most recent ranking by Tilburg University (2005-2009), we rank 34th among all economics departments in the United States…

http://econweb.tamu.edu/graduate/ms-program.htm

 

I didn't. I based it on what science actually is, and the application of the scientific method to the various social sciences. I'm still waiting for you to do the same.

Although, given that you have lied about your education background, I do not expect much from you.

 

I didn't. I based it on what science actually is, and the application of the scientific method to the various social sciences. I'm still waiting for you to do the same.

Although, given that you have lied about your education background, I do not expect much from you.

 

no, you based it on your opinion about what science is


notice how universities classify economics, finance and management


MASTER OF SCIENCE IN MANAGEMENT STUDIES

A Customizable, Advanced Master’s Degree for Students from Non-U.S. Business Schools. The Master of Science in Management Studies (MSMS) Program at MIT Sloan School of Management offers talented students from around the world the opportunity to enhance their expertise in a chosen management concentration

http://mitsloan.mit.edu/academic/msms/


MSF - Master of Science in Finance

The Texas Master of Science in Finance (MSF) Program at the McCombs School of Business provides a unique opportunity for students to receive graduate-level training to prepare for careers in finance, especially those requiring analytic rigor and quantitative skills.

http://www.mccombs.utexas.edu/msf



Master of Science in Economics

The Department of Economics at Texas A&M University has a long tradition of excellence in both teaching and research. In the most recent ranking by Tilburg University (2005-2009), we rank 34th among all economics departments in the United States…

http://econweb.tamu.edu/graduate/ms-program.htm

you're the one lying

 

Can we get back to the topic of this thread?

All I am saying is that I don't see how the central bank can change interest rates just by pushing around a bunch of paper. I think those who believe a central bank can actually control real interest rates are just short-sighted. When you pull money out, that money has to go to somewhere else. When you put money in, that money has to come from somewhere. Whatever the central bank does, it will just cause inflation or deflation that will entirely cancel out whatever effect it is attempting.

So the notion that a central bank can control interest rates and stabilise the economy may just be part of an erroneous economic ideology.

 

You're unintelligent.

MIT Sloan launched its Master of Finance (MFin) as a direct response to demand in the financial industry. This rigorous one-year program combines in-depth study of quantitative techniques with practical, hands-on business problem solving.

http://mitsloan.mit.edu/mfin/

Masters of Arts in Economics (MA)

http://www.bu.edu/econ/gradprgms/ma/ma/

Not that what degree a university gives in a certain subject has any bearing on the debate, but this just goes to show how weak your argument is. The name of the degree varies from school to school, as has already been explained to your inferior mind.

Also, you did lie about your education. You claimed to have an advanced degree in Economics but failed to answer a simple economic modeling question.

 

Economics and finance are subjects best understood through both quantitative and qualitative lenses. They are not scientific in terms of subject classification, albeit often including scientific methodologies with rigorous mathematics to observe, evaluate, and analyze phenomena. Like all other subjects, too much reliance upon one methodology leads to an overgeneralized and narrow-minded view of a matter. The world is inherently nuanced, complex, and idiosyncratic, and there is no reason in the pursuit of knowledge to treat such otherwise. Simplification certainly helps to better comprehend certain aspects and formulate certain outcomes, but those methodologies which do so the best are not the be all end all.

International Relations, International Studies, Global Politics, or World Politics suffers from similar dilemmas. Realism and Liberalism are still the dominant theories in IR, yet they have been proven time and time again unable to predict and effectively analyze events. Among the most notable is the inability of Realists and Liberals to foresee the events which led to the end of the Cold War. If an alternative theory such as Constructivism, Post-Structuralism, or Marxism had greater traction, the IR scholarly community may have been able to determine that the disintegration of Communist regimes was on the horizon.

 

I agree.

Going back to the field of economics, I find it funny that my colleagues (especially the traders) often like to brag about not having degrees in economics. Economics is probably the most ridiculed field of study (due to the neoclassical/Keynesian dominance.) I've been told that this is true of traders pretty much everywhere, though I cannot confirm it.

 

I hear people talk about education in economics, or finance, and all I can think of is how the documentary the Inside Job, breaks down in specific detail, how the education system has been corrupted, and shows that the average economics/finance professor is making huge amounts of money to tout the company line at Universities.

 

you don't know what you're talking about

 

I don't necessarily have anything against professors doing consulting work for companies on the side. I don't see that as having an adverse effect on the quality of education. On the contrary, having someone with practical experience as a professor can be very helpful.

My problem with the way economics is taught today is that it is presented as a science, when it inherently is not. It has also become too quantitative through the years, with less focus on the qualitative side. It's nothing more than economists desperately wanting to be mathematicians & physicists. The result of which has been observed through poor forecasting, and on a deeper level, poor understanding of the dynamics of the economy.

 

I don't necessarily have anything against professors doing consulting work for companies on the side. I don't see that as having an adverse effect on the quality of education. On the contrary, having someone with practical experience as a professor can be very helpful.

My problem with the way economics is taught today is that it is presented as a science, when it inherently is not. It has also become too quantitative through the years, with less focus on the qualitative side. It's nothing more than economists desperately wanting to be mathematicians & physicists. The result of which has been observed through poor forecasting, and on a deeper level, poor understanding of the dynamics of the economy.