I don’t know about you but one of the best parts about traveling (besides a couple of nights sleep without my 2 year old wake-up call) is the fact that you get “plane time.” Back when I worked in Big 5 consulting, this time was spent doing one of two things….catching up on sleep or cramming to get some deliverable completed before the plane landed. After a quick cat nap, however, I had the luxury of reading the Wall Street Journal (not cover to cover mind you) but I did get to read the sections that I never read in the on-line version. Though there was a great front page story on the mining and metals industry, “Giant Mines Scramble to Cut Output,” I felt we have covered most of what that story contained previously. So on to the op-ed page and lo and behold way back on page A19 I saw a piece with an intriguing title, “To Prevent Bubbles, Restrain the Fed.”
Now with a common sensical headline like that, the only question I have is “how?” People joke about how our politicians are light years behind Wall Street in terms of understanding financial markets or accounting firms on the use of SPE (Special Purpose Entities). We can look now and say the oversight and regulation is always administered post-event. But it’s not only administered post-event it’s usually hastily passed, ill-informed and too bureaucratic. That may be some harsh commentary. I am speaking of acts like Sarbanes-Oxley. But here we look at policy in action. Specifically, the Fed kept interest rates low after the September 11 attacks. In fact, rates were at 2% or less for three years thereafter, when they should have been raised. The article goes on to say that, “people were being paid to borrow and they responded by often borrowing irresponsibly.” And there you have the sub-prime crisis.
So if the issue here today is: how do we prevent asset bubbles from forming like the one that just popped? The answer according to Gerald O’Driscoll Jr. of the Cato Institute is to create, “a commodity standard on the Fed.” What does it do? Specifically, it “…imposes discipline on a central bank because it forces it to acquire commodity reserves in order to increase the money supply.” The idea was so intriguing to me that I highly recommend you read the whole piece here.
The author points out that the key benefit to the Fed is that it would receive price signals serving as an early warning system to the formation of any potential bubbles, “because the price of the commodity would be continuously traded in spot and futures markets.” So anyone that watches the spot markets would be able to see in advance any bubbles forming.
I’d like to put my vote in for steel as the commodity of choice. That has a certain irony to it since that is where Alan Greenspan first cut his teeth professionally as an economist as he describes in his aptly named book, “The Age of Turbulence”.