Foreign interest

The next place to admit to gambling was the market for interest and foreign exchange rates. As with insurance and stocks, denial that rates were random caused serious mispricings. The government encouraged banks to issue 30-year mortgages to home owners at fixed rates, funding them with deposits that could be withdrawn at any time. That obviously meant that if interest rates went up, the banking system would be in huge trouble, since its revenues (the income from the mortgages) were fixed but its expenses (the rates it had to pay on deposits) would go up. The solution until 1980 was Regulation Q, a rule that set a maximum amount on short-term interest rates. That makes perfect sense if you think of interest rates as something the government sets, but if interest rates are random you're asking the banks to make a trillion-dollar bet with government money. Of course, Regulation Q failed, and the government was forced to spend hundreds of billions of dollars bailing out the banks. And only a miraculous efficiency in the government-run cleanup effort and some good luck kept the trillion handle off the price tag. Japan suffered far more-political unwillingness to write the check took the most dynamic economy in the world and mired it in almost two decades of recession.

Not only did governments try to legislate interest rates; they used their central banks to try to set foreign exchange rates. The final nail in that coffin was driven by George Soros, a famous hedge fund manager. Great Britain insisted the pound was worth 3.2 German deutschmarks. George kept selling pounds at that price until the country gave up on Black Wednesday, September 16, 1992. George made several billion dollars, England lost 10 times that amount, and the pound fell to 2.9 deutschmarks. Even with the advantages of controlling the printing presses and making the laws, governments were no match for determined speculators.

Central banks still influence interest rates and foreign exchange rates, but none are bold enough to get in the way of a determined market move, or even a determined hedge fund manager. Everyone knows that unpredictable market forces are more powerful than governments. Foreign exchange and interest rates are random.

An economist would explain that the government manipulates the value of money in order to manage the economy, to keep it from growing too fast or too slowly. I don't believe this works; central bankers use outdated and imprecise information to guide unpredictable tools. There is no doubt the process injects a lot of risk into the economy. No one can be sure what one currency is worth in terms of another, or what the currency will purchase in the future. Traders wait breathlessly for Federal Reserve Board announcements, which often trigger frenzied trading and market volatility. Those risks are artificial. We could virtually eliminate them by going back to the gold standard. The fanatic secrecy and delicacy associated with Fed decisions remind me more of gamblers ensuring a fair shuffle than scientists reaching open consensus about how to tune a precision machine. I think that risk stimulates the economy. The fed is doing its job by being unpredictable, not by being right about the economy.

Now it was even harder to distinguish financial markets from gambling. With insurance and stocks, there was some physical external risk the markets could use to claim they were not generating their own randomness so people could bet. But what physical external risk caused interest rates and foreign currency exchange rates to move up and down so much? Interest rate trading volumes were far larger than the total outstanding amount of bonds. Foreign currency trading dwarfed exchanges to support export and import.

Дата добавления: 2015-10-26