This is because one is bottom up and one is top down. The qualities of the bottom up figures is at least they reflect (making many assumptions about the quality of the data).
The imposed figures do not reflect anything except a belief that what they are is effective. What I mean by this is when the Fed keeps Fed Funds rates at near zero for a long time they do it because they believe it relieves the ongoing economic crisis. Their behavior during this crisis has exactly supported the belief this is a top-down imposition.
They do this because they believe this causality (presumably): if $ is cheap to borrow, it will be borrowed and put back into the economy as one of those bottom up inputs. The problem is historically these top down inputs seem to have caused enormous financial crises. However controlling the bottom up inputs is not the answer it just causes a phenomenal crisis (the soviet economic mess etc.). Put simply the system does not like to be controlled.
Western governments have put more and more of these controls out of their hands and into the system itself (the market). What this has resulted in, is the crisis happening in the market itself. Is the systemic collapse from the crisis better than a soviet style collapse.
Well, it brought down the government, but it it did not bring down the system (though in the depths of the crisis there were unusual calls for a new system, if one remembers). But one control not in the hands of the market is the control which may have caused the system collapse, the Fed Funds rate.
The central bank sets this figure for a very good reason, in the same sense a retail bank sets its rates (though it is highly constrained in this, partly by the Fed Funds rate). It is money held at the Fed which banks are lending to each other. My argument is not that the market should set this rate.
This could be logically unsound (from a systemic basis, or the limits of knowledge of it), my argument is rather this rate is set from systemic considerations rather than as a tool to stimulate or cool the credit markets.
Pumping liquidity into the system seems to have resulted in a kind of go to the lowest point mentality, the money has not gone to productive uses, it has gone to try and re-inflate assets which arguably are or were correctly priced. Let the system itself reflect into this decision, rather then an imposition into the system. There is a big difference.
The problem with this is the system is ill understood there are a lot of recursions involved in any attempt to do this. What one might suggest is the forex market does reflect this system, but governments seem to want to fight with it rather than come to terms with it.
© 2010 Guy Barry - All Rights Reserved.
