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Wednesday, April 4, 2012

The Grand Pooh Bah Price Fixing Committee

Interest rates are among the most important prices in a credit economy.  Your monthly mortgage payment depends on the mortgage rate.  Your car payment depends on bank loans rates.  Longer-term rates are linked to short-term rates and short-term rates are set by The Grand Pooh Bah Price Fixing Committee, also known as the Federal Open Market Committee.

The Committee meets behind closed doors to set the price of money.  Some details on their deliberations are presented in the form of minutes on a delayed basis.  Yesterday the minutes of their most recent meeting was released, and markets took it on the chin.  Confusion reins.  In their ever-increasing arrogance, the Committee previously announced they would keep rates low to the end of 2014.  Now, with stronger economic data, dissension to that view is increasing.  Are they going to raise the price sooner?  Should we buy a house now or is it OK to hold off?  Is it safe for car dealers to hire sales staff or is the FOMC going to slam it with a 2x4?

One wag on CNBC pointed out that this Committee, that had boasted of transparency, has, in fact, created more uncertainty than ever.

Economics 101 teaches the folly of price fixing.  It emphasizes the distortions that occur over time because of price fixing.  The ex-Soviet Union learned the hard way.  The U.S. is following in its footsteps.


  1. Just ask the Nixon Administration how wage and price controls worked for them. Time to let interest rates find their own equilibrium.

    1. It is interesting that you bring up the Nixon administration. Since then we have evolved from a 1 earner family to a 2 earner family to a family that has 2 earners and is up to its eyeballs in debt. The policy makers love debt and inflation because they both require you to spend. We have the greatest economic system in the world but I fear sometimes that our policies are bent on destroying it.