The dollar, in pegboard

December 16, 2015 12:27 PM

The New York Times made a Rube Goldberg machine to explain what happens when the Fed raises the interest rate
posted by R a c h e l (44 comments total)

I'm assuming there's narration that ties this together, but with the sound off it looks like a satire of political cartoons.
posted by reprise the theme song and roll the credits at 12:40 PM on December 16, 2015 [3 favorites]

but what happens when they can't find a ping-pong ball because they've all been used to float florida?
posted by pyramid termite at 12:42 PM on December 16, 2015 [1 favorite]

This is probably more helpful to explain what the Fed does.
posted by Sangermaine at 12:45 PM on December 16, 2015 [5 favorites]

it certainly doesn't feel like 10 years.

not sure what's going to happen here. the dollar is already high.
posted by andrewcooke at 12:47 PM on December 16, 2015

So that's, like, literally what happens?
posted by mazola at 12:57 PM on December 16, 2015

Hm...poor people who have to borrow will pay more, while rich people who can save will get more? They may have forgotten to show the gear that crushes little tiny people in its teeth.
posted by mittens at 1:00 PM on December 16, 2015 [17 favorites]

That's the worst Goldberg Machine I've ever seen. More interesting things domino when my dog jumps on the counter to snatch a chicken leg.
posted by You Should See the Other Guy at 1:02 PM on December 16, 2015 [6 favorites]

I think it's great that the NYTimes is trying different ways to get explain the phenomena. In this case I feel like I now know less than when I began watching the video. The visuals seemed perfectly designed to distract me from the information being conveyed in the audio.
posted by funkiwan at 1:05 PM on December 16, 2015 [18 favorites]

I wonder if this was inspired by the MONIAC.
posted by i_am_joe's_spleen at 1:33 PM on December 16, 2015 [2 favorites]

They forgot the part where Wall Street freaks-out no matter what the Fed does.
posted by Thorzdad at 1:41 PM on December 16, 2015 [3 favorites]

Of course, if somebody accidentally bumps the table and knocks over the bucket on top of the rickety stairs, the whole thing gets triggered anyway and it still counts as Mousetrap.
posted by Strange Interlude at 1:45 PM on December 16, 2015

So that's, like, literally what happens?

Depends on what source texts you work from.
posted by FatherDagon at 1:47 PM on December 16, 2015

In this case I feel like I now know less than when I began watching the video.

I award the NYT no points, and may God have mercy on its . . . soul?
posted by The Bellman at 1:50 PM on December 16, 2015 [1 favorite]

Here's what I learned. Economists, please tell me if this is way off:

rate raises mean foreign economies might buy our currency, which is good.
but China can fuck our shit up by sitting on money we are ideally hoping they'll spend on us. we don't know why and we can't accurately predict it when they do it.
ideally, what happens is it gets harder to get a job and to buy things.
so businesses don't raise prices on things.
which stagnates growth in a way we... want?
===begin my speculation to understand this===
because inflation is basically what happens when everyone has a bunch of money to spend.
when everyone has a bunch of money to spend, prices go up.
and out of control inflation can price everything out of range of most people's ability to pay
which can crash the fuck out of the entire economy.
except rich people, who seem like they get what they want either way. either lower wages and savings payoffs or higher products on prices regardless of the public's ability to pay.
===end my speculation to understand this.===

===from her on out is rampant opinion and probably a real misreading of the issue.===
honestly, this sounds like we have a really bad system here. I don't know what a better one would be, but it feels like the secret to wealth is to already have it and game the system and the fed sort of has no choice but to go along with it.

It's a marvel to me that the "End The Fed" cries seem to come from the rich, since the fed seems determined to keep their wealth in their hands.
posted by shmegegge at 2:00 PM on December 16, 2015 [4 favorites]

also it feels like this is largely dependent on an economy of things/products (cars and houses).

but that our current economy of intangible, digital services (dropbox, spotify, etc... maybe even uber) and useless garbage (twitter, etc...) might be so far outside the scope of the fed's rates, and so large, that all of our understanding from years past goes out the window.

am I even close to an understanding, here?
posted by shmegegge at 2:03 PM on December 16, 2015

andrewcooke: "not sure what's going to happen here. the dollar is already high."

The dollar will fluctuate
posted by chavenet at 2:17 PM on December 16, 2015

Along the same lines as shmegegge:

Fed raises interest rates, borrowing becomes less attractive, less money is invested, people get laid off, unemployment rises, people cannot demand higher wages, this somehow benefits the economy by preventing another bubble like the first internet bubble, when the inflation rate was 1.6% or the housing bubble when the inflation rate was at 3.5%. Thus, aiming for a value in between the two, of 2%, will prevent another bubble from forming and make it so that the government only gives massive amounts of money to rich people in the form of subsidies and tax breaks, instead of rescue funds which anger people.

I know I'm missing something here, can someone please enlighten me?
posted by Hactar at 2:41 PM on December 16, 2015 [2 favorites]

Clear as mud.
posted by Splunge at 2:42 PM on December 16, 2015 [5 favorites]

In my day, when the Fed raised interest rates they did it with solid metal ball bearings, none of this cheap plastic ping-pong crap.
posted by straight at 2:56 PM on December 16, 2015 [1 favorite]

10 because inflation is basically what happens when everyone has a bunch of money to spend.
20 when everyone has a bunch of money to spend, prices go up.
30 and out of control inflation can price everything out of range of most people's ability to pay
40 which can crash the fuck out of the entire economy.
50 except rich people, who seem like they get what they want either way. either lower wages and savings payoffs or higher products on prices regardless of the public's ability to pay.

As I understand it — which may not be very well — lines 30 and 40 of the above only apply to price-driven inflation. When inflation is driven by wages rather than prices, everyone can buy more. There might be product shortages as producers ramp up production, but this is the opposite of "pricing everything out of range of most people's ability to pay." Basically line 20 is a bad thing if and only if prices don't just rise to meet wages, but actually outpace wages.
posted by You Can't Tip a Buick at 3:01 PM on December 16, 2015

(but like the closest stuff to contemporary bourgeois economics that I've studied meaningfully is typically classed as "political economy" rather than "economics," so I'd gladly defer to people who actually know stuff about actually existing economics as actually practiced.)
posted by You Can't Tip a Buick at 3:05 PM on December 16, 2015

The final shot of the sequence shows the banners and buckets from the rising credit card and loan rates still in their original positions. This was not filmed in a single take. That's a failure of a Rube Goldberg machine.

Plus, it's not very illustrative of anything, really. It's a cute idea, but not well thought out or executed or filmed.

Seriously NYT. Step up your game.
posted by hippybear at 3:14 PM on December 16, 2015 [4 favorites]

okay, now that I've actually watched the video: the tl;dr of their rube goldberg machine¹ is that the point of raised interest rates is to lower your wages. Which I've never really thought about before, but, well, yeah, duh, that's how it works.

Just out of curiosity, are there means available for the government/the fed to slow inflation specifically by lowering prices on goods, rather than lowering wages? Other than just like straight up price controls?

1: which I agree doesn't depict the concepts they're describing all that well. Frankly it seems like all the "it's such a complicated rube goldberg machine!" stuff, coupled with the cutesy Radiolab-ey music, primarily functions to distract the viewer from noticing that the machine is designed to lower wages.
posted by You Can't Tip a Buick at 3:14 PM on December 16, 2015

That's a failure of a Rube Goldberg machine. Plus, it's not very illustrative of anything, really.

I dunno, I think it's very illustrative in its way. I think the problem here is the one that's common to all Rube Goldberg machines: every single step along the way is an opportunity for something to go wrong, for the marble to fall out of the cup, for the pendulum not to swing exactly how you expect it, for China to swoop in and invest, for Wall Street to freak the fuck out more or less than usual. If the NYT had simply copped to the difficulties in putting this together, it'd have better illustrated how uncertain this money policy thing all is at its core.

Just out of curiosity, are there means available for the government/the fed to slow inflation specifically by lowering prices on goods, rather than lowering wages? Other than just like straight up price controls?

If they thought about it a bit I'm sure they could. If you want the price of something to go down, you can effectively decrease it by selling it at that price yourself. Sure, you'll lose money on the deal, but by monkeying around in markets in the first place you're already declaring that there are more important things than ultimate market efficiency. And, indeed, often there are more important things, where a government is (or should be) willing to spend that money itself to make things easier for citizens.
posted by JHarris at 3:57 PM on December 16, 2015

It's a marvel to me that the "End The Fed" cries seem to come from the rich

No, that comes from crazy people, the distribution of which isn't neatly correlated with wealth.
posted by jpe at 4:02 PM on December 16, 2015 [5 favorites]

Just out of curiosity, are there means available for the government/the fed to slow inflation specifically by lowering prices on goods, rather than lowering wages? Other than just like straight up price controls?

I imagine--and welcome being proved wrong--that we will see exactly that in the housing market. As mortgage rates go up, buying a house will be less and less attractive, causing sellers to lower their asking prices. Which of course will be interesting...you could see a situation where you'd pay the same thing this year as a particular house cost last year, except this year more of that money would be going to the bank, less to the human being selling it to you.

I wonder, too, if that prospect would slow the growth of new housing, pushing down construction and other wages.
posted by mittens at 4:11 PM on December 16, 2015

Just out of curiosity, are there means available for the government/the fed to slow inflation specifically by lowering prices on goods, rather than lowering wages? Other than just like straight up price controls?


Isn't this basically how farm subsidies work?
posted by murphy slaw at 4:35 PM on December 16, 2015 [1 favorite]

Farm subsidies don't keep prices low, they allow farmers in rich countries to compete with the already-low prices from farms in poor countries.
posted by straight at 4:57 PM on December 16, 2015

Either way you might view farm subsidies, they certainly work to keep prices from being subject to the Invisible Hand or whatever they call market forces these days.
posted by hippybear at 5:02 PM on December 16, 2015

I thought this is what the Fed does.

No one knows what will happen. Nothing? The markets will crash? Perversely, wages could rise? The sea will become blood?
posted by fiercekitten at 5:03 PM on December 16, 2015 [2 favorites]

The thing you don't hear much about is there is really two kinds of lending. When banks lend money to people and businesses so they can expand their business, it's an investment. Higher interest rates are a good sign because they mean people are getting (or at lease expecting) higher returns on their investments. It's money that is used to produce stuff. Wealth is being created.

The other kind is consumer debt. When too much of the profits from producing stuff go to a few owners, workers can't afford to buy the stuff that gets made (and rich people can only buy so much stuff), so workers have to borrow money. From that perspective, higher interest rates mean faster transfer of wealth from the poor to the rich. That money isn't producing anything, if anything wealth is being destroyed in the cost of transferring it from the poor to the rich.
posted by straight at 5:13 PM on December 16, 2015

So one of the interesting things is that they chose to increase the interest on reserves held with the fed. So the target rate is 0.5%, and they're offering banks with money the option of lending it to the Fed for exactly the same rate.

I've heard it argued that it makes no sense to print money via QE1/2, with a stated purpose of to revive lending in the greater economy, and then increase the reward for hoarding that money at the fed and not lending it out to the public. And that the only consistent logical explanation is that interest on reserves is being used as a stealth method of recapitalizing the banks using public funds.

Frankly, I really don't see a better explanation of the facts, and the increase in rates paid out by the Fed aren't helping their case. =(
posted by pwnguin at 5:14 PM on December 16, 2015 [2 favorites]

So one of the interesting things is that they chose to increase the interest on reserves held with the fed. So the target rate is 0.5%, and they're offering banks with money the option of lending it to the Fed for exactly the same rate.

These two facts are consistent. The Federal Funds Rate isn't really a rate that the Federal Reserve directly sets. The Federal Funds Rate is the interest rate that banks charge each other when lending money. Banks have to balance their accounts daily and there is a natural daily ebb and flow between banks as checks are cashed at one bank and deposits made at a different bank. To balance accounts daily, a bank with an excess lends money to a bank with a deficit overnight.

The Federal Funds Rate is a target for the interest that banks charge each other. The Fed does not mandate that rate directly. Normally the Fed withdraws reserves from the banks by selling them bonds so they have less excess for lending other banks and therefore the inter-bank lending rate goes up. But as a result of three rounds of quantitative easing, all the banks are swimming in excess reserves. Every bank has an excess and no banks have deficits, so the inter-bank lending interest rate is very low because no banks need to borrow overnight reserves.

So in order to raise interest rates, the Fed has to pay a higher interest rate to entice the banks to keep their excess reserves on deposit at the Fed instead of lending to each other at lower rates. With the Fed paying higher interest, the banks won't loan to each other at a lower rate because they can make more money loaning to the Fed.

So the thing to remember is that the Fed doesn't set the Funds Rate directly because it is a rate set by the market of banks lending each other. The way the Fed manipulates the market rate to its desired target is by influencing the amount of excess money banks have to lend each other. By raising the interest rate that the Fed will pay for deposits, it removes from circulation money that the banks would otherwise lend to each other. So indirectly the Fed has raised the inter-bank lending interest rate.
posted by JackFlash at 5:49 PM on December 16, 2015 [4 favorites]

Fed raises interest rates, borrowing becomes less attractive, less money is invested, people get laid off, unemployment rises, people cannot demand higher wages, this somehow benefits the economy by preventing another bubble like the first internet bubble, when the inflation rate was 1.6% or the housing bubble when the inflation rate was at 3.5%. Thus, aiming for a value in between the two, of 2%, will prevent another bubble from forming and make it so that the government only gives massive amounts of money to rich people in the form of subsidies and tax breaks, instead of rescue funds which anger people.

I think that's the usual idea. What's happened is that that Fed had reduced rates basically to zero, ostensibly to encourage borrowing in the broader economy to promote activity and growth following the '08 crash, and maintained that almost zero rate right through the anemic recovery, until today, when they announced a .25% hike, the first of what they promise will be a number of teeny-tiny boosts. They've said they are doing this in order to get out in front of inflation and too much growth a few years down the line. They've also said they'll lay-off the planned hikes if the economy stutters a bit. That's why they're acting now, they say, so they can move slowly, and have some flexibility later, if they need it.

But I'm sorta with pwnguin on this. They taught us in Econ 101 that loose money in a recession is like pushing on a string -- you just aren't going to get much growth with your low interest rates when demand is shot. (Although in the absence of robust fiscal policy from the government -- borrow and spend, which would create demand -- what else was there to do?) If I knew more about how the money actually moves, maybe this would be more than a hunch: I guess what we bought with the past half decade of cheap money was big institutional investors (banks, but also giant pension funds like CALPERS) borrowing cheap money to buy stocks and bonds while they liquidated their ugly old, lossy real estate derived holdings. And now the Fed is putting the brakes on that easy money -- too many unicorns in the tech sector, maybe, and all-in-all too much risk of new bubbles forming.

Anyway, to the part I bolded, yeah, that's government fiscal policy rather than monetary policy, and reflects a good investment in politicians.
posted by notyou at 6:23 PM on December 16, 2015

Brad Delong: Pre-Federal Reserve Liftoff Lollapalooza Must-Reads: December 15, 2015
posted by the man of twists and turns at 8:03 PM on December 16, 2015 [2 favorites]

Whoa. That Lollapalooza thing linked above is fantastic! (If you're basically a Keynesian and get Delong's shorthand.) It sticks close to the establishment view of the operation of the banks (so less pwnguin and more Jack Flash), but it's valuable as a look at the variety of left-center economist views of what's happened. ( Do right-centrist and right-right views even matter at this point?)
posted by notyou at 10:35 PM on December 16, 2015

So in order to raise interest rates, the Fed has to pay a higher interest rate to entice the banks to keep their excess reserves on deposit at the Fed instead of lending to each other at lower rates. With the Fed paying higher interest, the banks won't loan to each other at a lower rate because they can make more money loaning to the Fed.

So the normal, ECON 101 way the Fed achieves the target rate is through open market activities, by buying and selling bonds for cash, right? Sell some bonds, then the supply of money shrinks, and the new money-interest rate equilibrium will be higher.

One linked to article from Delong's collection above is "Fed rate rise — now comes the hard part", which explains some of the experimental policies being tested here. The graphs are fairly interesting: 2.5 trillion in excess reserves, and the IOER doesn't appear to actually be setting a floor.

So again, why raise interest paid instead of having open market operations take some of that 2.5 trillion out of the money supply? If the goal is to avoid that money leaking out into the real economy and causing inflation, we'll have to keep paying higher and higher interest rates as we go. Whereas bonds sold are generally fixed rate, and thus seem preferrable.
posted by pwnguin at 11:44 PM on December 16, 2015 [1 favorite]

So again, why raise interest paid instead of having open market operations take some of that 2.5 trillion out of the money supply?

In order for the open market operations to work, in which the Fed buys or sells bonds to change the money supply, all $2.5 trillion of those excess reserves have to be sucked back up first in order to get any leverage on interest rates. Under normal conditions, open market operations work because there are very little or no excess reserves. There are just barely enough reserves to satisfy requirements of the banks so that if the Fed tweaks the amount of reserves slightly, they have a strong influence on interest rates. But with $2.5 trillion excess reserves sloshing around, nothing the Fed does with open market operations has any effect. So first they have to reduce the excess reserves to nearly zero before open operations begin to be effective.

Now to get rid of that $2.5 trillion in excess reserves, the Fed would have to sell $2.5 trillion of bonds. Dumping that much on the market all at once would cause bond prices to plunge and interest rates to soar. With a glut of bonds on the market, buyers would demand high rates to soak them all up. Who knows, 5%, 8% or more. This of course would way overshoot their interest rate target and cause another recession.

So selling off the $2.5 trillion in excess reserves is going to be a slow, long term project -- maybe a decade or two. In the mean time open market operations are ineffective until all those excess reserves are gone. That's why they are trying these other methods to influence interest rates. Their traditional methods aren't working right now.
posted by JackFlash at 12:33 AM on December 17, 2015 [2 favorites]

ahh, a Vox explainer, from Matt Yglesias
This week, the US government will take action to slow the economy and prevent wage growth
posted by the man of twists and turns at 12:36 AM on December 17, 2015 [1 favorite]

You're all wrong. This is what the Fed does.
posted by gauche at 7:11 AM on December 17, 2015 [4 favorites]

And a big FAQ from FT
posted by the man of twists and turns at 7:31 AM on December 17, 2015 [1 favorite]

But with $2.5 trillion excess reserves sloshing around, nothing the Fed does with open market operations has any effect.

Now to get rid of that $2.5 trillion in excess reserves, the Fed would have to sell $2.5 trillion of bonds. Dumping that much on the market all at once would cause bond prices to plunge and interest rates to soar.

So is this some sort of non-linear effect, where 2.4999 trillion dollars sold has no effect, and the last dollar is suddenly 8 percent interest? Because otherwise the logic here is self contradicting.
posted by pwnguin at 9:27 AM on December 17, 2015

So is this some sort of non-linear effect

Yes, it is a non-linear effect. Keep in mind the Fed's goal is to regulate the overnight Federal Funds Rate which is the rate that banks lend to each other for overnight reserves. If all the banks have large excess reserves, then they could care less what the Fed does with their bonds. It doesn't materially affect their required supply of reserves so doesn't directly affect the Federal Funds Rate.

What selling large amounts of bonds would do is affect the overall market for bonds of all durations, not just the overnight rate, and in ways that that are not easily predictable. Quantitative easing is a last-resort, blunt instrument and it would be just as blunt in reverse, not like the fine tuning of open market operations. If the Fed tries to dump their bonds it could create a "run on the bank" effect in which bond holders everywhere also tried to dump their bonds as prices fall and interest rates soar.

The zero lower bond is an asymmetrical limit. You have to push harder and harder with quantitative easing as you approach it from above. People already holding bonds have an incentive to keep holding them as prices rise and rates fall, in resistance to the Fed's purchases. But in the other direction it can explode like popping the cap off a beer bottle. As prices fall and rates rise, holders of bonds also have an incentive to sell, amplifying the Fed's sales.
posted by JackFlash at 10:11 AM on December 17, 2015 [2 favorites]

It's very important that the unemployment rate stay where it is.
Where the Jobless Rate Is 2.3%, Here’s What Happened to Wages
posted by the man of twists and turns at 11:40 AM on December 22, 2015 [1 favorite]