I think low interest rates (and perhaps some negative or complex natural
or real rate) is what drives the Kagan eponential velocity into harmonics and strange attractors, explaining the "liquidity trap". Having been schooled in Sargent Wallace 1975's high rate rational expectations strange detractor, I feel the only peggable rates are between 2-6%, and that anything else can't
be pegged, begging for other intstruments. However, given that electronic
money (Wenninger 1987 & Partland 1992, FRBNY QR) make money suppl no longer measurable. That Metro card and Kinko card is really the "Commodity based currency" the Fed supposedly terminated in 1913.
Financial panics resemble epidemics and blackouts both in terms of
contagion and interconnectedness. Like power, it is the grid which makes finance work.
Interest rates are an exponential quantity in economics (whether in Kagan velocity or just compounding), but the real rates are a function of the rates we use, hence we cannot be sure if the transformation at very small rates crosses over into the imaginary (complex number) range, triggering harmonics (theory of oscillations and stability). Hence we do not fully understand if
the liquidity trap is caused by low rates or the other way around. This may explain Haugen's observation of persistent volatility during the Great Depression (Keynes said makrets are irrational longer than you can stay sovent) which suggests we should be looking at higher order moments and
maybe chaos theory to fully understand the perplexing complexity.
Clearly the government creates our worst problems: In 1902 OCC banned
banks selling corporate securities but chose not to block National City from using a subsidiary in 1911, then in WW1 encouraged banks to sell government bonds. (Broome& Markham 2001 p731& 747) Enron masked phantom profits by claiming to reinvest them instead of paying dividends. In 2008 mortgage risk was masked from Basel ratios by stripping. THis suggests that Basel can only be effective if part of the reserve capital is placed with the Fed. But at
the same time, deposit insurance also creates a moral hazard by promising to rescue bad behavior. Instead of a waivable binary Volcker Rule, they should use a Taylor-like Rule that changes Basel Capital Ratios with leverage
squared, volatility and inversely GNP (the SDE is (L-1) dr + L d var)
I would use Basel ratios across the board on banking, finance, insurance, and make them hold it as interest-bearing excess reserves at FRB to avoid phantoms (like pre-Hubbard-dividend retained earns). Capital ratios are self-insurance, hence lack the moral hazard of deposit insurance. A quantitative rule is a lot harder to waive the way the Volcker Rule or Glass-Steagal can be. To appreciate the quixotic nature of the Volcker Rule, recall banks were first convinced to sell securities by the government
wishing to sell its own bonds a century ago. They should depend on leverage squared and volatility and countercyclically on GNP growth.
Income inequality is a mirage due to the disintermediation of cuddly benefits and triple martinis brought about by tax reform making the need to hide higher incomes necessary.
Social savings accounts should replace entitlements (retirement, health, education, housing). As Enron, Bear Stearns, GM and Chrysler pensions vanished, these should be jointly monitored by individual, employer and government. As major transactions are delayable and deliberate and tax assessors never mark to market, it is better to use indifference prices than marking to market. When an individual has fulifilled obligations to social savings, may be considered "accredited" investor.
Two decades ago at NYC's Harvard Club, I got Andy Spindler to concur that moving regulation to the Treasury OCC would eliminate the conflict of
interest that inspires conspiracy theories.


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Vasos Panagiotopoulos, Columbia'81+, Reagan, Mozart, Pindus, BioStrategist
http://www.panix.com/~vjp2/vasos.htm
---{Nothing herein constitutes advice. Everything fully disclaimed.}---
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