The rate of interest is more complex than that…

Would love to have been a fly on the wall for this one.  Picked it up off the Mises Blog:

An Austrian Interviews for a Fed job

It’s not a joke. I pick this up from the forum, which you should join:

i should tell the story about my job interview with the fed here in kansas city. they asked me about optimal monetary policy, and hilarity quickly ensued.

so they started off asking basic technocratic economic questions…”what should the fed do when inflation is increasing?”, “why do bond prices and their yields move in opposite directions?”, “what happens when the fed increases the reserve requirement?”, etc. i prefaced every answer with the words “the textbook says…” so when inflation is increasing, i said “the textbook says you raise rates.” they noticed, and at the end of the interview they asked why i prefaced every answer with “the textbook says…” i said, “because i don’t always agree with the textbook, particularly when it comes to the actions of the federal reserve.” i then turned the tables and put them on the defensive. a nutshell:

me: what are your feelings on price and wage controls?

them: we’re against them.

me: do you disagree that interest rates are prices, that they communicate information about the real state of the economy, the capital structure, and producer/consumer sentiments?

them: it’s more complicated than that…

me: if you don’t have another interview scheduled after mine, i don’t mind waiting and listening to your explanation. how exactly can the fed manipulate interest rates and not expect consequences not unlike those that result from controlling other prices and wages (ie…minimum wage, rent control, etc)?

them: the nature of money is very different than is the nature of other goods and services. blah, blah, blah…

me: fair enough, but that doesn’t distract from the fact that distorting the price of money, as communicated by interest rates, has effects on the real economy. if it didn’t there would be no need for the fed in the first place. if the fed’s actions had no real effect, it would be a redundant institution, no?

them: ………………………..

me: i’ll show myself out. thanks.

Simply beautiful.  If central bankers were to be better versed in monetary economics they’d understand that their understanding of the interest rate is so deficient as to be non-existent.

The rate of interest in any economy is a function of time preference.  It is market determined, and is effectively the exchange rate between present- and future goods.  This interaction keeps the entire production structure in a very fine balance as it signals to producers and consumers where and when to allocate capital.

The interest rate is not only important to the market for loanable funds and in credit transactions as is commonly believed.  On the contrary, as Murray Rothbard tought us, it permeates the entire production structure of the complex economy.