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Comment by wpietri | Hacker News Reader

Can you show me something from a few central banks saying that they were trying to force savers into riskier assets?

I agree that can be a consequence (although it isn't necessarily so; many people just leave their savings be), but I don't believe it ever was a goal.

And regardless, I think it's a big leap from "some savers wanted higher returns" to "let's throw a lot of money into things without due diligence or a coherent success story". Which unarguably happened lately. E.g., all the "smart" money invested in FTX, which we now know to be an absolute clown show. Other, better choices were possible. Including the supposed experts saying, "Sorry, we can't deploy this capital for you, as we don't think there are good opportunities in the current market conditions."

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Central banks are forcing the rich to create capital flows because our politicians can't do it (e.g. taxes).

They do this by suppressing interest because parked money loses value to inflation in such an environment.

In reality, the better solution is probably to raise taxes, but none of our politicians have the will.

Rich people aren't forced to do anything here. They're rich. They have have plenty of choice. They may be choosing riskier investments in pursuit of the returns they want. But then they are also choosing higher risk of the sort of losses that would also lose money over time.

They are forced to because in a low interest environment, they are literally losing value to inflation.

They are not forced. The FBI did not show up with guns and say, "Invest in this dumb-ass startup or we shoot you."

During a recession, they decided that rather than lose some value to inflation, they wanted to risk losing all of their investment in hopes of a higher long-term return.

This is called a choice. They made it. Nobody owes them a guaranteed safe rate of return just because they're rich.

So many of these kinds of arguments end up just being semantics. Strictly speaking, they were not forced.

Realistically, an environment was purposefully created that would make the average actor move a certain way. Sure, the individual may have had the option to just eat the losses.

This is not just semantics in that people often use particular language to direct attention away from actual agency.

Returning to my original point, forest fires are about a natural phenomenon. Fire doesn't want anything and doesn't make choices.

But startup founders and venture capitalists and limited partners are all morally competent actors who get to make choices. No matter how much money is available, nobody is forced to put together a startup. Nobody is forced to invest in it regardless of its chances of success.

Language that makes their bad choices the fault of government or whomever is something that is very convenient for preserving their egos and keeping the game going. But it is not factually correct, and I am not obliged to swallow my objections to it just because some find it an uncomfortable truth.

You seem to be overly focused on a single definition of "force". Nobody (except maybe you?) is confused that the FBI might be holding a gun to VC's heads. Webster has a lot of definitions of "force", and most of them don't have anything to do with coercion in the face of violence. For example

    3 : to make or cause especially through natural or logical necessity 
        "forced to admit my error"

    8 : to induce (a particular bid or play by another player) in a card game by some conventional act, play, bid, or response

Yes, but no. No reasonable definition of "force" applies here.

They are incentivized to do it, though.

I never said otherwise.

Central banks don't say a lot about what they are / are not trying to do. Ask the reverse question: What do Central Banks say they are trying to do when lowering interest rates? They only really make vague statements like 'easing conditions' or 'providing liquidity'.

In the US, we can only go by their stated goals, dual mandate from congress: keep inflation and unemployment low. https://www.stlouisfed.org/in-plain-english/the-fed-and-the-...

So what are the mechanisms that they can keep unemployment low (create jobs)? They lower interest rates, which causes people to sell assets that don't create jobs (treasury bills) and buy ones that do (corporate bonds, VC funds, etc) in attempt to get a return on capital (however, with more risk).

It's not some secret that lowering / raising interest rates affects all investors risk curve.

I of course agree that they are affecting incentives. I am specifically disagreeing with the claim that the "goal of low interest rates was to force savers into riskier assets". Force is the wrong word here, and I don't think individual savers are at all the people the Fed is trying to affect here.

And although they are affecting incentives, people are not robotically obliged to follow them. VCs cannot be simultaneously such brilliant investors that they deserve to be wildly rich and also so without agency that a drop in the federal funds rate forces them to waste money on bad startups.

> some savers wanted higher returns

Or, to put it differently, some savers didn't want to pay the bank for holding their money and suffer 10% inflation. Of course that'll push them into funds and shares. Is it a goal? Possibly not, but it's a known and unavoidable side-effect, like having to poop at some point after you eat things.

As for the terms of investment being better for companies: that's just supply and demand. Everyone wants to invest their money, so the deals get worse.

Yes, as I have been clear, I'm not saying it's not a predictable outcome. I'm just saying it's not a central bank goal. Their goal is just to prevent recessions and keep inflation under control.

> that's just supply and demand. Everyone wants to invest their money, so the deals get worse.

If people would rather lose money in a bad investment than due to overall inflation, that is a choice they can make. But that doesn't force the creation of bad investments. Some people create the bad companies, and others, ones who nominally should know better, put other people's money into them.

Forcing is probably too strong since nobody is holding a gun to anyone's head, but risk is part of the cost of the investment. When the supply side is limited, the cost increases - that could be paying more for less equity or taking riskier deals.

Since there isn't an unlimited amount of low-risk deals that you can bid on and pay more to be a part of, accepting higher risk is the only other option that still has a chance at being better than keeping the money in a bank and losing 10+% per year.

Exactly. Some people want to maintain their return on capital during a recession even at higher risk of losing their money. That's a choice they make based on desires they have.

Other people make different choices. Which can be quite good ones! US inflation in 2022 was 6.5%, but the NASDAQ lost something like 30%.

Might VCs choose a spray-and-pray approach when money is abundant? Sure. Might LPs choose to give money to those VCs? Yes. But my point here is this is not mean old Jerome Powell ordering around robots or slaves or whatever. VCs can just not invest if there isn't something good. They can return the money or not take it.

Heck, even startups are not compelled to take the money. The last time I did one we eventually decided we had dug a dry hole, so we gave back the remainder of they money to investors. We were not compelled to spend it past the point we thought it was actually a good investment.

> Exactly. Some people want to maintain their return on capital during a recession even at higher risk of losing their money.

But we weren't in a recession when they made those investments, we had negative rates, 6-10% inflation and low unemployment in many countries (and certainly in the US). It's hard to argue that we're in a recession even now, since inflation is still high and unemployment is still low, these layoffs are publicized, but they're not moving the needle much.

> They can return the money or not take it.

What do investors do with the money instead? Yes, they can pass it on to the bank and have a 100% chance of the value going down 6-10% a year. How is that a choice, do pension funds just say "sorry, folks, we didn't see any good opportunities while the fed injected money, so your pensions will be 50% lower than expected"?

You conspicuously ignore the VCs here. They were not obliged to do jack. Neither were the founders who took more money than they could successfully apply. It's funny how many people here are stubbornly unable to find the people with moral agency in the startup funding chain.

But yes, part of fiduciary duty is acting for the benefit of the person whose money you are holding. That obliges them to get the best return possible, no more and no less. If a lack of good opportunities means that the best actual return is a lower one than people hoped, that's the job. Because it's not like the people whose pension money went into FTX are going to do particularly well on the deal either.

I feel like it is pretty uncontroversial that the purpose of the Fed fiddling with interest rates is to encourage or discourage investment. What else would they be up to?

I am specifically objecting here to the notion that the "goal of low interest rates was to force savers into riskier assets".

What a given central bank is up to depends on the central bank. But the Fed is pretty clear about its goals. E.g.: https://www.stlouisfed.org/in-plain-english/the-fed-and-the-...

I agree it's true that they change interest rates as a way of influencing investment rates as they pursue their goals. But I believe they have very interest in influencing the average individual saver in any particular direction, let alone having that as a goal. And I absolutely disagree that "force" and "encourage or discourage" mean the same thing.

My broad point here is that the Fed, using pretty blunt instruments, tries to keep us from both recession and inflation, but that does not "force" rich people to do anything. Those investing in startups have enough money that they have incredible agency in what they do with that money.

I can believe that VCs feel compelled to invest so they can keep up their reputations and their fat checks. But if so, they are compelled by prestige and greed, not by Jerome Powell.

They write here that they intend to maximize employment and yet I can easily pick up a newspaper and read them fretting that employment is too high. e.g., https://apple.news/AtzUI_uozTyOjXZhyAcUpPw

Now sure, we can say that’s just the “dual mandate” at work, since they tie this concern to inflation. But still, I wouldn’t take a public statement like this as gospel.

I suppose it is true that no one person is forced to do anything, but if you create strong incentives to do one thing and disincentives to do another then I don’t think the difference is that meaningful in the aggregate.

Yes, that is exactly the dual mandate at work. Too tight a labor market causes labor price inflation, which quickly causes general price inflation, eroding the value of the higher wages and causing all sorts of other problems. None of that is proof that their goal is to "force savers into riskier assets".

And I'd say the difference is absolutely meaningful, because people have moral agency. People have "incentives" to do all sorts of harmful things. But we can still expect them to make good choices, and to own it when they make bad ones.

As an example, take FTX and Sam Bankman-Fried. He clearly had plenty of incentives to do what he did. That doesn't make what he did any less wrong. Indeed, morals that only applied when one had no incentive to act against them would be meaningless. It's exactly when the incentives favor harmful actions that morals most matter.

I can’t really agree that investing in a financially unsound business is “immoral.” I’d also point out that in that story the Fed is fretting about high employment in spite of prices beginning to stabilize, so I think maybe “Political Aspects of Full Employment” would be a more useful tract to read to understand the dynamics at work than “what the Fed does in simple English.”

You're welcome to argue that investing one's own money badly is not immoral, just dumb. But there are other people involved here, and it's surprising to me they have escaped your notice.

Here you go: https://en.wikipedia.org/wiki/IS%E2%80%93LM_model

From the article: I(r) represents business investment decreasing as a function of the real interest rate

Businesses invest less as the rate increases. That's equivalent to businesses save less as the rate decreases.

That's a theoretical model of a consequence. I never denied the consequence, I denied that this particular consequence is the goal for central banks. Which is why I asked for something different than what you provided.

Central banks are famously cryptic. If you’re looking for a smoking gun, this 2020 statement by Powell might satisfy you.

“If you look at P/Es they’re historically high, but in a world where the risk-free rate is going to be low for a sustained period, the equity premium, which is really the reward you get for taking equity risk, would be what you’d look at,” Powell said.

As you may know, this statement was made after Powell famously reversed course on his 2018 unwind of Yellen’s put after asset prices started to fall.

https://www.hindustantimes.com/world-news/powell-busts-out-f...

Central banks are famously cryptic about some things, especially about things that may be taken as indication of future action. But they are pretty transparent about goals. E.g.: https://www.stlouisfed.org/in-plain-english/the-fed-and-the-...

What you have is at best an acknowledgement of a typical consequence of one kind of Fed intervention, but I don't think that's at all evidence of a goal.

I suppose I can only appeal to the broadly held view that investment and debt are considered to have effects on employment rates and economic growth.

Sure. I agree that there are broad effects and never said otherwise. My objection in this subthread is to the much more specific claim "the goal of low interest rates was to force savers into riskier assets".

At no point has your question been misunderstood.

The whole concept of reducing interest rates was to encourage borrowing and discourage saving, to get money moving. Naturally this was into more risky investments as pretty much everything is more risky than savings accounts, bonds, and not borrowing money at all.

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