The federal reserve is going to pull another ONE TRILLION DOLLARS OUT OF THEIR ASS!

[LiberalNut]

When the rate of interest is significantly below that for an extended period of time, it skews capital allocation towards unproductive purposes,

The answer is NOT to raise interest rates when fucking rich people are gambling with the money! The answer is to REDISTRIBUTE WEALTH. If you want a rich guy to invest in actual production, you have to create the expectation of profit for doing that. The only way to increase the attractiveness of capital investment is to increase AGGREGATE DEMAND. The way to do that is to give more purchasing power to the folks with the highest propensities to consume.

Furhtermore, the reason that rates were kept low under Bush was because idiotic supply-side tax cuts coupled with foreign military adventurism made perpetual government deficits the reality. hence the need to monetize the debt.

Insofar as the government was complicit in the meltdown, it was all CONSERVATIVE governance that did it! Not enough regulation and insane fiscal policy.

I've spent most of my time here dispelling conservative economic myths...since the Fed is the primary institution that affects the pricing of credit, it bears the most responsibility for this mess.

These things are self-contradictory toro. While you're not screaming like a wingnut about CRA and Barney Frank, you are in fact spreading a right wing myth. The fed did not cause this crisis. Conservative economic philosophy and corrupt Wall Street Bankers did it.

 

[LiberalNut]

Why?

The sooner gas becomes expensive enough to warrant a change to alternative transportation energy, the sooner that will happen. You want to talk about the government distorting the market? When exactly are we gonna get the price of 2 carrier battle groups in and around the Persian Gulf and numerous regional wars into the price of gasoline at the pump?

 

[Toro]

When the rate of interest is significantly below that for an extended period of time, it skews capital allocation towards unproductive purposes,

The answer is NOT to raise interest rates when fucking rich people are gambling with the money! The answer is to REDISTRIBUTE WEALTH. If you want a rich guy to invest in actual production, you have to create the expectation of profit for doing that. The only way to increase the attractiveness of capital investment is to increase AGGREGATE DEMAND. The way to do that is to give more purchasing power to the folks with the highest propensities to consume.

Furhtermore, the reason that rates were kept low under Bush was because idiotic supply-side tax cuts coupled with foreign military adventurism made perpetual government deficits the reality. hence the need to monetize the debt.

Insofar as the government was complicit in the meltdown, it was all CONSERVATIVE governance that did it! Not enough regulation and insane fiscal policy.

Redistributing wealth through inflation is horrendous policy. If you want to redistribute wealth, its just better to tax and send checks off to people.

Keeping interest rates too low encourages speculation, not production, especially when there is excess capacity in the economy. This was the problem during the Housing Bubble.

Rates were not kept low because of tax cuts and foreign invasions. Interest rates were kept low because Greenspan believed that that was the right policy to offset the collapse of the Tech Bubble and as a response to 9/11. His policies were wrong but its ridiculous to say that interest rates were because of tax cuts. You're right that Bush was fiscally irresponsible, as Greenspan was monetarily irresponsible, and that not enough regulation in the financial sector contributed to this mess. But to blame "all conservative governance" isn't a serious answer. That's just ideological nonsense.

These things are self-contradictory toro. While you're not screaming like a wingnut about CRA and Barney Frank, you are in fact spreading a right wing myth. The fed did not cause this crisis. Conservative economic philosophy and corrupt Wall Street Bankers did it.

No, they are not contradictory.

Just like the right-wingers parrot the usual talking points, you are parroting the left-wing talking points. The right-wingers blame the government, the left-wingers blame the market. It's predictable. Wall Street and dogmatic ideology contributed to the crisis. In fact, there are many reasons for why this happened, of which market failure is one. But in the end, the Fed is the biggest determinant of the price of credit, and credit exploded under its watch, which fueled both the housing boom. It is the Fed that's most responsible for this.

 

[LiberalNut]

Redistributing wealth through inflation is horrendous policy.

Agreed. But we haven't seen a period of high inflation in a long time. Wealth should be redistributed using the tax code.

better to tax and send checks off to people.

Tax yes, send checks no. Build infrastructure, yes.

Keeping interest rates too low encourages speculation, not production, especially when there is excess capacity in the economy.

Speculation happens because there is excess purchasing power in the hands of the few and no incentive for capital investment. No matter what rates are, specualtion will grow out of the mal distribution of wealth. There is no such thing as "excess capacity". That's a backwards way of saying not enough purchasing power among the masses to consume the production capacity of industry.

But to blame "all conservative governance" isn't a serious answer.

Well, I'm serious when I say it. Deregulate the banks and the banks will fail. It's not like we didn't see it under Reagan. You gonna blame the Fed for the S&L crisis too?

It is the Fed that's most responsible for this.

The fed did not force a bank to write a liars loan.
The fed did not force the hiding of those loans in CDOs.
The fed did not force the paying off of ratings agencies to give "AAA" ratings to toxic assets.
The fed did not force the bying of CDSs.

The fed did not force any of the things that actually caused the meltdown. Again, while you are not a screaming wingnut, you are pushing a right wing myth.

 

[Paulie]

What the fuck?

You got a centrist in here who's willing to recognize ALL the problems that contributed to the collapse, but it's just not good enough for you because there happens to be a point mentioned that more on the right subscribe to than the left.

I don't think think it's possible for you to be any more partisan.

Ignoring the Fed's irresponsibility is just ridiculous.

There's not a rational argument that exists for allowing credit to be that cheap for that long. When you increase the money supply that much, you create an environment ripe for malinvestment. More money chasing goods and services. Just because the fucking CPI doesn't peg the meter on "WE'RE FUCKED!!!" doesn't mean that inflation isn't out of control.

When you say we haven't seen high inflation in a long time, you're referring to consumer price inflation, and completely leaving out asset inflation.

The only posters you will agree with in this thread are the ones who place 100% blame on everything republican.

It's partisan bullshit.

 

[LiberalNut]

The fed is not responsible. You're running around saying that the Wall Street bankers are marrionettes at the end of strings pulled by the fed. That's a load of bullshit. The fed does not controll the decisions of any human being. Period, end of story.

There is no determinative model for human behavior and there is no comprehensive economics.

You cannot back this notion of the fed causing the meltdown with empiricism and coherent modelling. You can't. You are pushing IDEOLOGY alone.

 

[mdn2000]

More of the lazy demanding others money

Blaming only republicans or only democrats indicates the morons are easily duped.

 

[Paulie]

No one claimed the Fed FORCED banks to do ANYTHING.

But the Fed's goal in monetary easing is to incentivize borrowing and lending. They create the necessary environment for credit to be demanded and issued. That's the point of setting lower rates. To spur borrowing and lending. They do everything short of FORCING it.

You don't have to consult with behavioral economics to figure out that by offering credit that cheap, it's going to entice a slew of borrowers that wouldn't have existed in the absence of such cheap credit.

When you go to buy a home, one of the biggest influences in the decision is the cost of the loan. That's why the Fed is trying to keep mortgage rates low now...to spur more demand.

The irresponsibility comes into play when you don't cut the money off at the appropriate time, and let the bubble grow. They could have EASILY raised rates and extinguished reserves, which would have put a damper on the bubble.

But they didn't.

You blame CDO's, which don't exist without the mortgages packaged into them. It's a chicken/egg scenario.

 

[Toro]

Speculation happens because there is excess purchasing power in the hands of the few and no incentive for capital investment. No matter what rates are, specualtion will grow out of the mal distribution of wealth.

Speculation occurs because people are greedy and want to get rich. I have spent nearly 20 years working in the investment business, first as a stockbroker then as an institutional money manager, and watching the frenzy that went on for tech stocks and then housing by the middle and upper-middle income stratas was amazing. I remember walking through the Charlotte airport in 1999 and going by the NASCAR sports bar, and all the TV channels were turned to CNBC. Likewise, I met so many people who speculated in homes, not a few rich people, but those in the middle class. Speculation is not merely the few having too much money.

There is no such thing as "excess capacity". That's a backwards way of saying not enough purchasing power among the masses to consume the production capacity of industry.

Of course there can be excess capacity. The capacity stock of the economy can only grow as fast as the rate of productivity and population growth over time. When it deviates from that trend, you can get over or under-capacity. Since GDP growth is merely an aggregation of income, income cannot grow faster than the rate of productivity and population growth. That's why demand never grows at 20% per year in the United States. It simply cannot because the technological bounds of productivity growth does not allow the economy to grow that fast. So demand is capped. Thus, when you get over-investment, as we have in housing right now, you get excess capacity and prices fall.

Well, I'm serious when I say it. Deregulate the banks and the banks will fail. It's not like we didn't see it under Reagan. You gonna blame the Fed for the S&L crisis too?

It is the Fed that's most responsible for this.

The fed did not force a bank to write a liars loan.
The fed did not force the hiding of those loans in CDOs.
The fed did not force the paying off of ratings agencies to give "AAA" ratings to toxic assets.
The fed did not force the bying of CDSs.

Absolutely deregulation played a roll. If you study banking crises around the world, you often see that financial deregulation is a main cause. Why? Because financial deregulation often brings an acceleration in credit creation. It did so in this, as well. I think Wall Street/banks/deregulation is the number two culprit in this, but far, far behind the Fed. Why? Because all fixed income products are priced off the government bond curve. And though the Fed does not control the back end of the curve, it has a huge effect on the front end, which will affect investor behavior on the back-end as spreads between short and long-term rates expand. When spreads are historically wide, investors start bidding up long-term debt, or offering better rates or better terms, lowering longer-term interest rates and spreads. The Fed induces market behavior.

You have to ask yourself, if deregulation in the United States was the main driver in the Housing Bubble, why did the US lag many other countries in home price appreciation? Prices went much higher in Ireland, the UK, Spain, Portugal, Australia, Singapore, Canada, etc. In Canada, for example, home prices today are about the same level of valuation as they were in the US in 2006. Yet, there has been very little deregulation in Canada (which is how Canadians rationalize why their housing bubble won't collapse!) There are no liars loans. Subprime is a sliver of total loan mortgages. Yet Vancouver is the most expensively priced market in the English-speaking world relative to income on the planet. You can't explain that because of deregulation in the US, or the scant deregulation in Canada, but you can explain it by the oceans of liquidity created by the central banks, i.e. the Fed, sloshing around the world looking for a home.

Also, the GSEs played a part in this too, because like Wall Street, they facilitated the creation of credit. They leveraged themselves up to 50:1, compared to 33:1-40:1 for the Wall Street firms. Without that excess leverage, the GSEs wouldn't have been able to have taken as many mortgages on their balance sheets, which would have lessened demand and increased rates. So it wasn't just all the stereotypical right-wing baddies who had a role in this.

The fed did not force any of the things that actually caused the meltdown. Again, while you are not a screaming wingnut, you are pushing a right wing myth.

I see it as you being constrained by your own ideology, and you are looking at the world through a left-wing prism, fitting answers to correspond to your ideology.

 

[LiberalNut]

Speculation occurs because people are greedy and want to get rich.

Yes but they don't care how they get rich. They would just assume make more widgets but nobody makes more widgets that nobody is gonna buy. In an environment like that, tons of capital and no incentive to make capital investment, speculation ensues. High rates, low rates, it makes no difference except that the direction of the bubble might be changed. The speculative bubble will exist though.

I met so many people who speculated in homes, not a few rich people, but those in the middle class.

People with high incomes like us tend to distort what the middle class is in their minds. Median income is just a bit over $40,000 per anum, yes? You didn't see people like this speculating in homes.

Of course there can be excess capacity.

No, there can't be. As you say, capacity is a function of population and productivity. You can't produce beyond those limits. If you are producing at those limits and inventories are piling up, the problem is not "overproduction". It's a lack of puchasing power among the masses. It's a mal distribution of wealth.

when you get over-investment, as we have in housing right now

This is a common mistake made by folks trained in business or finance but not econometrics. In the macro-economic sense, "housing" is not investment. Investment is spending on new productive capacity. New plants and equipment, training for workers and so on and so forth. Stocks are not investment, bonds are not investment, real estate in not investment.

Anyway, more later, got business to do today.

 

[LiberalNut]

They create the necessary environment for credit to be demanded

No. The demand for credit is independent of rates. What the fed does is increase the SUPPLY of loanable funds. Thus, the intersection of supply and demand occurs at a higher point onthe already existing demand curve.

That's the point of setting lower rates. To spur borrowing and lending.

It is. However, the fed does not dictate underwriting standards. The fed does not create CDOs. and on and on. Those decisions are made in the private sector.

by offering credit that cheap, it's going to entice a slew of borrowers that wouldn't have existed in the absence of such cheap credit.

But the fed doesn't make anyone go beyond those people at the margins who become credit worthy because of lower rates. That's what the banks did. They didn't say "oh, rates are lower so now X more people can afford credit". They said "here's a loan, we don't care if you can afford it or not".

When you go to buy a home, one of the biggest influences in the decision is the cost of the loan.

Yes, but still, you have to be able to afford the loan, even at the lower rate! The fed does not dictate underwriting standards!

That's why the Fed is trying to keep mortgage rates low now...to spur more demand.

Again, you are making an elementary mistake. You are confusing the demand curve with the supply curve. The fed does not directly effect the demand for loanable funds. They manipulate the SUPPLY of loanable funds.

The irresponsibility comes into play when you don't cut the money off at the appropriate time, and let the bubble grow.

I actually agree here. So, the problem was lack of government control, not too much. Greenspan was a free market God worshipper. He thought the market would "self-correct". He has since admitted his mistake.

They could have EASILY raised rates and extinguished reserves

Yes but in a non-inflationary environment, that is not the feds mandate. Yes, they could have slammed the breaks on the economy byraising rates and caused a recession. But, that's not what they are tasked to do. They are tasked to keep inflation low and help GDP grow. By advocating that the fed actually induce recessions as a matter of policy is, well, a curious approach to free market economics.

You blame CDO's, which don't exist without the mortgages packaged into them.

The underlying problem of course is the bad loans contained in the CDO. Indeed, as near as I can tell, the whole reason to have a CDO is to hide bad mortgages in them. I see no other purpose for the instrument.

 

[Paulie]

I'm not sure how you can say that lower interest rates doesn't create demand for credit.

Interest rates are the price of money, much like any other price. When prices fall, demand will increase. If that wasn't true, then Wal-Mart wouldn't be the stalwart that it is. And businesses in general wouldn't bother reducing prices and having sales, because why bother? It's not going to create any more demand. That's stupid logic. When demand falls, interest rates fall as well. The reason the rates fall is to find a clearing price for the credit, where people will then demand credit again.

And I don't know where you get the idea that I'm advocating "creating a recession". When you see an obvious bubble inflating, economic wisdom would tell you that you should start to slow down the credit creation before it becomes a monster. If a recession, by DEFINITION, happens to come of it...well...then so be it.

What you're saying is that instead of slowing that growth, we should just let it play itself out and become the massive recession that it did. What's worse...2 consecutive quarters of negative GDP growth while the market stabilizes, or letting it burst and have what we've had the last 3 years?

It's not like bubbles of that magnitude ever end positively.

 

[Charles_Main]

The federal reserve is going to pull another ONE TRILLION DOLLARS OUT OF THEIR ASS! Have fun with the inflation everyone! =)



I wonder how little your dollars are going to need to be worth before some of you choose to start paying attention to federal monetary policy...?

http://www.youtube.com/watch?v=GNqxGtzUW4I

Why do you think Gas is back up over 3 bucks a gallon in many places? The Devaluation of our Currency do to borrowing and Printing money.

Direct Cause and effect.

 

[LiberalNut]

I'm not sure how you can say that lower interest rates doesn't create demand for credit.

You have to understand what Supply and Demand actually are. They are positively and negatively sloped curves respectively when the axises are labeled price on the verticle and output on the horizontal. The demand for loanable funds is what it is. Fluxuations in price lead you to different positions on an already existing curve. No new demand is created.

Interest rates are the price of money

But the fed does NOT directly dictate the rate at which a bank offers a loan. They simply don't.

And I don't know where you get the idea that I'm advocating "creating a recession".

The tools at the feds control are not scalples that can reach into the economy and stick pins in bubbles in the financial markets. You advocated a raise in rates, that is a reduction in the money supply. All else held equal, that is a recessionary policy.

slowing that growth,

It's amazing. In one breath you want to say that the fed doesn't control the economy and in the next breath you want to grant them the power to "fine tune" at will. This isn't how the real world operates. The fed either increases or decreases the money supply. It can't pluck a growth rate out of whimsy and then dictate that the economy achieve that rate.

 

[Paulie]

I'm not sure how you can say that lower interest rates doesn't create demand for credit.

You have to understand what Supply and Demand actually are. They are positively and negatively sloped curves respectively when the axises are labeled price on the verticle and output on the horizontal. The demand for loanable funds is what it is. Fluxuations in price lead you to different positions on an already existing curve. No new demand is created.

Interest rates are the price of money

But the fed does NOT directly dictate the rate at which a bank offers a loan. They simply don't.

And I don't know where you get the idea that I'm advocating "creating a recession".

The tools at the feds control are not scalples that can reach into the economy and stick pins in bubbles in the financial markets. You advocated a raise in rates, that is a reduction in the money supply. All else held equal, that is a recessionary policy.

slowing that growth,

It's amazing. In one breath you want to say that the fed doesn't control the economy and in the next breath you want to grant them the power to "fine tune" at will. This isn't how the real world operates. The fed either increases or decreases the money supply. It can't pluck a growth rate out of whimsy and then dictate that the economy achieve that rate.

When demand drops, the price drops.

That's how it works when the market is free to establish an equilibrium.

The Fed attempts to control demand by stepping into the market, and ARTIFICIALLY setting the price of credit.

What part of that do you not understand?

The Fed doesn't directly control bank lending rates, but it absolutely does guide them by controlling the supply of money.

That's how monetary policy works. The rate at which banks lend is typically in direct correlation to the Fed's interest rate target policy.

 

[LiberalNut]

When demand drops, the price drops.

You have to distinquish between shifts in demand and movement along a given demand curve. But, in general, at lower prices, more will be demanded with any given demand curve. Now, classical economics will say, yes, when demand for products falls, prices will adjust downward. However, in the short term, in the real world, this is not what happens. What happens is that industry prefers production cuts to price deflation in the short term. That's what starts the recession rolling.

The Fed attempts to control demand by stepping into the market

Indirectly, yes. What the fed does is manipulate the supply of loanable funds thereby, in theory, shifting the supply curve for money. Shifting the supply curve for money is not shifting the demand curve. It's causing movement along a given demand curve.

What part of that do you not understand?

Dude, I'm certified to teach this stuff. I understand. You are making elementary, freshman mistakes.

 

[Paulie]

Here's one of the 4 laws of supply/demand:

Demand decreases, while supply stays the same: equilibrium price and quantity of goods or services both decrease.

That being the case, if you artificially establish a lower price, demand and quantity will increase.

Please tell me that is not lost on you.

 

[Toro]

People with high incomes like us tend to distort what the middle class is in their minds. Median income is just a bit over $40,000 per anum, yes? You didn't see people like this speculating in homes.

People who make $70-$80k are not "the rich" and don't constitute "the few." I knew lots of people making less than 6 figures who were buying homes and condos to resell.

No, there can't be. As you say, capacity is a function of population and productivity. You can't produce beyond those limits. If you are producing at those limits and inventories are piling up, the problem is not "overproduction". It's a lack of puchasing power among the masses. It's a mal distribution of wealth.

I absolutely have no idea how you can come to this conclusion. It should be self-evident after one of the greatest asset bubbles of all time that we have built too many homes.

Capacity is not a function of population and productivity. Long-term economic growth is a function of population and productivity. Those are two very different things. If you keep the real rate of interest below equilibrium for an extended period of time, as the Fed has done for the past decade, people will borrow more until the rate of return equals the cost of capital. If the cost of capital is too low, the only way marginal returns can tend towards marginal cost is by adding capacity. Otherwise, economic rent will occur. There are two ways by which asset markets can come back into equilibrium, changes in the rate of return or changes in the cost of capital. Because the government kept the cost of capital too low, returns fell and supply exploded. That's simple math.

The rate of household formation in this country has been fairly constant for many years at about 1.1-1.2 million. Incomes were stagnant for most of the past decade. Yet, we were building 2 million homes a year. How can you possibly come to the conclusion that there was not excess supply when we were building nearly a million more homes a year?

Your assumption that there can be no excess capacity implies that the supply curve cannot shift. That is simply wrong.

 

[LiberalNut]

 

[Paulie]

When demand drops, the price drops.

You have to distinquish between shifts in demand and movement along a given demand curve. But, in general, at lower prices, more will be demanded with any given demand curve. Now, classical economics will say, yes, when demand for products falls, prices will adjust downward. However, in the short term, in the real world, this is not what happens. What happens is that industry prefers production cuts to price deflation in the short term. That's what starts the recession rolling.

The Fed attempts to control demand by stepping into the market

Indirectly, yes. What the fed does is manipulate the supply of loanable funds thereby, in theory, shifting the supply curve for money. Shifting the supply curve for money is not shifting the demand curve. It's causing movement along a given demand curve.

What part of that do you not understand?

Dude, I'm certified to teach this stuff. I understand. You are making elementary, freshman mistakes.

Your mistake is assuming I think the Fed can control things 100% of the time regardless of other influences.

I don't.

Right now we're seeing them stuck in their own liquidity trap without any more policy tools to spur growth other than to keep increasing the monetary base, hoping banks finally lend.

It doesn't ALWAYS work. But in the early part of last decade, it DID. And it's proof positive in how many fucking mortgages were demanded.

It wasn't just rich people flipping houses.