With the Fed being blamed for keeping rates too low and causing a housing bubble, I’m curious what they should have done instead. The US was coming out of a recession and needed to jump start the economy. From the Fed’s perspective, how do you stop a flow of cash from heading straight to the housing markets resulting from cheap interest rates that are necessary for the economy?
From late 2003-2007, we had a boom in financial markets. One should have tried to tighten credit at least mid-way through the boom. The main problem with that is that while the financial markets were booming, not all that much seemed to be happening in the real economy. In the US, we weren’t really producing much. We were just selling each other houses that were becoming inflated through easy credit, and consuming (mostly imported) goods by doing equity-for-debt swaps. From an employment perspective, we were being paid mostly to facilitate more consumption (retail, real estate and mortgage brokering, etc.), but not to produce. It was a political problem that to tighten credit substantially would reveal that we weren’t really producing much, so it was probably easier to keep credit flowing and the populace quiet. Bread and circuses. Always seems to end the same way.
You nailed it bchadwick.
bchadwick Wrote: > The main problem with that is that while the > financial markets were booming, not all that much > seemed to be happening in the real economy. In > the US, we weren’t really producing much. We were > just selling each other houses that were becoming > inflated through easy credit, and consuming > (mostly imported) goods by doing equity-for-debt > swaps. Paul Krugman was trying to draw attention to that problem but he wasn’t successful.
bchadwick Wrote: ------------------------------------------------------- > From late 2003-2007, we had a boom in financial > markets. One should have tried to tighten credit > at least mid-way through the boom. > > The main problem with that is that while the > financial markets were booming, not all that much > seemed to be happening in the real economy. In > the US, we weren’t really producing much. We were > just selling each other houses that were becoming > inflated through easy credit, and consuming > (mostly imported) goods by doing equity-for-debt > swaps. From an employment perspective, we were > being paid mostly to facilitate more consumption > (retail, real estate and mortgage brokering, > etc.), but not to produce. > > It was a political problem that to tighten credit > substantially would reveal that we weren’t really > producing much, so it was probably easier to keep > credit flowing and the populace quiet. Bread and > circuses. Always seems to end the same way. You are right. I would also add that some of it was allowed to happen to distract from the war.
I think there were lots of simple things that should have been done. The goal should have been to stimulate the economy but not risk a real estate blow-up to do it. The problem was that all you had to do was turn on CNBC and listen to the latest pundit saying that the Fed was encouraging people to borrow money on their HELOC to buy things to stimulate the economy. I think the Fed even believed that. As bchadwick points out - there needed to be guidance to get the real economy going that didn’t come from the 2 or 3 levers the Fed has. What should have happened is what should happen now - the gov’t needs to think hard about restoring productivity to the real economy. Even right now the Fed is desperately pulling these same silly levers. Steps that should have been taken to help the real economy: a) Coherent and comprehensive energy policy - Not Sarah Palin’s drill the crap out of ANWR but a policy that builds infrastructure to save energy and produce more of it, hopefully in some environmentally friendly way. Dirty coal and foreign oil are cheap so we still don’t have this. This would provide an excellent way of building a future that isn’t polluted and reliant on the Husseins and Chavezs of the world selling us oil that Joseph Hazelwood ships past Somali pirates. b) A comprehensive health care policy that is affordable and sensible. How many people work in the wrong jobs because of health care decisions or fears? (tons). How many ways does health care interfere with American productivity by being a cost that is borne by business but is not connected to productivity? c) No wars. Yes, wars have traditionally been a way of stimulating the economy in the short term. The long term of a war is that we take productive capacity for building bridges and providing peri-natal care and use it to destroy bridges in foreign lands, build them back, and look after combat wounds. Very stupid. etc.
The funny thing is, talk to someone outside of finance and I bet you that a majority of the time, they believe war is good for the economy, period. They don’t realize that being productive in making bombs lead to a better quality of living as the bombs just destroy someone else’s quality of living that like you said, end up in us building it back up with them.