Posted on 01/20/2010 5:31:51 PM PST by Comrade Brother Abu Bubba
Economists aren’t buying Federal Reserve Chairman Ben Bernanke’s argument that the Fed’s low interest rates early last decade didn’t contribute to the financial crisis.
In a recent Wall Street Journal survey of top economists, 42 said low rates contributed to the housing bubble, while 12 said low rates didn't contribute.
In recent congressional testimony, Bernanke said, "Regulatory and supervisory policies, rather than monetary policies, would have been more effective means of addressing the run-up in house prices.”
But economists weren’t swayed.
The basic problem was the mistake of raising short-term interest rates too slowly from 2004 through 2006, Miles Kimball of the University of Michigan told the Journal.
"Going up quicker would have been better."
Low rates weren’t the only factor behind the financial crisis.
Allen Sinai, chief economist at Decision Economics, offered these reasons to the Journal: "Low interest rates, financial innovations in mortgages, lax regulation, and speculative euphoria."
But Bernanke is wrong for trying to take low Fed rates out of the equation, economists say.
“The evidence is overwhelming that those low interest rates were not only unusually low, but they logically were a factor in the housing boom and therefore ultimately the bust,” Stanford University economist John Taylor told Bloomberg.
Dean Baker, co-director of the Center for Economic and Policy Research, agrees.
“Low rates certainly contributed to the crisis,” he told Bloomberg.
“I don’t know how he can deny culpability. You brought the economy to the brink of a Great Depression.”
Economics is mostly about the efficiency of private-sector companies, but since economists don’t have real jobs, they don’t understand that. That’s the true downside of monopolies, for example, that the consumer is forced to overpay for an item, where they could spend their income elsewhere and get more “utility”.
Efficiency is the main driver of purchasable utility per dollar, or, in other words, the standard of living.
Every loafer who is getting paid is being paid out of higher prices for everyone.
Every opportunity that is found and used to produce goods or services more efficiently gives everyone a boost by lower the prices they pay - without anyone working any harder.
The idiots do plan on devaluing dollars to enable gov’t to pay back, but given the other economic effects that go with the devaluation, it looks doubtful. They are assuming that even with that maneuver, the economy will magically “come back” in the next year or two. They just can’t detail why that would happen...
Of course low rates contributed to the financial crisis. That’s not the question. The question is whether the Fed had any choice in the matter given the policy of Congress to pump trillions of dollars into the housing industry. If the Fed had kept rates high, it would have caused an immediate economic crisis, and Congress would have had a fit. It’s not the Fed’s role to decide how much money should be invested in housing. It’s also not the role of Congress to do that. However, having usurped the function of the market in that regard, Congress made the decision, and the Fed was bound to simply adjust to it. What the Fed did was try to keep the rates at a level where the rest of the economy was still growing, even though the Congressional housing policy was sucking it dry.
A politically correct term for "giving loans to people who could not afford them"
EVERYTHING ELSE was SECONDARY to that prime mover cause. If they are never going to admit that we are doomed to repeat it.
Barney Frank and Chris Dodd are almost SINGLE-HANDEDLY responsible for this financial world-wide disaster.
Can you please explain more about what this crisis would have been?
Given that the asset inflation bubble had been going on since Burns as chairman it is a bit rich to suggest that the FED got the country into trouble with 2 years of bad monetary policy. The FED got the country into trouble with 30+ years of bad monetary policy. We got away with it because the dollar was the world's reserve currency since WWII.
If this is true, why does Rogers like China so much?
It actually works very well with the economic cycle that way. When times are good, interest rates are bid up because there is more demand for borrowing. When times are bad, interest rates are bid down because people will save rather than spend. At some point, the low interest rates become attractive to businesses who will then borrow, invest and rehire to improve the business cycle again.
This is why, before creation of the Fed, we had panics and economic downturns lasting a couple of years or less before they were righted.
Once the Fed seized the role of setting interest rates, downturns can last much longer, sometimes more than a decade as was the case of FDR.
Do you have any numbers to back this up? I thought the downturns were less frequent and shorter, on average, after the Fed was created compared to before.
True, but what does it have to do with the Fed? It's not the entity that "spends us into prosperity" - that's what the Congress and executive branches of the government do to us, but it's always easy and fun to beat up on Fed.
Weak currency and big government spending has been the policy of Bush and Obama administrations and Democrats and Republicans in Congress. That is what's debasing the currency and puts strain on private sector commerce, spending and savings.
Fed's short-term interest rates are the bluntest tool in its arsenal, and affect all areas of the economy, not necessarily and not just the long-term rates of real estate market. Which is exactly what Bernanke is trying to explain and warn Congress against - Bernanke said, "Regulatory and supervisory policies, rather than monetary policies, would have been more effective means of addressing the run-up in house prices.”
Here is his speech in its entirety, not just the comments of other economists or market traders, with their own agenda - Chairman Ben S. Bernanke - At the Annual Meeting of the American Economic Association, Atlanta, Georgia - January 3, 2010 - Monetary Policy and the Housing Bubble
Also, Bernanke is on stand-by and is ready (with several monetary tools in Fed's disposal) to mop up the excess capital, when it becomes necessary. It's the Congress and the Obama administration that are keeping the fiscal "stimulus" going, in absence of Fed's monetary stimulus.
Taxpayer Burden Eases to $8.2 Trillion as Obama Supplants - BL, 2009 December 23, by Bob Ivry
The amount the Fed and U.S. agencies have lent, spent or guaranteed has fallen 15 percent since September to $8.2 trillion, the lowest in a year, based on data compiled by Bloomberg. Spending on infrastructure, tax breaks and other fiscal measures account for 52 percent of the total, up from 39 percent in March, as central bank loan programs are phased out. The change marks a new phase of public intervention in the economy. Congress and the administration’s $4.2 trillion portion, which amounts to 30 percent of everything produced in the country this year, also complicates any future exit strategy. It may be tough for elected officials to quit spending, prolonging the bailout and adding to the federal budget deficit. ..... Congress and the Obama administration are taking a bigger role in the rescue of the economy from the Federal Reserve, shifting the strategy to stimulus spending from central bank lending.
Bernanke Warns Deficits Threaten Financial Stability - BL, 2009 June 03, by Craig Torres and Brian Faler
Bernanke Doesn’t Rule Out Using Rates Against Bubbles - BL, 2009 December 03, by Steve Matthews and Vivien Lou Chen “Supervision, regulation of the financial system is the strongest, most effective” way to deal with bubbles, he said in response to a question at a Senate Banking Committee hearing considering his nomination to a second term. “I do not rule out using monetary policy if necessary, if that situation does become worrisome and threatening.” ..... Federal Reserve Chairman Ben S. Bernanke said he doesn’t rule out using monetary policy to pop asset-price bubbles, while stressing that financial regulation is his preferred approach.
Bernanke Says Regulation Came ‘Too Late’ to Curb Housing Bubble - BL, 2010 January 04, by Scott Lanman
..... The standard Taylor Rule would have recommended that the Fed raise the rate to a range of 7 percent to 8 percent through the first three quarters of 2008, “a policy decision that probably would not have garnered much support among monetary specialists,” Bernanke said. A variation of the rule used by the Fed focused on anticipated rates of inflation, not actual rates, he said.
After the Fed took over the role of setting interest rates, we had the mother of all depressions, 1929-1940. Our current recession will soon enter its third year with no real end in sight.
Once in awhile, usually by luck or coincidence, the Fed gets things right. More often, they magnify the very problems they were allegedly formed to solve. Read congressman Ron Paul's book on the topic for more insight.
I realize Paul is a raving moonbat when it comes to the War of Terror, but he is spot on when it come to the Fed. FWIW, I have a Master's Degree in economics and actually use it in my work. But don't take my word for it. Read Paul's book.
In my opinion, Andrew Jackson was one of our greatest presidents despite his sorry legacy of creating the spoils system because he had the good sense to kill the Bank of the United States, the first attempt to do to us what the Fed does now.
Correct.
Recession History - A complete history of economic recession cycles in the United States.
Business Cycle Expansions and ContractionsUS Business Cycle Expansions and Contractions ¹Contractions (recessions) start at the peak of a business cycle and end at the trough.Please also see:
Source: NBER Permission to copy is granted, provided credit is given |
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From Jan 1913-Dec 2007, 1139 months, 18 recessions for 243 months. One recession every 5.27 years, lasting 13.5 months. Recession 21% of the time.
Back of the envelop calculations, feel free to double check my numbers. Thanks.
What is even more important, is that it's not really the Fed's job (and never has been, to my knowledge) to prevent recessions, not that they could even try with monetary policy. However, the financial and banking systems have been greatly stabilized and real financial panics have been greatly reduced since.
In that same vein, it also should be taken into account that Fed was formed in 1913, just around the time when socialist societies in the world and Keyensian economics in US (bigger and broader government involvement in country's economic activity) became fashionable, and just before the time of Wilsonian / WWI policies, FDR / Great Depression / WWII policies when government became a much larger player as a percentage of economy.
Recessions, while inevitable, as all business cycles are, are much more a function responsive and sensitive to fiscal and regulatory policies than Fed's monetary policies.
Actually, and unfortunately, it is a part of the Fed's job to prevent recessions, at least indirectly. You have to actually see it/read it to believe it, because it is one of the most abominable pieces of federal legislation, notwithstanding how short it is, but the The Full Employment and Balanced Growth Act (Pub.L. 95-523, 92 Stat. 1887, enacted October 27, 1978, 15 U.S.C. § 3101–3152, aka the Humphrey–Hawkins Full Employment Act) does require the Federal Reserve to do its part to further four separate (and frequently conflicting) goals: full employment, growth in production, price stability, and balance of trade and budget.
This is another piece of bastardized liberalism of truly epic proportions, signed into law by Obama's role model, Jimmy "I see racist people" Carter, in 1978 (the nadir of American private enterprise and the acme of governmental meddling, interference in, and distortion of, supposedly free markets).
This this is such an atrocious piece of soviet-style communist thinking, that the flavor is best appreciated by a verbatim quotation of the relevant Wikipedia article: Quote:"In response to rising unemployment levels in the 1970s, Representative Augustus Hawkins and Senator Hubert Humphrey created the Full Employment and Balanced Growth Act. It was signed into law by President Jimmy Carter on October 27, 1978, and codified as 15 USC § 3101. The Act explicitly instructs the nation to strive toward four ultimate goals: full employment, growth in production, price stability, and balance of trade and budget. By explicitly setting requirements and goals for the federal government to attain, the Act is markedly stronger than its predecessor. {An alternate view is that the 1946 Act concentrated on employment, and Humphrey-Hawkins, by specifying four competing and possibly inconsistent goals, de-emphasized full employment as the sole primary national economic goal]. In brief, the Act: Explicitly states that the federal government will rely primarily on private enterprise to achieve the four goals. Instructs the government to take reasonable means to balance the budget. Instructs the government to establish a balance of trade, i.e. to avoid trade surpluses or deficits. Mandates the Board of Governors of the Federal Reserve to establish a monetary policy that maintains long-run growth, minimizes inflation, and promotes price stability. Instructs the Board of Governors of the Federal Reserve to transmit an Monetary Policy Report to the Congress twice a year outlining its monetary policy. Requires the President to set numerical goals for the economy of the next fiscal year in the Economic Report of the President and to suggest policies that will achieve these goals. Requires the Chairman of the Federal Reserve to connect the monetary policy with the Presidential economic policy. The Act set specific numerical goals for the President to attain. By 1983, unemployment rates should be not more than 3% for persons aged 20 or over and not more than 4% for persons aged 16 or over, and inflation rates should not be over 4%. By 1988, inflation rates should be 0%. The Act allows Congress to revise these goals as time progresses. If private enterprise is lacking in power to achieve these goals, the Act expressly allows the government to create a "reservoir of public employment." These jobs are required to be in the lower ranges of skill and pay so as to not draw the workforce away from the private sector. The Act directly prohibits discrimination on account of gender, religion, race, age, and national origin in any program created under the Act. The Act quietly expired in 2000. "
While the Act has, technically, expired, it still informs the spirit of much of what the Fed does, and is the sort of socialist pablum that Bernanke was reared on as a young pup at the Fed.
Bottom line is: it shouldn't be the Fed's concern, but the fcuking socialists/communists aka liberals have consistently forced the Fed to have to make it its concern. (and BTW, for topics such as this, I include erstwhile, nominal Republicans such as Nixon in the category of "socialists/Communists aka liberals" because Mr. Nixon, without apparently batting an eyelid, took any number of steps that, today, post-Reagan, would be considered to be the sole purview of the rabid hard left, such as price controls.)
Hard-coded numbers as percentage goals for inflation, enshrined into law, with no prescription of how any of it can be achieved or what the remedy is if not achieving them, was simply hilarious when I first read it.
Re Nixon, price controls / WIN are just some of the things he messed up in his economic policies.
Viz. Nixon: Yup. I was actually flabbergasted the first time I started reading up on his actual economic policies and whatnot. Ever since I was little, Nixon was always portrayed as sort of the uber-evil-right-winger/conservative, the hobgoblin/bogeyman that was supposed to be haunting the Reagan years, but it turns out that in many respects his economic policies would be considered to be those of a hard-core flaming left-wing liberal these days.
Yes, President Nixon's wage and price controls were an abomination. If memory serves, though, WIN ("Whip Inflation Now") was President Ford's program.
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