When the Fed stopped doing its job

[377OHMS]

We take a ride in the way-back-machine and arrive in 2004. The housing market, fueled by exceptionally low interest rates, is heating up unacceptably. Anecdotes about incredible appreciation of real estate assets were everywhere. People were flipping homes, there were television shows about it.

I remember that I fully expected the Fed to, rightly, increase rates. All of my life the Federal Reserve Bank had more or less done its job, that is, to manipulate interest rates as a regulating mechanism on the economy. As inflation occured rates were raised, as deflation and stagflation occured rates were eased. It made sense and it worked, erm more or less.

But in 2004 Alan Greenspan simply doubled down and lowered rates further clearly causing the enourmous housing bubble and its attendent devastation when housing began to slip.

Ever since 2004 I've been watching and wondering when the Fed would raise rates. It seems that over the last decade the Fed has lost its independence and has become beholden to the White House, first Bush and now Obama. A phone call from the White House seems to suffice to arrest the Fed from performing its regulatory function.

Yeah, if you raise rates you will hurt business, households and the like but how long can reality be ignored? To me it seems that the Fed has duct-taped the accelerator pedal to the floor and is just going to leave it there.

Thoughts?

 

[nutmeg]

The housing market, fueled by exceptionally low interest rates

---------------------------------

I think this alone is too simple. If the rates were higher would this have prevented unregulated shadow banks? Would higher rates discouraged securitization? CDO's were yeilding whatever rate of return the market wanted.

On the flip side, are interest rates a scapel, precisly targeting one asset class, I don't think so. yet the assumption is assigning the flaws of sub prime to Fed interest policy.

 

[Landis82]

Quote from 377OHMS:

We take a ride in the way-back-machine and arrive in 2004. The housing market, fueled by exceptionally low interest rates, is heating up unacceptably. Anecdotes about incredible appreciation of real estate assets were everywhere. People were flipping homes, there were television shows about it.

I remember that I fully expected the Fed to, rightly, increase rates. All of my life the Federal Reserve Bank had more or less done its job, that is, to manipulate interest rates as a regulating mechanism on the economy. As inflation occured rates were raised, as deflation and stagflation occured rates were eased. It made sense and it worked, erm more or less.

But in 2004 Alan Greenspan simply doubled down and lowered rates further clearly causing the enourmous housing bubble and its attendent devastation when housing began to slip.

Ever since 2004 I've been watching and wondering when the Fed would raise rates. It seems that over the last decade the Fed has lost its independence and has become beholden to the White House, first Bush and now Obama. A phone call from the White House seems to suffice to arrest the Fed from performing its regulatory function.

Yeah, if you raise rates you will hurt business, households and the like but how long can reality be ignored? To me it seems that the Fed has duct-taped the accelerator pedal to the floor and is just going to leave it there.

Thoughts?

Actually, I don't lump Greenspan and Bernanke's terms all together (as you do) over the last decade.

Today's Fed is simply trying to "buy more time" for people to go through the de-leveraging process. They might be successful at it, or they may not be. Thus far, the Bears have been wrong.

As for Greenspan, he claimed that there (1) was no upward pressure on wages (2) real estate was a local market and could never impact the national economy, and (3) companies, ie. the Banks would not do anything to jeopardize shareholder equity.

Clearly, he was WRONG on all three.
Could he be an "academic" that was far too naive, or was he making excuses for knowing how things were to turn out . . . all along?

Your guess is as good as mine.

 

[gastropod]

Hmmm, it is a "relative" thing ;-) Viewed from the perspective of the rich, fat cat bankers...the Fed Res is a total success - they could screw up in business...and still collect ridiculously large salaries and bonuses and not worry. Viewed from the perspective of the American taxpayer the Fed Res has NEVER worked. The Fed Res was created around 1913 (after the "Panic of 1907) to stop "panics and depressesions" (we conveniently dropped the word depression from the lexicon and call them "recessions" now). Did the Fed Res work in 1929-1940 - NOPE! Did the Fed Res prevent ANY of the "recessions" since WW II??? Nope....do we still have rich, fat cat bankers - YUP!

-gastropod