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Fed Admits Economy Can't Function Without Bubbles
In short, the dot-com bust was the last chance for the Fed to pivot and liberate the American economy from the corrosive financialization it had fostered. A determined policy of higher interest rates and renunciation of the Greenspan Put would have paved the way for a return to current account balance, sharply increased domestic savings, the elevation of investment over consumption, and a restoration of financial discipline in both public and private life. Needless to say, the Fed never even considered this historic opportunity. Instead, it chose to double-down on the colossal failure it had already produced, driving interest rates into the sub-basement of historic experience. This inexorably triggered the next and most destructive bubble ever. - David Stockman, The Great Deformation
Over the course of the roughly twelve and a half years from Black Monday to the beginning of the end for the dot-com bubble, the Fed effectively engineered a mania by facilitating the explosion of bank loans, GSE debt, and the shadow banking complex, which together grew from under $5 trillion in 1987 to $17 trillion by the beginning of 2000.
For evidence that this expansion was indeed the work of monetary authorities and was not funded by an increase in America’s savings, look no further than the following chart which shows an accommodative Fed and an increasingly savings averse American public:
When the Nasdaq collapsed, the Fed was given an opportunity to restore some semblance of order and discipline to a market that had learned to rely on the Greenspan put. Instead, it chose to inflate a still larger bubble and now, courtesy of Janet Yellen’s friends at the San Francisco Fed, we know precisely why.
* * *
Interest Rates and House Prices: Pill or Poison?
Wild swings in asset prices over the past 20 years and the associated boom-bust cycles have sparked considerable debate about how monetary policy might play a stabilizing role.
We can now calculate how much interest rates would have had to increase relative to the historical record to keep housing prices in check. Figure 4 displays the historical U.S. post-World War II ratio of house prices to income, stated in log terms so that changes can be read approximately as percentage changes. That ratio had declined steadily until 2002. Using a linear approximation from 1950 to 2002, we extrapolate the trend rate through 2006. We then calculate the percent difference between actual observed house prices and this trend, which turns out to be about 40%. A similar number would result from comparing house prices to the consumer price index, so this difference is not particular to our choice of normalization. The United Kingdom suffered a similar 40% house price boom. Since a 1 percentage point increase in the short rate translates into about a 4.4% decline in house prices, keeping house prices on trend would have required about an 8 percentage point increase in the federal funds rate in 2002 according to our calculations.
What actually happened? The federal funds rate, the Fed’s short-term policy rate, stayed between 1% and 1.25% from the end of 2002 until the middle of 2004. Starting in June 2004, the federal funds rate rose 4.25 percentage points, reaching 5.25% by June 2006. In our experiment, the rate would have been about 8 percentage points higher at the end of 2002, but would have ended at about the same level observed in June 2006. That is, preemptive interest rate policy would have been extraordinarily tight in 2002 then would have gradually abated to around the level eventually reached in June 2006. By our calculations, such a large increase in interest rates would have depressed output more than the Great Recession did, roughly speaking.
What is the takeaway then? Slowing down a boom in house prices is likely to require a considerable increase in interest rates, probably by an amount that would be widely at odds with the dual mandate of full employment and price stability. Moreover, the Fed would need a crystal ball to foretell house price booms. In restraining asset prices, while the power of interest rate policy is uncontestable, its wisdom is debatable.
* * *
Got that? In other words, the Fed would have needed to hike rates by 800 bps in the wake of the dot-com collapse in order to prevent the housing bubble. That would have purged the system and gradually, the FOMC could have eased by around 300 bps over the next four years. That policy course would have prevented the speculative bubble that brought capital markets the world over to their knees in 2008.
And why didn’t the Fed do this? Because "such a large increase in interest rates would have depressed output more than the Great Recession did, roughly speaking." In other words, thanks to Alan Greenspan, the US economy cannot function under a normalized monetary policy regime, "roughly speaking."
We suppose the only question now is this: if rates needed to be 9.25% in 2002 in order to completely disabuse markets of the idea that the Fed will everywhere and always move to support asset prices, how high should rates be today?
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The shit is getting real, everyone knows we did it, and I need to cover my ass.
A Greenspan
Define 'normalized'.
start by eliminating the fed
James Grant on bubbles and bargains...
http://www.planbeconomics.com/2014/06/jim-grant-on-bubbles-and-bargains....
Hey FED I have a bubble for you. We're in the pool, Janet sitting uncomfortably close. 4 lethal bubble rise to the surface.
That's what I think of your joo confetti!
Oil at $45 but gas still at $4.50.... fuck you Bernank And Yellen!
Appparently there are only 10 gallons in an Obarrel.
Karma is a bitch bitches.
"roughly speaking" someone should rough up all the bankers.
That was before. Now the FED thinks that bubbles inflate to infinity.
i recently read some keynesian crap in form of a newspaper article, suggesting that bubbles are a GOOD driver of econimic growth. i forget who wrote it, but i'm sure krugman and stiglitz approve.
Speculation that induces producers to invest their hard won earnings into the ponzi which redistributes the bulk of their wealth to the casino owners. Sure there are a few winners allowed, to keep the game alive, but it ain't the producers, the originators of the wealth, its the speculators (gamblers) riding the wave that the dumb money creates.
They are attempting to destroy any perception of risk through artificial means. Risk exists and to hide it or pretend it doesn't exist is to make the risk even great and more inevitable.
risk does not exist for the manager class--- they are not owners --they have golden parrachutes and no risk--producers (or capitalists) are bought out (M&A) via bank loans with their very own companies as collateral. The debt is the risk--sometimes a company will go into debt 5 times its asset value to aquire a company producing that which it cannot produce. Speculators gamble-- thats risk--
I would say that you are looking in the wrong direction--IMHO you should look at management--the faceless none owner that destroys the producing companies for profit to himself--with no risk.
financialization is the means--the banks will profit as free money is created from the debt--the managers will pay themselves handsomely the stockowners will benefit temporarily from higher equity prices, the workers will lose their livlyhood due to the downsizing and the producers (the owners that built the company) will be employees of the company they sold to.
Your bubble don't count in the feds eyes.
It has nothing to do with Greenspan, and everything to do with Nixon... And human nature.
We're all Keynesians, now (until we're not).
It actually has everything to do with GHWB. Nixon was never DCI. So who has more power, POTUS or DCI? I suppose the answer depends on who is POTUS at the time.
And then, what happened next in '53?
Without a big snort of cocain, I wouldn't be able to go to work in the morning.
What???
I got it under control.
I can quit any time I want!
Try to do 2 weeks w/o ciggies, you can't do it, you'll most likely drown first before kicking the habit.
Roll my own. Powermatic II baby.
Even when we acknowledge our addictions, even to go so far as to admit they are ultimately destructive, we will always try our best to justify them or excuse our actions, rather than suffer the pain of reality.
Our "system" depends on it.
Anyone who thinks that 90% of the crap we buy has not had its "demand" artificially placed in our heads is deliberately delusional. After decades of advertising and media and educational indoctrination, we have no idea what is actually rational and what has been rationalized for us. We simply know we NEED, that we have a hole to fill with consumption, and now increasing more so, self destruction. We have been convinced we are stupid and unworthy of the lives we lead, and those who seek a better life through hard work are especially denigrated. We are told we must sacrifice our hard won dominance and hand it over to any an all claimants who we have theoretically "oppressed". Winning is no longer allowed, only through redistribution can our sins be washed away...for a day.
Well that's what makes us each completely and utterly different, one minute after having been completely and utterly created equal by law. Everyone walks a different path yet is expected to meet and be competitively equal in the end, it simply is not that easy to attain the American dream once money gets involved and all is said and done.
I don't think inflation is the problem, shithead.
in this case it's asset price inflation - which is not part of CP, RPI or any other easily manipulated government measured index
Asset prices are not manipulated?
Are you crazy?
And you sir are either a paid operative or an idiot
I'm an operative for truth.
You're the idiot.
troll skill 1/10.
you're crap compared to MDB.
The Fed has manipulated asset prices via the flood of QE they unleashed on us from December 2008 through October 2014, along with ZIRP and "the twist."
STOP Whoring for Wall Street!
http://www.showrealhist.com/yTRIAL.html
http://patrick.net/?p=1223928
If greenspan and bernenke would drop dead tonight, i would have a shot of old bushmill and do an irish jig. and, i dont drink. i would, happily, take one or both. yellen is just the patsy to take the fall. bernanke is over in chicago with his lover boy, ken griffin tongue kissing. bernanke has already told his wife that they will be very rich soon. dont think for a second my story is a fairy tale. you can bet it is true.
Like truth matters.....
Some born again christians never die.
I need to get me some of that desiccated fetal tissue for direct injection so I can live to be 800 years old like Alan Greenspan!
;)
The only 'flaw' Greenspan is really worried about is that chances are good he's still around when society goes full-tilt batshit fucking crazy!
When Greenspan-hits-the-fan grab your nutsacks or beef-curtains folks and hang on for one crazy-ass experience. My greatest concern is that the blame gets placed on the correct MFers...
The economy works just fine without bubbles. It's the financial industry that needs them.
So, do we need the financial industry?
HEY! I think you are right on right!
Rich stay rich by stealing from the poor. Bubble = Ponzi scheme.
I have been writing this for years:
The MAIN ENABLER OF sizable asset price bubbles is keeping the real price histories rarely seen.
http://showrealhist.com/yTRIAL.html
Alan must see the spike in the minimum wage as inflationary.
QE4?
Was, and I ask you I'm not being coy or glib, the problem really lower interest rates {bear in mind, at 7%, money doubles about every 10.3 years - so anyone buying a house for X is paying 3X over a 30 year to a bank that created 90% out of the money from thin air by dint of loaning it, and the other 10% out of thicker air basing it on reserves, but not actually using the reserves}....................... or a wall stret/financial sector bubble machine that relaxed lending standards and made a relative few lots and lots of money by securitizing those loans, and placing insurance on them, then repackaging - taking a cut each time?
it was just the rates? REALLY? the securitization and risk only partially dispersed via tranching and swaps and niv loans to keep the party going for coke addled brokers and traders wasn't involved? Wall Streets massive cash bonanza derived from inchoate and new mortgage payments had no role?
Sooner or later, you run out of other people's credit.
"Fed Admits Economy Can't Function Without Bubbles"
Theft labeled as "bubbles." Hmmmm?
In his essay "Politics and the English Language", George Orwell observes that political language serves to distort and obfuscate reality. Orwell’s description of political speech is extremely similar to the contemporary definition of doublespeak;
In our time, political speech and writing are largely the defence of the indefensible… Thus political language has to consist largely of euphemism, question-begging and sheer cloudy vagueness… the great enemy of clear language is insincerity. Where there is a gap between one's real and one's declared aims, one turns as it were instinctively to long words and exhausted idioms, ...
https://en.wikipedia.org/wiki/Doublespeak
Liberty is a demand. Tyranny is submission..
Involuntary attempt at sexual pleasuring.
Meh. They are not scared until they let gold rise again. They devistated global savings by mashing on it. You can't tell me a US housing bubble was so bad it took down the world, but debasing all the gold collateral in world did nothing at all. In fact, the second leg of this depression started precisely when they did assault gold at 1900. And if there is some other reason they need to mash it, then oh well, we are stuck with a depression. It might be too late for them to stop it now anyway.
Jesus fucking tap dancing Christ himself wouldnt believe the hypocrisy these utter cunts spew forth with abandon.
Just who the fuck does this idiot think he is? Tell you one thing you wont see greenspan you fucking pox on the face of humanity. You wont see the fucking spawn you sired reduced to the lowest common denominator you always expected the likes of us to live by, will you?
I will.
And fucking hurry up and kick off fella, you damn well have overstayed your welcome you hideous cunt.
Hades is awaiting..
:-)
Bubbles are to a Fed Stimulated economy what overdoses are to heroin addicts.
Stop injecting and see what happens....
Dougle entry mechanics and private banking credit means are what is operative today.
Economists cannot think outside of their ledger. A non-double entry worldview does not exist to them, it is anathema.
Credit as money cannot come into existence unless double entry mechanics dictate it. This is why bubbles tend to be against fungible asset classes. Land in particular is desireable because it is supply limited and the basis for all of goods production, as well as a place to live.
Yet, the average flux of daily transactions is not related to land/securities/debt instruments. In other words, private banking credit must create bubbles so that enough credit can come into being to allow transactions and to pay ever expanding debts. The future must increase to pay the past simply as a function of ledger mechanics, especially with buried exponential functions, such as compounding usury.
Huber has worked out ledger mechanics for permacredit. This would add enough debt free to the economy to then be available for transactions and savings. As it cycles in and out of debt instruments it pays them down to then extinguish said "credit" debts.
A certain percentage of the economy has to be base money, and it might as well be debt free permacredit spent into productive channels. Or, preferably, directed into heterosexual households to then allow family formation.
(Families are the cornerstone of civilization, despite all of contrary nonsense spewed by prostitute media. Money power rightly belongs to citizens, and they get first seigniorage, not government or MIC, or any other special interest group.)
Below is quote describing how permacredit can be handled with double entry:
http://www.sovereignmoney.eu/36-what-would-sovereign-money-system-look-like
"Conventional bookkeeping may insist on treating debt-free sovereign money formally like a 'credit', even though free of interest and without specified maturity. It would thus be entered as, say, permacredit to the treasury and as a liability of the central bank. Scarcely anyone would worry much. For practical and statistical reasons those 'liabilities' would be subdivided, similar to the case today, into 'coin in circulation', 'notes in circulation', 'digital currency in circulation'. It might nonetheless be more appropriate to enter debt-free permacredit in a central-bank balance sheet not as a liability but as part of a nation's monetary equity, say as a national monetary endowment which the money-issuing authority can write out to the state coffers."
"Huber has worked out ledger mechanics for permacredit. "
You are trying convince people to learn a new language when they don't even understand the one they use presently.
-Not that I am trying to inhibit you in the least. I am ALL for it: please do not desist or diminish your efforts.
I am always pleased to see your posts, links, info, commentary. Please continue.
Best regards,
JWRIII - The Throxx Of Vron
it can live without bubbles if we eliminate debt based/fractional reserve currency
"We suppose the only question now is this: if rates needed to be 9.25% in 2002 in order to completely disabuse markets of the idea that the Fed will everywhere and always move to support asset prices, how high should rates be today?"
PAUL VOLKER.
There is still time...
This repot could be reitled "Dr. Strangelove or: How I Learned to Stop Worrying and Love the Bubble".
I wonder if the Fed put out this report in order to get people (and the media) to stop complaining about bubles.
As planned
https://www.youtube.com/watch?v=MN4drI2CLEQ
Chris Martenson interviewed by Greg Hunter
One has to ponder, how many bubbles will Greenspan create once he's equipped with concrete shoes and thrown off a ship in the Gulf of Mexico.
Hypothetical, but let us know Alan Greenspan. Seriously, how many bubbles would you create before hitting the ocean floor?
They need moar skin in the game.
Treat them like China does, if they do something wrong, execute them.
Stockman, I challenge the assertion that the Fed (why do we call it that?) could "pivot and liberate" anything. According to Norman Dodd (former JPM banker, and congressional researcher), the chief reason for the creation of the Fed (there's that word again.) was for quite bluntly -- perpetual war. So how does an institution (more like a mental institution) that was designed and created specifically for never ending wars, and the "war profits" thereof, presume and/or pretend to "liberate" anything? (except joe six pack's bank account into the Fed's primary shareholder's accounts.)
And furthermore, Stockman apparently did not get the memo: (as also didn't such Reaganite notables Paul Craig Roberts et al) ..
So why the silence guys? Everyone was informed as far back as, I don't know, say 1985? Ah, I guess you didn't have clearance at the time. Then surely you got the memo in 2006? Enough time to assist in preventing the meltdown of 2008 (at the very least minimizing its effects to level of say, '20/'21). You didn't? Gee, why is that?
But you didn't get anything wrong, or miss anything, because people believe what they want to believe, right? Just like you, there never will be a crash so why disturb this sleeping mkt.
I just want my academic question answered from Alan Greenspan. The Kike that was called the Maestro who fucked up the United States of America.
Lets plug another variable, what if you created more bubbles by using the saxophone on the way down to ocean floor. Can you script the probably formula for those two senerio's?
As a guy that fixes gadgets and stuff. If you look at a thingy that works sometimes you can know whats inside. Even though you never had one apart. In that context. Wow that guy needs to take a peek inside a woodchipper.
Greenspan is a Zionist Pig. I hate Zionist Pigs and anyone who associates with them. Baby Bush gave Greenspan a Medal once...
Silver Bitcoin Barbell Strategy (SBBS): 1000 Ounces of .9999 Silver & 100 Bitcoins
The Fed would have needed to hike rates by 800 bps in the wake of the dot-com collapse in order to prevent the housing bubble. That would have purged the system and gradually, the FOMC could have eased by around 300 bps over the next four years.
In a properly managed Medium of Exchange (MOE), interest collections must exactly equal defaults ... perpetually. Where are the time series of defaults over this period that prove the numbers claimed here ... or are these rates, as usual, just made up.
Moreover, the Fed would need a crystal ball to foretell house price booms.
No they wouldn't. All they needed to do is keep track of the trading promises they certified (i.e. in process mortgages); monitor them precisely for defaults; and collect interest equal to defaults to reclaim the broken trading promises. The relation is INFLATION = DEFAULT - INTEREST = zero. It has automatic built-in negative feedback to guarantee stability.
The Fed can't even show you a time series of defaults or of interest collections. This proves they don't have a clue what they're doing ... and their performance proves it.
Further, they claim to be shooting for 2% inflation and have delivered no better than 4% over their 100 years at the helm. The right number for inflation is 0%.
But the Fed, of course, has performed splendidly. They have made the elites' (that own the Fed) farming operation more profitable than ever before. And when they got too aggressive and greedy, they stuck the tax payers with bill. Pretty neat operation if you're party to it.
so the whole purpose of the "federal" reserve has been admittedly futile (not to mention a big fucking lie from day one). a waste of time, effort and most important of all, PRODUCTIVE RESOURCES.
dumbass ignorami, i.e.: the common voter
ZH, what should be the interest rate today and why?
ZH, what should be the interest rate today and why?
There's no way to know. They don't keep and report a default and interest collection time series. In a properly managed Medium of Exchange (MOE) these should be perpetually equal to each other.
The relation is: INFLATION = DEFAULT - INTEREST = zero.
But with the fake interest rate of zero and the obvious default amounts equal to QE (QE is just counterfeiting which is default), interest rate (regardless of what you use for a divisor) should be way way up there.