patrick.net

The Titanic is going under alright, the only difference is the real Titanic sunk due to a little too much water taking the place of dry air space. The economy that is the USA Titanic is sinking under too many dollars that will one day be worth the same as a continental. Helicoptor Ben, start your engine. Look out below, here comes more cash to the rescue. Weimar Republic here we come!

Or the fed trying to give CPR to a rotting corpse :)

Whats more absurd than an ARTIFICALLY LOW interest rate? For example: Artifically low rates => inflated housing prices => housing crash => millions of people forclosed upon and lose their homes. All as the result of a "benevolent" government and a fraudulant, evil, corrupt Federal Reserve Central Bank.

And the benefit of an ARTIFICALLY LOW interest rate is ?

Recent Treasury interest rates:

10 year Notes: 3.63 %

30 Year Bonds: 3.9%

These are rates that the government can borrow large sums from investors. Mortgage rates are based in large part on these rates (add 1 to 1.5% for the higher risk).

The primary way that what the fed does influence these rates is that these markets believe that the fed is tight enough, given the current environment that these markets are not worried about inflation. If the fed was to expand the money supply in a way that made these markets nervous, then long term rates would be higher.

True that "tight enough" loses some of it's meaning when we have unusual deflationary pressures.

This is all an oversimplification, from my point of view, but Abe,...please get a clue. That propaganda you read is written my people that know almost nothing about the financial markets.

IF down payments had been kept reasonable, and if balloons (which assume house inflation continues forever) hadn't been the rage, and if incomes were seriously verified, then this wouldn't have happened.

The problem was lack of regulation, but it was also simply bubble psychology.

It's true that the fed might have taken action to suppress the bubble, tighter monetary policy, basically inducing a recession, or keeping us in one, back in 2002 - 2003, might have helped prevent this. But it's too easy to put too much blame with the fed.

marcus says

It’s true that the fed might have taken action to suppress the bubble, tighter monetary policy, basically inducing a recession, or keeping us in one, back in 2002 - 2003, might have helped prevent this. But it’s too easy to put too much blame with the fed.

Well said.

tatupu70 says

marcus says

It’s true that the fed might have taken action to suppress the bubble, tighter monetary policy, basically inducing a recession, or keeping us in one, back in 2002 - 2003, might have helped prevent this. But it’s too easy to put too much blame with the fed.

Well said.

Thanks. Regarding 2002. Let's not forget where the stock market was then. The fed had to worry about that too, in setting their policy.

marcus says

Let’s not forget where the stock market was then. The fed had to worry about that too, in setting their policy.

Job #1 for everyone in government 2001-2004 was making sure W didn't have the same thing happen to him that happened to his daddy in 1992. This resulted in a lot of sh--y decisions that started gaining traction in mid-2003 and were on a roll in 2004, time for the election.

This is a log-scaled graph of household debt 1990-2010. We can see the pace picking up in the 1990s (thanks to rising cheap imports, productivity gains, and low unemployment driving wages up), and the already unsustainable growth of 2000-2002 actually inflected upwards 2002-2004. We were trying to borrow ourselves out of a recession.

The 2004-2006 period was a carry-through of the momentum established in 2002-2004. Household debt increased $2T in this critical two year period, a lot of cash-out refis, and other equity extraction.

Extrapolating the 1992-1998 line, a non-crack-boom debt growth rate would have put us at around $10T today, not the $13T+ we are actually at now.

$3T+ of unsupportable debt in the system is kinda serious problem. I don't have any policy solutions but I certainly admire this challenge.