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Monetary & Housing Policy Thread: Fed Adopts Evans Rule

Alright, both of you two are way too smart for me to chime in..... but long term are we really at a housing bottom if housing is inflated by sub 4% rates? I guess my question is obviously I know that if interest rates start rising the world is going to end, but what are the real chances we have to prevent this eventually given our current path? We got in this mess because we kept interest rates too low, so we're getting out of it by keeping them even lower and for longer? There seems to be a huge spread in the rates people are achieving for their risk.
 
palmab03 said:
Alright, both of you two are way too smart for me to chime in[SUP]1[/SUP]..... but long term are we really at a housing bottom if housing is inflated by sub 4% rates?[SUP]2[/SUP] I guess my question is obviously I know that if interest rates start rising the world is going to end[SUP]3[/SUP], but what are the real chances we have to prevent this eventually given our current path? We got in this mess because we kept interest rates too low[SUP]4[/SUP], so we're getting out of it by keeping them even lower and for longer? There seems to be a huge spread in the rates people are achieving for their risk.
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1. Disagree, and I think this perception is generally unhelpful.

2. I'm more concerned by the fact that it's one data point (the most recent month on Case-Shiller) and that there are still a lot of headwinds out there than I'm worried about rates being "artificially" low. I mean, there's not exactly a lot of economic activity going on, so it makes sense that yields would suck and shitty yields -> cheaper loans because savers don't have better options.

3. I don't think rates will rise until their rising would no longer pose an existential threat to the world economy.

4. This seems to be a popular take, but I'm not sure how convincing it is. I know Greenspan is now seen as some witch-doctor who cut rates whenever a recession came along, creating a new bubble, but that's basically textbook Fed policy to loosen money when a demand-shock recession comes along. Krugman has a neat chart in The Return of Depression Economics and the Crisis of 2008 regarding "Greenspan's bubbles," but I don't think it was so much monetary policy (low rates) that got us into this mess, though rates were historically low before and are historically lower now. I think TR and I both agree that poor regulatory oversight was far more culpable (still Greenspan's fault, mind you), though he places more blame on the regulators while I blame both the regulators and Congress for making a shitty regulatory framework. Some people go further than that and blame rising income inequality as well. I think there might be an uncomfortably non-neoliberal case that factor price equalization (free trade lowering the world price of low-to-medium skilled labor in the US) hollowed out the US middle class, forcing it to turn to debt instead of income to finance their lifestyles, but I still wouldn't blame monetary policy for that outcome (seems like a damned-if-you-do, damned-if-you-don't situation, plus better urban policies could have alleviated some of those stresses). Anyhow, I don't think blame for the crisis falls at the feet of monetary policy (certainly at the feet of some of the policymakers, though for other reasons), so I think the Fed can play a constructive role in getting us out, even at the ZLB.
 
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TuffaloDeac10 said:
1. Disagree, and I think this perception is generally unhelpful.

2. I'm more concerned by the fact that it's one data point (the most recent month on Case-Shiller) and that there are still a lot of headwinds out there than I'm worried about rates being "artificially" low. I mean, there's not exactly a lot of economic activity going on, so it makes sense that yields would suck and shitty yields -> cheaper loans because savers don't have better options.

3. I don't think rates will rise until their rising would no longer pose an existential threat to the world economy.

4. This seems to be a popular take, but I'm not sure how convincing it is. I know Greenspan is now seen as some witch-doctor who cut rates whenever a recession came along, creating a new bubble, but that's basically textbook Fed policy to loosen money when a demand-shock recession comes along. Krugman has a neat chart in The Return of Depression Economics and the Crisis of 2008 regarding "Greenspan's bubbles," but I don't think it was so much monetary policy (low rates) that got us into this mess, though rates were historically low before and are historically lower now. I think TR and I both agree that poor regulatory oversight was far more culpable (still Greenspan's fault, mind you), though he places more blame on the regulators while I blame both the regulators and Congress for making a shitty regulatory framework. Some people go further than that and blame rising income inequality as well. I think there might be an uncomfortably non-neoliberal case that factor price equalization (free trade lowering the world price of low-to-medium skilled labor in the US) hollowed out the US middle class, forcing it to turn to debt instead of income to finance their lifestyles, but I still wouldn't blame monetary policy for that outcome (seems like a damned-if-you-do, damned-if-you-don't situation, plus better urban policies could have alleviated some of those stresses). Anyhow, I don't think blame for the crisis falls at the feet of monetary policy (certainly at the feet of some of the policymakers, though for other reasons), so I think the Fed can play a constructive role in getting us out, even at the ZLB.
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1. I got an A in Econ and an A in derivatives at wake (and That was perhaps 2 of my 5 A's in 5 years), have spent years in the big picture/mish/nakedcapitalism blogosphere, and I can't chime in to ya'lls converstions about specifics.

2. Lets say the economy is fixed in 6 months and the blue line is touching the red line, people who bought a 500,000 house with sub 4% interest rates' houses are going to be worth less than 400k if rates were 6-7%, correct?

3. The big elephant in the room is can we control it. Europe is trying and failing, we're the last domino in that but are we greatly understating the risk that we perhaps can't control our interest rates.

4. I agree with most, ,but what would your argument be to someone saying "well screw free trade then" to rebuild our middle class.
 
I don't think these rates are coming up exogenously, so I'm not sure what to say about your #2. My take is that rates will come up when demand for mortgages comes up, and house prices shouldn't crash in response to rising demand. But all else equal, higher rates would mean fewer sales and more competition between sellers.



I'd argue that free trade still has some benefits to the middle and lower class in terms of reduced prices for goods, and I think the right response here is a long-term one (perhaps the only time I consider the long-run); better schooling and education to produce a more competitive workforce. I don't think there's much to be said for trying to compete with labor-rich Asian countries in low value-added industries, so the right thing to do should be preparing a workforce for high value-added jobs and the service sector. Again, this is a long-run solution, I don't think it's what's needed to get us out of the current jobs crisis. I want to either spend spend spend or print print print right now.
 
Me and my Doves picked up a win today. So did the unemployed (and Caturday, too). Bernanke is gonna buy $40B of stuff each month until AFTER things have improved. Good forward-looking policy has arrived (although there's still room for it to improve).
 
The Fed announced an $85 billion per month bond buying program until the end of the year, and promised to keep the federal funds rate at zero until the end of 2015.
 
TuffaloDeac10 said:
This is also a win for Obama. It's good for management when employees stop not doing their jobs.
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Politically, I think it's a loss. At this point, the impact from quantitative easing is unlikely to be felt by the next jobs report, and at the same time people will view continued Fed action as a sign that the economy is not recovering. So we'll see.
 
jimmy smits on the West Wing wanted a 220 year school year to deal with education. "Our current school year is based on the egrarian calendar, we don't need our kids out in the fields anymore picking crops"
 
6. I'm telling you, the paradox of toil makes sense, as long as an expansion of aggregate supply actually decreases the price level. You gotta remember that Krugman & Eggertson hit the ZLB because debtors suddenly decide they can't take on any more debt and the savers don't want to spend down their savings. So demand is then constrained by the real value of debts and that's how we get the backwards sloping AD curve. That sounds like a more or less accurate, though simplified, description of what happened to get us where we are in the real world. The lower price level = higher real debts -> less consumption -> contraction. ZLB = people who have cash just hold it. I think this fits with your own statements that the problem is too much debt.

7. Next POTUS controls Bernanke's job. Nixon's campaign was in a somewhat stronger place than Obama's is. Bernanke didn't get to where he is without having a concern for the Federal Reserve as an institution and I don't think he wants to go down in history as the last guy who lost the Fed's independence. I'm also not sure there's much reason to think he's not going to be re-appointed regardless of who wins. Barrack would probably prefer to have a Democrat manning the Fed for his second term and Mitt's said that he wouldn't reappoint Bernanke.

8. All manner of firms hire in response to short-term demand. And don't forget that recessions and depressions are alternator trouble, we don't need indefinite stimulus, just the right amount of it to get the economy turning over again.
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6. Eggertsson's argument makes sense until he argues that the AD curve actually becomes inverted. That is completely counterintuitive. He's actually trying to argue that the more things cost, the more people will buy, and the less things cost, the less they will buy. It's just nonsense. I would agree that in current conditions elasticity of demand would increase, but there is no way it would get to the point of a vertical AD curve, much less an inverted AD curve. First of all, by the time these wage decreases actually affected output, there would be countervailing forces from the Pigou effect. Second, price-stickiness, which by the way is one of the central assumptions of Keynesian economics, would render this effect largely inert.

7. I think events have proven me right on this one.

8. No, we don't. That's only true if the economy is in a deflationary spiral. The economy is actually growing, it's just not growing quickly enough for more jobs to be created.
 
TR1982 said:
The Fed announced an $85 billion per month bond buying program until the end of the year, and promised to keep the federal funds rate at zero until the end of 2015.
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Which bonds are they buying? This stuff is so over my head.
 
Ball State Deac said:
Oh gotcha. Those are like little investment vehicles that people buy and sell, right? So its possible that your mortgage and mine are owned by someone as an investment?
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I'm not the best at explaining them. TR, Tuffalo, or Caturday would be good resources on this.
 
TR1982 said:
Politically, I think it's a loss[SUP]1[/SUP]. At this point, the impact from quantitative easing is unlikely to be felt by the next jobs report[SUP]2[/SUP], and at the same time people will view continued Fed action as a sign that the economy is not recovering[SUP]3[/SUP]. So we'll see.
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1. Naturally

2. DJIA and S&P 500 both jumped at the announcement. Hiring does and will take longer, but I think we'll see that lags aren't so long and variable if communication is clear. I'm also not sure that the next two jobs reports matter unless they break the trend. Current mediocre-to-shitty trend should be enough for re-election (see IEM, Intrade, FiveThirtyEight).

3. I think that's already known. What Obama needs is for it not to deteriorate. This helps. He jumped 5% on Intrade, although that could be just a correction because his odds there were previously out of line with Pinnacle and IEM and other books.
 
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