Fed announced rates will be low until unemployment is 6.5%

I'm not suggesting the stock market as a measure of wealth - I'm suggesting it as a measure of future expectations for the economy. Regardless of who owns the stocks and is benefiting from them, the world thought the future was extremely bleak in 2009, and now has a very different view of where we are going.

 

2007? The housing bubble started in the late-1990s and ended in 2006; the credit cycle itself was probably older than that. The central bank is now, again, devoted to helping its primary dealers through further security purchases. There are many large banks with poor status (Citi and BofA), and only appear in good shape because of their release of loan-loss reserves over the past two years.

Inevitably, the Federal Reserve understood (that everyone else understood) the relationship between its Fed fund rate and lagging changes in unemployment. I doubt whether it will stay at .16 for much longer.

 

Yes, of course the credit cycle started before 2007. You might even argue it started in pre-Meiji Japan, when the Japanese first meekly accepted that saving was the best thing ever, and then perpetuated a culture of saving that aided and abetted by neoclassical forces, led to terrifying savings rates that flowed outwards in the financial liberalization of 1981, presaging the heralded global search for yield and the internationalization of American credit.

Or you can blame Reagan for liberalizing financial markets, and pouring on the national debt, and creating policies that led to stagnation in middle-income and low-income wages, therefore creating the necessitous outflow of credit to ensure the illusion of "middle-class growth and opportunity" that characterizes American ideals.

Or you can blame the Fed itself.

Let's leave the blame aside for now.

I refer to 2007 as the height of the bubble in asset prices and household leverage---while housing had shifted down, it had not completely melted, and equity/credit markets were slow to price in the coming disaster. It was only at this point that Goldman et. al really started betting against the housing market en masse (Abacus was presented on February 26th of 2007)---let that be another turning point if you will. Greenspan also first publicly admitted that the small local real estate bubbles were in aggregate a national bubble in 2007.

Now, for bubble conditions as prevalent as 2007 (the last standing year where credit conditions could be seen as excessive as they were considering the circumstances), it will take quite some while, since America is going the opposite way. Credit is now constricting significantly.



Are Fed actions pumping up weak primary dealers? Possibly. Can the Fed create credit cycles? Sure. But it can also curb them. For the moment, as central banks around the world (even the strictest most hawk-prone) have realized, inflation is not as big of a threat as debt deflation, and a low interest rate policy is the best standing policy, as excessive risk-taking has been replaced with Japan-like defeatist risk-avoiding. But when excessive conditions presaging pre-2007 like conditions start popping up, interventions can be made by raising the policy rate and stopping the overflow of credit when the time is right.

 

Until there are alarming signs of a new credit cycle emerging, and over-leveraging, I think it's fair to target employment outcomes and expand credit as rapidly as possible under the circumstances, the circumstances being rapidly contracting household credit, and sky-low leverage ratios on Wall Street and beyond. If the Fed wants to peg itself to employment outcomes, I believe it is a marked improvement over the "mid-2015ish" signs that came before.

Sure, you have to be aware of the risks on the other side of that. My only qualms are that the Fed might have been recently too aggressive with unconventional monetary policy, and that the financial system that is providing the inter-mediation is still as flawed (or perhaps even more so) than it was in 2008, but financial system reform takes time, and is best done when banks are healthier.

It's a sad fate that the current system is so tied up with so many flawed agents, but reform has to go through one step at a time. The Fed should not be immune from that, I must admit, especially with things like the Greenspan put coming to mind.

 

And I suppose the government should've run a surplus and removed financial assets from the private sector while households are deleveraging? Seriously, take an intro economics course at the local community college before you start calling me ignorant.

You'd expect a member of Congress to cede his/her constitutionally delegated authority to shape and affect the final budget, and instead vote on the President's proposal as-is? What lawmakers in their right minds would do such a thing?

Like I said, the only reason any lawmaker would bring a President's proposal to the floor for a vote is to make a political statement. There's a reason why it only happened to Obama's budget for FY12 and FY13...when the most dysfunctional Congress (both houses) I've ever seen was in Washington.

I'm sure none of this matters to you though. Those darn facts sure get in the way of "reality" don't they?

 

Of course it does - as it did in late 2007 and before just about every other crash. But it's probably a larger/better measure of the general opinion of the world than anything else. There is no perfect indicator of the future - if there were, we would be able to see crashes coming.