Fed announced rates will be low until unemployment is 6.5%

http://www.zerohedge.com/news/2012-12-12/regime-change-critical-message-todays-fomc-announcement

Spoiler

 

Let me guess- you also thought Romney was tied or ahead leading up to election day and that the race was "razor tight" or "too close to call"

 

Hmm.

Didn't they previously state rates would be held down through 2013?

 

LFPR will expand instead of contracting if there is a real sustainable recovery, if America goes off the fiscal cliff and the LFPR continues contracting than the Fed's low interest rate policy will come in handy.

 

Yeah, I can acknowledge that there are counter-arguments to the things I post. I just don't happen to think Austrian economics in particular are good counter-arguments.

Austrian economics tends to get me a little riled, because I'm on the other side of that ideologically. Funnily enough, on the far left of post-Keynesian economics, people are just as easily attacked by mainstream economists, and many of the New Keynesian models are things I don't agree with at all (IS/LM is dead hat for me, though admittedly to a lot of economists on the cutting edge of economics, this is true as well).

You will find my mind is quite malleable to a good argument, but I've spent an inordinate amount of time countering those from free-market and Austrian proponents, many who have also spent an inordinate amount of their time studying these matters. It would take a lot to surprise me.

This is just a matter of policy debates. I understand if you don't have the time to look into it, I myself can only boast of knowing these things because I love economics (probably a disproportional amount to what is healthy), and have spent a lot of time on it both in a field of study and in a professional capacity. I do like the fact that you are taking the time to analyze these things critically, because I believe that everybody out there who takes the time to parse through these issues, whether from one stance or another, is doing themselves and others a favor. Just avoid the bossman when you're doing it!

That's why I debate and discuss around here. I want to learn as well, but love it too if someone feels challenged enough to look into things by themselves---that's winning to me. If you make a good argument, I am more than willing to hear it. I myself am somewhat seduced by the concept of government creating credit cycles (though I suppose my solution to that being more government is antithetic to Austrians).

I just don't think a lot of what Austrians say is true---

Inter-bank offer rates combined with credit surveys like SLOOS (SLOOS - Senior Loan Officer Opinion Survey on Bank Lending), notwithstanding bank collusion and improperly set standards that led to manipulation (see: LIBOR crisis), offer a pretty good guide to what a "free-market" interest rate would look like given who is willing to lend at what price. Sure, government monetary policy affects that channel massively, but it's not like one can't finger out a pretty good "free-market" interest rate from the information.

Besides, I think the whole concept of time preference for interest rates is shot until someone teaches the American populace that double digit interest rates on their credit card statements is bad. My two cents on that.

If interested---

Definition of SLOOS
http://www.investopedia.com/terms/s/soslp.asp#axzz2Es6xrADy

Actual SLOOS
http://www.federalreserve.gov/boarddocs/snloansurvey/

Interbank offer rate
http://www.investopedia.com/terms/i/interbankrate.asp

LIBOR rates (an example of interbank offer rates)
http://www.bankrate.com/rates/interest-rates/libor.aspx

 

This reminds me of a Galbriath passage.

If one applies this argument to 2008, for example, one can quickly see the folly of trusting private market agents fully with their "rational" actions. Most of AIG FP and half the banking sector thought housing prices were going up forever, irrespective of government policy (I mean really, when you're thinking like that, there's nothing that can get you to think straight). The others must have mightily mistimed their exit.

Perhaps one of my favorite quotes sums it up quite nicely.

 

Why would going back to Clinton tax rates cause the LFPR to contract?

Also, what happens to the stock market if UE hits 6.5% and the easy money spigot is shut off? Pop goes the bubble?

 

That is interesting and promising in my eyes, if this means that there are far more people advocating these positions than there used to be.

He was just arguing that if firms understood and operated with the knowledge of ATBC, they could still suffer from the business cycle because they might think they can avoid the inevitable collapse that follows credit expansion.

But this is a strictly hypothetical point he's making to the person who says that the ATBC is true but it doesn't matter because firms can work around it. He's not saying this is what happened in 2008 or that this is what firms ought to do.

As for the pure time preference theory of interest, there is dissent even within the Austrian school. Roberth Murphy and Jörg Guido Hülsmann denounce it entirely, I think.

 

"Easy money" is not really an on/off spigot. It just means you'd start the process of raising rates - the goal is well below 6.5% but the idea is to slow down before the economy is at full employment since Fed actions tend to have a delayed reaction.

 

Free market advocates abound in mainstream economics, it's the school of thought that gave us the invisible hand, markets as proper agents for the optimal allocation of resources etc. so essentially all economists are, other than the extreme heterodox schools, capitalist free-marketers---the argument is in the degree of belief in the free market. I think people outside the field have this impression of hard-hat Keynesians trying to push government all the time. In reality, the field is much more diverse now (and has been since the 80s), and even new Keynesians, until recently, hesitated to advocate for fiscal policy levers as a policy tool.

As for the prisoner's dilemma/timing argument, the problem is here again that private agents also have historical notions of credit cycles as well. A full understanding of ATBC would lead people in times of excess credit not to lend or borrow as much with expectation that the bubble will burst, and not fall into the historical blunder of thinking they are the "exception" that will rise above the herd. Poor grasp of timing should be built into rational expectations---i.e most everybody has a poor grasp of when these things will fall apart, so I probably have a poor grasp of the timing as well. If one then realizes that one is in an artificially created bubble cycle, than one will not invest or bet against the bubble.

Time and again, this has been shown not to happen. It's a bit like watching people keep on playing the lottery. Yes, both examples show that the notion that a mass of men and women aggregated together do not make a rational symposium of beauty and ideal credit allocation, as most on the more free-marketing side would have you believe.

2008 is a good example. You cannot consider these economic theories in isolation, otherwise they are of no use. When the market aggregates to believe and acts as if housing prices will go up---forever---that's a fallacy that not even government misallocation could hope to cure.

 

Any rate hike will lead to downwards pressure on equity prices, not that stock prices are a particularly good gauge of economic fundamentals.

The Dow Jones Index has an aggregate price/earnings ratio of 14.59 at the moment, which is historically very low (well, at least in comparison, I guess somewhat dangerously, to the roaring 90s and 2000s that brought the crisis). One can suppose that if there is 6.5% unemployment, that means debt deleveraging is finishing and the economic growth that will follow will lead to upwards pressure on both earnings, and on the P/E ratio itself, as more Americans swing back to risk-on behavior (taking on equities that are traditionally more risky, pushing up P/E ratios on the stocks).

My favorite source on the debt deleveraging
http://www.mckinsey.com/insights/mg...markets/uneven_progress_on_the_path_to_growth

 

Fighting unemployment by trying to create a housing bubble is redundant. The Federal Reserve is afraid of cutting the fat and the lean.

 

At least they've increased the target unemployment rate. 5% sounds a lot like those 12% year-over-year stock market returns we used to hear about when privatizing SS was still politically feasible.

 

lowered expectations in The Age of Obama

 

A bubble the size of 2007 won't occur for quite a while. That's the thing with these credit cycles---you go from irrationally exuberant to irrationally pessimistic.

you need someone to smooth that out.

ideally a fellow like Mark Carney, but Bernanke will do.

 

lowered expectations after disastrous financial market liberalization, and the Age of AIG FP.

 

They haven't lowered anything. 5% is still considered full employment - but you start slowing things before you get there, or you end up with inflation pressure. It's just like driving a car to a destination - you slow down before you reach the destination.

 

You know if you can't throw down 20% now, you gotta buy PMI that lasts the life of the loan unless you refi and you have the equity established.

Sorta starting this process now. Makes sense.