5 ms·

> And I wonder if we in a Western democracy would ever be able to the same (i.e. pop a residential real estate bubble on purpose). We do it all the time. It's

> And I wonder if we in a Western democracy would ever be able to the same (i.e. pop a residential real estate bubble on purpose). We do it all the time. It's called raising the interest rate. When we want to create bubbles, we lower the interest rate. Pretty much all bubbles are created and popped by banks and governments. Doesn't matter if it is a 'western democracy' or not.

ortusdux 5y ago
As I understand it, lowering the interest rate is one of the few tools the Fed has at its disposal. Their goal is to always be raising the rate as long as it does not cause disruptions, so they have something to lower in the future.
- ItsMonkk 5y ago
  This is a cynical take, but it's an honest good faith effort on my part. I post a thorough comment in hopes that people can build on top of or destruct where it's wrong. > The Federal Reserve has two mandates: maintaining maximum employment and maintaining stable prices and moderate long-term interest rates. This seems fine at first glance, until you see that maximum employment does not mean maximum employment, and in fact you can have more than maximum employment. Last decade we had more than maximum employment and the Fed was expecting inflation that did not come. "Struggling to reach 2%". Why was the Fed expecting inflation? Because when you have more than full employment, it converts the labor market from a buyer's market to a seller's market. This ties in with the other side of it's mandate: stable prices. Why would prices rise? If you read my water analogy comment[0], you could see that there are only two real ways. The rivers are higher, or the reservoirs are leaking. We have not seen any signs of reservoirs leaking. So then the rivers are higher. What is the CPI really tracking? What is the Fed trying to keep under control? The ability for labor to negotiate. Why did we not get inflation even though we had above maximum employment? Wealth inequality. Monopolies. The business owners have all but shut down a perfect competition in the economy and can without discussing openly, act like a cabal. Until CO-VID, until unemployment checks, until stimulus going out to people. Suddenly labor has an opportunity to negotiate. People are leaving their jobs and moving to higher paying ones. Work from Home is having companies compete from all over the nation, now you are not limited by your building size, you can employ as much as you can handle. Wages are being negotiated. Suddenly it's a seller's market. So the rivers are rising. The Fed has to react according to their mandate. What will they do? The same thing they have done the last 8 times since the 70's, they rise rates. It's a proven strategy that when the Fed funds rate rises above the 30 year treasury rate[1], it de-stabalizes the economy. As a result within short order we get a recession. Recessions mean job losses, which means the market moves back to a buyer's market. Labor is happy to have any job at all. The rivers fall. Inflation is back off the table. Once the goal has been reached and the market has switched, they go ahead and drop the interest rates back down to 0. Let the free money be free once again. So long as it does not cause disruptions? Disruptions for whom? To me it looks like the system is working exactly as it was designed. [0]: https://news.ycombinator.com/item?id=25646585 https://news.ycombinator.com/item?id=25646585 [1]: https://fred.stlouisfed.org/graph/?g=ENDs https://fred.stlouisfed.org/graph/?g=ENDs
  - imtringued 5y ago
    The "clearing" interest rate balances supply and demand for labor. That's unfortunately not the same thing as full employment. When supply shocks reduce the availability of energy it can also result in a reduction in the supply of labor because people cannot work. Setting the interest rate correctly means that everyone who can work and wants to work gets to work. >and the Fed was expecting inflation that did not come. "Struggling to reach 2%". >The ability for labor to negotiate. Why did we not get inflation even though we had above maximum employment? Wealth inequality. Monopolies. The business owners have all but shut down a perfect competition in the economy and can without discussing openly, act like a cabal. Inequality is driving the demand for labor down, i.e. rich people are saving money at a faster rate than the rest of the economy can spend it. This forces inflation and interest rates down. When the economy is controlled by increasingly fewer people who already have everything they could possibly want then your economy will slowly reach saturation because these individuals are already saturated and have a growing share of the economy. >Until CO-VID, until unemployment checks, until stimulus going out to people. Suddenly labor has an opportunity to negotiate. People are leaving their jobs and moving to higher paying ones. Fiscal spending does the obvious. Keynes would say the government is increasing aggregate demand. Well, more importantly it's increasing the demand for labor faster than the supply of labor, giving workers the upper hand. >So the rivers are rising. The Fed has to react according to their mandate. What will they do? The same thing they have done the last 8 times since the 70's, they rise rates. Well, the fed was created to spread risk among banks via central bank reserves and to kill inflation. The Fed can't actually create inflation. QE doesn't create inflation. It's only the government that can increase inflation via fiscal policy and it should use it for long term investments. Things that are still there in 30 years.
  - dragonwriter 5y ago
    > It's a proven strategy that when the Fed funds rate rises above the 30 year treasury rate, it de-stabalizes the economy. No, its proven that when investors are skittish about the private markets, which is both a predictor and contributor to recession, their seeking the shelter of Treasuries causes the usual coupling between general interest rates and Treasury rates to break in the direction of lower Treasury rates. You have reversed cause and effect. It is not that inverted yield curve causes economic instability. Economic instability, and the market response to it, causes an inverted yield curve, and tends to do so before the point at which a “recession” is labelled.
jbay808 5y ago
Having the method available doesn't mean having the ability to use it! There may be systemic reasons why the interest rate doesn't get proactively raised enough to pop a bubble, such as maligned incentives.

ortusdux 5y ago

As I understand it, lowering the interest rate is one of the few tools the Fed has at its disposal. Their goal is to always be raising the rate as long as it does not cause disruptions, so they have something to lower in the future.

ItsMonkk 5y ago
This is a cynical take, but it's an honest good faith effort on my part. I post a thorough comment in hopes that people can build on top of or destruct where it's wrong. > The Federal Reserve has two mandates: maintaining maximum employment and maintaining stable prices and moderate long-term interest rates. This seems fine at first glance, until you see that maximum employment does not mean maximum employment, and in fact you can have more than maximum employment. Last decade we had more than maximum employment and the Fed was expecting inflation that did not come. "Struggling to reach 2%". Why was the Fed expecting inflation? Because when you have more than full employment, it converts the labor market from a buyer's market to a seller's market. This ties in with the other side of it's mandate: stable prices. Why would prices rise? If you read my water analogy comment[0], you could see that there are only two real ways. The rivers are higher, or the reservoirs are leaking. We have not seen any signs of reservoirs leaking. So then the rivers are higher. What is the CPI really tracking? What is the Fed trying to keep under control? The ability for labor to negotiate. Why did we not get inflation even though we had above maximum employment? Wealth inequality. Monopolies. The business owners have all but shut down a perfect competition in the economy and can without discussing openly, act like a cabal. Until CO-VID, until unemployment checks, until stimulus going out to people. Suddenly labor has an opportunity to negotiate. People are leaving their jobs and moving to higher paying ones. Work from Home is having companies compete from all over the nation, now you are not limited by your building size, you can employ as much as you can handle. Wages are being negotiated. Suddenly it's a seller's market. So the rivers are rising. The Fed has to react according to their mandate. What will they do? The same thing they have done the last 8 times since the 70's, they rise rates. It's a proven strategy that when the Fed funds rate rises above the 30 year treasury rate[1], it de-stabalizes the economy. As a result within short order we get a recession. Recessions mean job losses, which means the market moves back to a buyer's market. Labor is happy to have any job at all. The rivers fall. Inflation is back off the table. Once the goal has been reached and the market has switched, they go ahead and drop the interest rates back down to 0. Let the free money be free once again. So long as it does not cause disruptions? Disruptions for whom? To me it looks like the system is working exactly as it was designed. [0]: https://news.ycombinator.com/item?id=25646585 https://news.ycombinator.com/item?id=25646585 [1]: https://fred.stlouisfed.org/graph/?g=ENDs https://fred.stlouisfed.org/graph/?g=ENDs
- imtringued 5y ago
  The "clearing" interest rate balances supply and demand for labor. That's unfortunately not the same thing as full employment. When supply shocks reduce the availability of energy it can also result in a reduction in the supply of labor because people cannot work. Setting the interest rate correctly means that everyone who can work and wants to work gets to work. >and the Fed was expecting inflation that did not come. "Struggling to reach 2%". >The ability for labor to negotiate. Why did we not get inflation even though we had above maximum employment? Wealth inequality. Monopolies. The business owners have all but shut down a perfect competition in the economy and can without discussing openly, act like a cabal. Inequality is driving the demand for labor down, i.e. rich people are saving money at a faster rate than the rest of the economy can spend it. This forces inflation and interest rates down. When the economy is controlled by increasingly fewer people who already have everything they could possibly want then your economy will slowly reach saturation because these individuals are already saturated and have a growing share of the economy. >Until CO-VID, until unemployment checks, until stimulus going out to people. Suddenly labor has an opportunity to negotiate. People are leaving their jobs and moving to higher paying ones. Fiscal spending does the obvious. Keynes would say the government is increasing aggregate demand. Well, more importantly it's increasing the demand for labor faster than the supply of labor, giving workers the upper hand. >So the rivers are rising. The Fed has to react according to their mandate. What will they do? The same thing they have done the last 8 times since the 70's, they rise rates. Well, the fed was created to spread risk among banks via central bank reserves and to kill inflation. The Fed can't actually create inflation. QE doesn't create inflation. It's only the government that can increase inflation via fiscal policy and it should use it for long term investments. Things that are still there in 30 years.
- dragonwriter 5y ago
  > It's a proven strategy that when the Fed funds rate rises above the 30 year treasury rate, it de-stabalizes the economy. No, its proven that when investors are skittish about the private markets, which is both a predictor and contributor to recession, their seeking the shelter of Treasuries causes the usual coupling between general interest rates and Treasury rates to break in the direction of lower Treasury rates. You have reversed cause and effect. It is not that inverted yield curve causes economic instability. Economic instability, and the market response to it, causes an inverted yield curve, and tends to do so before the point at which a “recession” is labelled.

jbay808 5y ago

Having the method available doesn't mean having the ability to use it! There may be systemic reasons why the interest rate doesn't get proactively raised enough to pop a bubble, such as maligned incentives.