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> The solution is simple. Raise rates and let asset prices normalize, regardless of the consequences. This is the exact policy adopted by the Fed in 1929: purg

> The solution is simple. Raise rates and let asset prices normalize, regardless of the consequences. This is the exact policy adopted by the Fed in 1929: purge the bad out of the system. Let the failing banks go bankrupt. That turned what was a recession into a full-blown deflationary credit crunch. All the high-and-mighty theory and bloviating may not mean much in the face of 25% unemployment, wages falling 50%, and 15%+ contraction of global GDP. I agree there needs to be moral hazard to investing and interest rates are to low... but be careful what you wish for.

adam_arthur 5y ago
Yeah, but the point of the fed is to smooth the peaks and troughs. Stimulus in recessionary periods is smart, and prevents prolonged recessions like was seen in the great depression, and somewhat during the GFC. But the stimulus has already been done at this point. The crisis is over. The situation we're in now is corporate earnings at all time highs, the gap between open jobs and job seekers at all time high, consumers with spending power at all time high, home prices accelerating at all time highs, inflation running very hot. So this is the exact time that the Fed should be smoothing the peak, to avoid a full on bubble type of scenario. By not acting, they setup the risk factors for another 1929 or 2008. E.g. encouraging mass speculation, high levels of debt and so on. So I agree with you. But the goal should be to avoid creating the conditions for systemic failures by letting bubbles get out of hand. China in particular let their real estate bubble get far out of hand, to the point that it's not really possible to resolve without creating a systemic issue. You fundamentally just have to accept some down periods and small hits to avoid the massive failures that come along with facilitating much larger bubbles/structural risks.

adam_arthur 5y ago

Yeah, but the point of the fed is to smooth the peaks and troughs. Stimulus in recessionary periods is smart, and prevents prolonged recessions like was seen in the great depression, and somewhat during the GFC. But the stimulus has already been done at this point. The crisis is over. The situation we're in now is corporate earnings at all time highs, the gap between open jobs and job seekers at all time high, consumers with spending power at all time high, home prices accelerating at all time highs, inflation running very hot. So this is the exact time that the Fed should be smoothing the peak, to avoid a full on bubble type of scenario. By not acting, they setup the risk factors for another 1929 or 2008. E.g. encouraging mass speculation, high levels of debt and so on. So I agree with you. But the goal should be to avoid creating the conditions for systemic failures by letting bubbles get out of hand. China in particular let their real estate bubble get far out of hand, to the point that it's not really possible to resolve without creating a systemic issue. You fundamentally just have to accept some down periods and small hits to avoid the massive failures that come along with facilitating much larger bubbles/structural risks.