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The most dangerous thing that can happen to an advanced economy is credit markets grinding to a halt. It was the panic of 1907 that created the federal reserve

by dkrich 4y ago

The most dangerous thing that can happen to an advanced economy is credit markets grinding to a halt. It was the panic of 1907 that created the federal reserve in the first place. Over the ensuing decades there was a very awkward path to eventually figuring out that at the moments where a complete halt to credit markets looks imminent, the fed should step in and release the jam. What we’ve learned is that just the knowledge of the fed being able to just print and buy any debt and that they would do so caused major crises to be avoided (2008 and 2020). The problem recently has been that this fed is simply incompetent. They do not form their own opinions and simply follow what the prevailing narrative dictates. If it’s consensus that rates should not be lifted, they just coast through those meetings towing the same line and continuing to buy bonds. Then one day the narrative shifts and concern starts to grow over fed policy. So the fed suddenly reverses course and announces sudden rate hikes. When it turns out that cpi moves slower than the fed hoped, the pressure to intervene grows. Now the consensus is that the fed should be making multiple 75-100 bps hikes so that’s what they do. The question now is will the narrative shift fast enough for them to not end up going too far the other way. I sincerely hope the next fed chair is someone who understands the relationship between credit markets and the economy and the need at times for the fed to be the lender of last resort, but also understands that the fed should be an independent entity capable of forming its own policy and having the courage to ignore what market pundits say should be done. The Fed’s mandate is not to make Wall Street happy.

drchiu 4y ago
This is perhaps one of the best explanation of the dynamics between the fed and the market as it actually happens. If I recall, those fed chairs tend to be Wall St alumni unfortunately.
blagie 4y ago
I'm kind of inclined to agree. We want to avoid structural damage: Lost jobs, bankrupt businesses, lost mortgages, and so on. Structural damage leads to loss of real productivity, and real harm to people's lives. The only way I knew to get through COVID shutdowns was to devalue currency by about as much as we've done. I didn't mind the short-term money printing, and I expected inflation to result. The inflation is painful, but the alternative is much more painful. My income buys less than it did two years ago, but I'm thankful I have a job. I was even more thankful when jobs were easy to come by. If my employer went under or I lost my job, I'd be profoundly unhappy. The right approach now would be to accept a dollar is worth less than it was before, and to give an honest estimate of how much less. Aggressively trying to control inflation by raising interest rates is a lost cause, and will do a lot of real harm. The outcome here seems to be that rather than mitigating the harm of COVID shutdowns, we've delayed them, and did a lot more harm along the way.
- caeril 4y ago
  > We want to avoid structural damage: Lost jobs, bankrupt businesses Completely incorrect. If the jobs and businesses in question existed only due to speculative excess, they shouldn't exist. Easy money generates what David Graeber would call "Bullshit Jobs", that contribute anywhere from zero to negative real value production. We want these businesses liquidated and the employees out on the street, to pursue work that actually contributes to society. The trick is to somehow limit the collateral damage to businesses that do produce real value. I don't think that's a problem that's been solved.
- rsync 4y ago
  "We want to avoid structural damage: Lost jobs, bankrupt businesses, lost mortgages, and so on." I disagree - I think what we need is a constant, low, background level of structural damage - which includes lost jobs and especially bankrupt businesses. I grow increasingly fond of the forest fire / controlled burns analogy: We have come to realize that preventing, or extinguishing, every wildland fire causes a dangerous level of fuels to slowly build up, eventually erupting in an unstoppable conflagration that destroys much more than the sum of the fuel overload. Preventing recessions and keeping business firms afloat that would otherwise fail without easy loan rollover - that's the financial equivalent of refusing to maintain fuel loads with controlled burns. Eventually the dead fuels (zombie business firms) will overwhelm all firefighting efforts (QE ? Negative interest rates ?) and will take down a much larger portion of the economy than otherwise would have failed along the way ...
- naijaboiler 4y ago
  Spoken very fairly. For a central banker, it's either high inflation or high unemployment. Strangely enough, they prefer the latter. Inflation affects everybody mildly, a recession affects the unlucky few that lose their jobs very badly

by dkrich 4y ago

drchiu 4y ago

This is perhaps one of the best explanation of the dynamics between the fed and the market as it actually happens. If I recall, those fed chairs tend to be Wall St alumni unfortunately.

blagie 4y ago

I'm kind of inclined to agree. We want to avoid structural damage: Lost jobs, bankrupt businesses, lost mortgages, and so on. Structural damage leads to loss of real productivity, and real harm to people's lives. The only way I knew to get through COVID shutdowns was to devalue currency by about as much as we've done. I didn't mind the short-term money printing, and I expected inflation to result. The inflation is painful, but the alternative is much more painful. My income buys less than it did two years ago, but I'm thankful I have a job. I was even more thankful when jobs were easy to come by. If my employer went under or I lost my job, I'd be profoundly unhappy. The right approach now would be to accept a dollar is worth less than it was before, and to give an honest estimate of how much less. Aggressively trying to control inflation by raising interest rates is a lost cause, and will do a lot of real harm. The outcome here seems to be that rather than mitigating the harm of COVID shutdowns, we've delayed them, and did a lot more harm along the way.

caeril 4y ago
> We want to avoid structural damage: Lost jobs, bankrupt businesses Completely incorrect. If the jobs and businesses in question existed only due to speculative excess, they shouldn't exist. Easy money generates what David Graeber would call "Bullshit Jobs", that contribute anywhere from zero to negative real value production. We want these businesses liquidated and the employees out on the street, to pursue work that actually contributes to society. The trick is to somehow limit the collateral damage to businesses that do produce real value. I don't think that's a problem that's been solved.
rsync 4y ago
"We want to avoid structural damage: Lost jobs, bankrupt businesses, lost mortgages, and so on." I disagree - I think what we need is a constant, low, background level of structural damage - which includes lost jobs and especially bankrupt businesses. I grow increasingly fond of the forest fire / controlled burns analogy: We have come to realize that preventing, or extinguishing, every wildland fire causes a dangerous level of fuels to slowly build up, eventually erupting in an unstoppable conflagration that destroys much more than the sum of the fuel overload. Preventing recessions and keeping business firms afloat that would otherwise fail without easy loan rollover - that's the financial equivalent of refusing to maintain fuel loads with controlled burns. Eventually the dead fuels (zombie business firms) will overwhelm all firefighting efforts (QE ? Negative interest rates ?) and will take down a much larger portion of the economy than otherwise would have failed along the way ...
naijaboiler 4y ago
Spoken very fairly. For a central banker, it's either high inflation or high unemployment. Strangely enough, they prefer the latter. Inflation affects everybody mildly, a recession affects the unlucky few that lose their jobs very badly