6 ms·

The Coming Change in Monetary Policy

28 points by dirtyaura 11y ago

MCRed 11y ago
If you really want to understand what's happening in the economy, with advance notice, read http://mises.org http://mises.org. That site has hundreds of economics books for free (great reading!) but also regular news articles. For instance, in 2001, before 9/11 (IIRC) there was an article there about how as a response to the DotCom boom the low interest rates plus changes in the CRA would be causing a housing boom and bubble over the next decade. In 2001 there was no boom, and after 9/11 the economy was bad. But that advice proved true, and gave me 6 years to time to invest based on the housing bubble hypothesis (alas I never found a way to short houses and wasn't the kind of person who could have bought CDOs against the foolishness) ... and I got out of the market very near its peak in 2007. Unlike what politicians would want you to believe, Economics is a science and the consequences of actions in economics are pretty close to those in physics. They can pretend like one president or another is responsible. (the Housing Bubble was the result of the actions of Clinton and Bush, and actually Obama who was a lawyer in the lawsuit that claimed "lending only to people who can afford to repay the loans is racist"... and like economics predicted (That banks want money and will disregard race) in the end it turned out that they weren't being racist but were lending based on likelihood of repayment... and the winners in Obama's class action lawsuit got their loans... and defaulted.) The consequences of the terrible actions in 2008- from the bailouts to the giving of one private bank (the federal reserve) the power to forcibly merge other banks (without regard to conflict of interest-- say one of the owners of the federal reserve wants to buy a smaller bank, he can just use the fed to force it to merge with him on terms he agrees to.... no way this will be abused, right?) .... these consequences are still playing out and have made the game much more dangerous than 2008. One thing I've noticed is that the "Black Swan" events-- like 2008 which people said "Tehre's no way you could see this coming" despite the popular sentiment in 2006 being "there's no way there's a housing bubble!" showing that people did, in fact, see it coming-- really are pretty predictable at least in terms of risk. And the risk of a Black Swan has only been going up given the past 3 decades of irresponsible governance (under congresses and presidents from both parties.) Don't look to VCs for economic perspective. They don't have it. All they know how to do is raise funds and collect a carry. Don't look to political hacks like "A housing bubble would be good for the economy" Paul Krugman, or any politicians.... look to actual economists. (Even Keyenes disagrees with the monetary policy we've been following for these decades, even though the politicians claim its his idea. IT isn't, it's not what he said at all.) The current bubble is the dollar, and they can't raise interest rates without popping it. Whether they intend to pop it I don't know.
- acconrad 11y ago
  > Don't look to VCs for economic perspective. They don't have it. All they know how to do is raise funds and collect a carry. Don't look to political hacks like "A housing bubble would be good for the economy" Paul Krugman, or any politicians.... look to actual economists. Agreed. I really like what's happening over at Calculated Risk (http://www.calculatedriskblog.com/ http://www.calculatedriskblog.com/). Bill seems to do a good job at taking macroeconomic information and distilling it into something understandable. The Fed has not shown any real interest in wanting to hurt this delicate (and booming) economy with an end to QE or by raising rates. But most analysts seem to point to Oct 2015 to mid 2016 as the point when rates will rise. But we also said that about early 2015 last year, so who knows what will happen, until it actually happens!
- vezzy-fnord 11y ago
  Unlike what politicians would want you to believe, Economics is a science and the consequences of actions in economics are pretty close to those in physics. Huh. Austrian economics argues the exact opposite, which is generally correct for most things at a higher level than chemistry, especially something as stochastic as economic modeling. One thing I've noticed is that the "Black Swan" events-- like 2008 which people said "Tehre's no way you could see this coming" despite the popular sentiment in 2006 being "there's no way there's a housing bubble!" showing that people did, in fact, see it coming-- really are pretty predictable at least in terms of risk. Austrian economists are wary of making predictions in general, which goes hand in hand with their overall distaste for econometrics. Not to say that the more naive ones don't yell about incoming collapse all the time. Even Keyenes disagrees with the monetary policy we've been following for these decades, even though the politicians claim its his idea. IT isn't, it's not what he said at all. We've come a long way since Keynes. Like we've debunked the marginal propensity to consume since then, for instance, despite the fact that most laymen and politicians keep making the same fallacy.
  - TheOtherHobbes 11y ago
    A lot of economists will be very surprised to hear that MPC has been "debunked." Last time I looked it's still considered a mainstream idea - mainstream enough to appear in introductory econ texts, anyway. Steve Keen makes the - IMO interesting - point that there are different kinds of consumption, and lumping consumption under a single Benthamite label is a gross oversimplification. But MPC is a simple measure of economic freedom. It's not what you spend your extra earnings on that matters, because - unless you're burning banknotes - it all goes towards increasing GDP anyway. Where things get fuzzy is a lack of appreciation for the fact that spending measures current economic activity, but savings, credit, and investment all measure faith in future economic activity. Because faith is based on an irrational thing called "sentiment", you have a huge chunk of the economy based on hope, fear, and desire - which is maybe not the most practical and useful way to make the economy work for everyone.
jkot 11y ago
Party is over.
stephengillie 11y ago
Does this mean that insane valuations (like Uber) will either get reduced, or start to make sense?
- abfan1127 11y ago
  Is this less affecting valuations and more affecting acquisitions using debt-issued bonds to fund the process. So many of the big deals were funded by cash and debt. These types of deals will disappear (IMO).
- tomjen3 11y ago
  It may take a dive, but I doubt it will be by that much - Uber makes money which is always a good argument for having a high price. That said I seem to remember Sequia talking about the party being over years ago and utterly nothing came of that.
  - ekanes 11y ago
    Link to Sequoia's presentation: http://www.scribd.com/doc/73886447/R-I-P-Good-Times-10-7-08-Final http://www.scribd.com/doc/73886447/R-I-P-Good-Times-10-7-08-...
- cgearhart 11y ago
  Not likely. High startup valuations are about protecting previous investors' money. We may see fewer deals or earlier IPOs as some of the funding for startups finds other investment opportunities, but the changing rate shouldn't fundamentally alter investors' desire to protect their investment.
snowwrestler 11y ago
As Fred says, the Fed has been telegraphing their rate increases for a while, which means that the market has largely priced them in. For example the market basically did not react at all to Yellen's press conference last week. The whole point of the Fed deciding to raise interest rates is that it means that the Fed believes that the economy is strong enough to start removing fiscal support. If they are right, then there should actually be not a huge effect on valuations.
- guiomie 11y ago
  " [...] which means that the market has largely priced them in." ... In theory yah.
phkahler 11y ago
They will raise rates very slowly this time. Greenspan even admitted that jerking the rates up was partly to blame for the 2008 crisis. They put rates near zero, then jacked them up a few years later. Then had an oh-shit moment and dropped them to zero. https://en.wikipedia.org/wiki/Federal_funds_rate#/media/File:Federal_Funds_Rate_1954_thru_2009_effective.svg https://en.wikipedia.org/wiki/Federal_funds_rate#/media/File... Mortgage rates follow but don't match the fed funds rate. Home prices vary inversely with interest rates. Falling rates generally mean rising home prices. So with rates near zero, there is only one thing for housing prices to do - fall when they raise rates. The only hope is that inflation will balance the fall in home prices caused by raising the rates. Otherwise, prepare for crisis part II.
- AnimalMuppet 11y ago
  Hopefully not - there's a lot less leverage and a lot less flippers, and house prices are more sane. (At least, I think they're more sane, but I don't have data to prove it.)
- cgearhart 11y ago
  Another major concern in 2008 was how little equity homeowners had in their property. If they had financed 100% of their loan, had exotic loans, or paid interest only, etc., then they weren't actually losing any money to walk away from a property. We're now seven years on, which means a hypothetical homeowner who financed 100% in 2008 may now hold about a 15% equity stake. That home could lose 15% of its value and the owner could still sell it to pay off their loan.
  - toomuchtodo 11y ago
    http://www.calculatedriskblog.com/2015/03/zillow-negative-equity-rate-unchanged.html http://www.calculatedriskblog.com/2015/03/zillow-negative-eq... "In the fourth quarter of 2014, the U.S. negative equity rate – the percentage of all homeowners with a mortgage that are underwater, owing more on their home than it is worth – stood at 16.9 percent, unchanged from the third quarter. Negative equity had fallen quarter-over-quarter for ten straight quarters, or two-and-a-half years, prior to flattening out between Q3 and Q4 of last year. While this may not seem very notable (after all, overall negative equity didn’t go up, merely flattened out), this represents a major turning point in the housing market. The days in which rapid and fairly uniform home value appreciation contributed to steep drops in negative equity are behind us, and a new normal has arrived. Negative equity, while it may still fall in fits and spurts, is decidedly here to stay, and will impact the market for years to come. "
tomcam 11y ago
Not addressed: that artificially low interest rates have a ruinous effect on savings, and therefore affect old people disproportionately.

28 points by dirtyaura 11y ago

MCRed 11y ago

If you really want to understand what's happening in the economy, with advance notice, read http://mises.org http://mises.org. That site has hundreds of economics books for free (great reading!) but also regular news articles. For instance, in 2001, before 9/11 (IIRC) there was an article there about how as a response to the DotCom boom the low interest rates plus changes in the CRA would be causing a housing boom and bubble over the next decade. In 2001 there was no boom, and after 9/11 the economy was bad. But that advice proved true, and gave me 6 years to time to invest based on the housing bubble hypothesis (alas I never found a way to short houses and wasn't the kind of person who could have bought CDOs against the foolishness) ... and I got out of the market very near its peak in 2007. Unlike what politicians would want you to believe, Economics is a science and the consequences of actions in economics are pretty close to those in physics. They can pretend like one president or another is responsible. (the Housing Bubble was the result of the actions of Clinton and Bush, and actually Obama who was a lawyer in the lawsuit that claimed "lending only to people who can afford to repay the loans is racist"... and like economics predicted (That banks want money and will disregard race) in the end it turned out that they weren't being racist but were lending based on likelihood of repayment... and the winners in Obama's class action lawsuit got their loans... and defaulted.) The consequences of the terrible actions in 2008- from the bailouts to the giving of one private bank (the federal reserve) the power to forcibly merge other banks (without regard to conflict of interest-- say one of the owners of the federal reserve wants to buy a smaller bank, he can just use the fed to force it to merge with him on terms he agrees to.... no way this will be abused, right?) .... these consequences are still playing out and have made the game much more dangerous than 2008. One thing I've noticed is that the "Black Swan" events-- like 2008 which people said "Tehre's no way you could see this coming" despite the popular sentiment in 2006 being "there's no way there's a housing bubble!" showing that people did, in fact, see it coming-- really are pretty predictable at least in terms of risk. And the risk of a Black Swan has only been going up given the past 3 decades of irresponsible governance (under congresses and presidents from both parties.) Don't look to VCs for economic perspective. They don't have it. All they know how to do is raise funds and collect a carry. Don't look to political hacks like "A housing bubble would be good for the economy" Paul Krugman, or any politicians.... look to actual economists. (Even Keyenes disagrees with the monetary policy we've been following for these decades, even though the politicians claim its his idea. IT isn't, it's not what he said at all.) The current bubble is the dollar, and they can't raise interest rates without popping it. Whether they intend to pop it I don't know.

acconrad 11y ago
> Don't look to VCs for economic perspective. They don't have it. All they know how to do is raise funds and collect a carry. Don't look to political hacks like "A housing bubble would be good for the economy" Paul Krugman, or any politicians.... look to actual economists. Agreed. I really like what's happening over at Calculated Risk (http://www.calculatedriskblog.com/ http://www.calculatedriskblog.com/). Bill seems to do a good job at taking macroeconomic information and distilling it into something understandable. The Fed has not shown any real interest in wanting to hurt this delicate (and booming) economy with an end to QE or by raising rates. But most analysts seem to point to Oct 2015 to mid 2016 as the point when rates will rise. But we also said that about early 2015 last year, so who knows what will happen, until it actually happens!
vezzy-fnord 11y ago
Unlike what politicians would want you to believe, Economics is a science and the consequences of actions in economics are pretty close to those in physics. Huh. Austrian economics argues the exact opposite, which is generally correct for most things at a higher level than chemistry, especially something as stochastic as economic modeling. One thing I've noticed is that the "Black Swan" events-- like 2008 which people said "Tehre's no way you could see this coming" despite the popular sentiment in 2006 being "there's no way there's a housing bubble!" showing that people did, in fact, see it coming-- really are pretty predictable at least in terms of risk. Austrian economists are wary of making predictions in general, which goes hand in hand with their overall distaste for econometrics. Not to say that the more naive ones don't yell about incoming collapse all the time. Even Keyenes disagrees with the monetary policy we've been following for these decades, even though the politicians claim its his idea. IT isn't, it's not what he said at all. We've come a long way since Keynes. Like we've debunked the marginal propensity to consume since then, for instance, despite the fact that most laymen and politicians keep making the same fallacy.
- TheOtherHobbes 11y ago
  A lot of economists will be very surprised to hear that MPC has been "debunked." Last time I looked it's still considered a mainstream idea - mainstream enough to appear in introductory econ texts, anyway. Steve Keen makes the - IMO interesting - point that there are different kinds of consumption, and lumping consumption under a single Benthamite label is a gross oversimplification. But MPC is a simple measure of economic freedom. It's not what you spend your extra earnings on that matters, because - unless you're burning banknotes - it all goes towards increasing GDP anyway. Where things get fuzzy is a lack of appreciation for the fact that spending measures current economic activity, but savings, credit, and investment all measure faith in future economic activity. Because faith is based on an irrational thing called "sentiment", you have a huge chunk of the economy based on hope, fear, and desire - which is maybe not the most practical and useful way to make the economy work for everyone.

jkot 11y ago

Party is over.

stephengillie 11y ago

Does this mean that insane valuations (like Uber) will either get reduced, or start to make sense?

abfan1127 11y ago
Is this less affecting valuations and more affecting acquisitions using debt-issued bonds to fund the process. So many of the big deals were funded by cash and debt. These types of deals will disappear (IMO).
tomjen3 11y ago
It may take a dive, but I doubt it will be by that much - Uber makes money which is always a good argument for having a high price. That said I seem to remember Sequia talking about the party being over years ago and utterly nothing came of that.
- ekanes 11y ago
  Link to Sequoia's presentation: http://www.scribd.com/doc/73886447/R-I-P-Good-Times-10-7-08-Final http://www.scribd.com/doc/73886447/R-I-P-Good-Times-10-7-08-...
cgearhart 11y ago
Not likely. High startup valuations are about protecting previous investors' money. We may see fewer deals or earlier IPOs as some of the funding for startups finds other investment opportunities, but the changing rate shouldn't fundamentally alter investors' desire to protect their investment.

snowwrestler 11y ago

As Fred says, the Fed has been telegraphing their rate increases for a while, which means that the market has largely priced them in. For example the market basically did not react at all to Yellen's press conference last week. The whole point of the Fed deciding to raise interest rates is that it means that the Fed believes that the economy is strong enough to start removing fiscal support. If they are right, then there should actually be not a huge effect on valuations.

guiomie 11y ago
" [...] which means that the market has largely priced them in." ... In theory yah.

phkahler 11y ago

They will raise rates very slowly this time. Greenspan even admitted that jerking the rates up was partly to blame for the 2008 crisis. They put rates near zero, then jacked them up a few years later. Then had an oh-shit moment and dropped them to zero. https://en.wikipedia.org/wiki/Federal_funds_rate#/media/File:Federal_Funds_Rate_1954_thru_2009_effective.svg https://en.wikipedia.org/wiki/Federal_funds_rate#/media/File... Mortgage rates follow but don't match the fed funds rate. Home prices vary inversely with interest rates. Falling rates generally mean rising home prices. So with rates near zero, there is only one thing for housing prices to do - fall when they raise rates. The only hope is that inflation will balance the fall in home prices caused by raising the rates. Otherwise, prepare for crisis part II.

AnimalMuppet 11y ago
Hopefully not - there's a lot less leverage and a lot less flippers, and house prices are more sane. (At least, I think they're more sane, but I don't have data to prove it.)
cgearhart 11y ago
Another major concern in 2008 was how little equity homeowners had in their property. If they had financed 100% of their loan, had exotic loans, or paid interest only, etc., then they weren't actually losing any money to walk away from a property. We're now seven years on, which means a hypothetical homeowner who financed 100% in 2008 may now hold about a 15% equity stake. That home could lose 15% of its value and the owner could still sell it to pay off their loan.
- toomuchtodo 11y ago
  http://www.calculatedriskblog.com/2015/03/zillow-negative-equity-rate-unchanged.html http://www.calculatedriskblog.com/2015/03/zillow-negative-eq... "In the fourth quarter of 2014, the U.S. negative equity rate – the percentage of all homeowners with a mortgage that are underwater, owing more on their home than it is worth – stood at 16.9 percent, unchanged from the third quarter. Negative equity had fallen quarter-over-quarter for ten straight quarters, or two-and-a-half years, prior to flattening out between Q3 and Q4 of last year. While this may not seem very notable (after all, overall negative equity didn’t go up, merely flattened out), this represents a major turning point in the housing market. The days in which rapid and fairly uniform home value appreciation contributed to steep drops in negative equity are behind us, and a new normal has arrived. Negative equity, while it may still fall in fits and spurts, is decidedly here to stay, and will impact the market for years to come. "

tomcam 11y ago

Not addressed: that artificially low interest rates have a ruinous effect on savings, and therefore affect old people disproportionately.