Originally posted by: rchiu
Originally posted by: PC Surgeon
Originally posted by: Lemon law
The more I read of the Alan Greenspan methods, the more I suspect its just more smoke and mirrors air guitar playing. Alan Greenspan got out before the merry go round stopped. Ben may not be so lucky.
Anyone with half sense would know that it was during Greenspans tenure was the beginning of the fall. Staving off recession by way of increasing money supply. We needed a recession to set it all straight and now Bernanke is just going to be the patsy. Most Americans won't know it, the government will tell them some shit to keep their eye off of the true reason.
So the Fed is suppose to do nothing when there is a recession? Like in 1929 when there was a credit crunch and they sit there did nothing and we all know what happened after that?
The Fed's responsibility is the stability of the overall economy, it's laughable to blame the chairman and the Fed for the problem in one industry. Since when is Fed suppose to regulate the real estate industry? If the Fed created excessive money supply, there would have been lots of inflation. Can you tell us what is the inflation over Greenspan's tenure?
There is a lot of debate as to the extent the Fed should play in manipulating the economy. First and foremost, their duty should be to provide liquidity to the banking system, supporting it when liquidity is scarce. Second, a central bank should protect the currency. Finally, it should prevent panics.
However, the biggest thing it has done recently is keep us out of recession. If you grow faster than is naturally "normal", then you need to have either a period of stagnation, or a period of recession to bring your economy back to the "mean". This regression is healthy and shouldn't be avoided.
If you keep your economy growing forever, you can lead to rampant inflation, or other difficulties.
Now, I do not think the Fed could really have prevented the current problems. It wasn't their fault that trillions of dollars flooded from the equity markets to the debt markets, driving long-term rates lower. That isn't to say that they couldn't have used cooling language or raised rates. However, they still had to contend with a tight liquidity situation post 9/11 and a slow-growth economy. If they had raised rates it could have shaken the market and dropped us into a severe recession.
Personally, I think the dollar was too overvalued and should have gone down anyway. The carry-trade kept it too high and flooded our markets with cheap goods, while making our goods too expensive. Now that's reversing, we should see some benefit.
However, the key component in that situation is China. Since their currency is still, more or less, pegged to ours, their goods get cheaper still. But if our economy falters, their economy stops growing, their inflation jacks up, they will have to either revalue their currency, or face peasant revolt.
This isn't a black/white world. I completely disagree with the Fed manipulating the economy for the long-term, since it's shown to be disasterous. The flip side of that is that doing nothing, in this situation, would seize the markets up and cause massive problems, perhaps a liquidity crunch/spiral where we'd never be able to get out of it. I do think they should have tried to cool the debt market in 2004 by raising rates faster. Would it have fixed the housing bubble? No, but it would have tempered it somewhat.
It's easy to judge the Fed in hindsight, or from the sidelines. However, once you look inside the financial markets, it's pretty evident that the markets needed liquidity.
As I have continually pointed out, there are AAA asset backed bonds out there with solid collateral, solid servicer/sellers, very good structures, that are pricing *WAY* over what they should be. There was a 10-year AAA credit card bond that priced at 115 over swaps. That's a *massive* movement from the 5 bps over swaps it would have cost last year.
It's a staggering thing to see and really worries a lot of people. From that perspective I am glad the Fed dropped rates.
As long as CPI (not core) stays moderated, the deflationary pressures of a recession, plus US goods getting cheaper, should create a good situation for this economy to grow pretty quickly out of a recession.
