Home > Uncategorized > The Fed’s excuse makers still in high gear

The Fed’s excuse makers still in high gear

from Dean Baker

Remember when then Federal Reserve Board Chair Ben Bernanke assured the public that the problems in the financial system will be restricted to the subprime market? This one ranks, along with some comments from and about Alan Greenspan, as one of the worst economic predictions of all time. In other words, the folks at the Fed really missed it.

This is worth remembering because it seems that the Fed is trying to get the excuse making going in advance for the next economic crisis. The NYT reported on a Fed conference where they expressed skepticism as to whether they could stop the next crisis.

There are a range of views presented, not all of them silly. (Using interest rates as the primary tool against bubbles is not a good strategy.) However the idea that the Fed is helpless against bubbles looks like some serious lowering of expectations.

The distortions created by the housing bubble were easy to see by anyone with open eyes. Residential construction as a share of GDP was hitting record levels even as demographics would have suggested the opposite. (Baby boomers were retiring or at least downsizing.) Consumption was hitting record highs as a share of disposable income, driven by housing bubble wealth. House prices had surged by 70 percent above inflation, after tracking the overall inflation rate for the prior century. And the bad loans were there en masse for anyone who cared to notice.

The Fed has a variety of tools but the most simple one is simply talking about a bubble. The financial markets will not ignore information (not a mumbled “irrational exuberance”) from the Fed as they showed in response to Fed Chair Janet Yellen’s comments about bubbles in the social media and biotech sectors.

There is no reason that the Fed should not have been issuing clear warnings (i.e. massive quantities of research) documenting the bubble from 2002 onward. The only cost to the Fed is a few researchers time, the potential savings are in the trillions. That seems a no-brainer. The Fed should have also been using its regulatory power to curb the issuance and sale of bad mortgages, but information is a good place to start.

Also, it is not plausible for an organization that argues an inflation target is important to say that information from the Fed has no impact on markets. It obviously believes otherwise.

  1. October 6, 2015 at 1:35 pm

    The price for junk cars has dropped to $50, a rebound from a brief low of 25. The high was about $200, briefly.

    The junk car price collapse was not so great in 2008. I didn’t write it down but I believe the bottom was about $100 in 2008/09.

  2. BC
    October 7, 2015 at 5:09 am

    Baker writes as though “the folks at the Fed” are paid to see bubbles or systemic financial risk; they are most certainly not. The principal officials are political appointees paid to run political cover for the TBTE banks’ (the Rockefeller-Rothschild int’l banking syndicates’) license to lever up and steal us all blind and saddle the mass public with unpayable debts to cover the banksters’ losses from their criminal financial activities.

    Yes, I know, Baker is much too mainstream and vested in the system to put it so plainly, but someone has to say it.

    BTW, Baker is not telling us that another bubble has formed (and is beginning to deflate) in real estate since 2012-13, which is as big as the one in 2004-07 vs. real wages and salaries per capita.

    Moreover, the total equity market cap reached similarly bubbly share of GDP as in 1999-2000 and above than of 2007.

    So, apart from Shiller hinting at the obvious bubbles in real estate and housing, few, if any, among the mainstream, Establishment eCONomists are telling us the truth about the many bubbles (some having begun to deflate) EVERYWHERE.

    • October 7, 2015 at 4:22 pm

      The price of junk cars for the chipper has dropped to $50 from near 200. This is a larger swing than 2008-09.

  3. BC
    October 7, 2015 at 6:02 pm

    Garrett, point noted and confirmed. I recently heard from someone that some junk yards are no longer even taking cars over ten years old, and they are now restricting the models they accept for cars tens years old or newer.

    Evidence of an oversupply of even junk (albeit costly junk from beginning to end): deflation.

    • October 7, 2015 at 9:38 pm

      These junk cars go into a gigantic chipper were they are reduced to spewed out grey chunks in about two seconds. I assume the next step is ore train cars and then an ore ship to China. (Although I don’t now the destination as a fact).

      An economic discussion that can establish a way to shrink the economic throughput while maintaining quality of life is the riddle that needs solving.

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