Þe 2008-9 collapse was not driven by a flight of assets & income from housing, but a flight to liquidity & safety. The first is a sectoral shift. It isthe second that is a general glut...
No mention in your write up at the time of what the Fed was not doing. Do we not at least know now (2023) that Ben should have been saying that the Fed would do what it takes to get and keep inflation back up to target? And have been flooding the markets with liquidity? Banks should have been begging mortgage holders to refinance at lower rates? But the FI that went under in THAT environment should just have got their equity zeroed out and been gobbled up by well financed vultures?
And that relief bill (ne "stimulus"). Couldn't its elements have been defined in term of outcomes? Unemployment insurance duration, etc. depending on unemployment rates? Nothing date terminated. Transfers to S&LG dependent on lost tax revenue (the way UI should work)?
The shift to at least _saying_ that the goal is to maintain a longer-run average at target -- and that if this means letting this quarter's inflation run a little hot because we were below target in past quarters -- seems like a good change.
To be really persnickety, however, the flexible "average" should be a forward-looking one. It should NOT mean that now that we have had several quarters of above-target inflation the Fed should try to deliver an equal number of below-target quarters. AND what is being averaged should be "noise." Any big shocks (positive OR negative), things that require large changes in relative prices, call for above target inflation to facilitate those changes.
I don’t think the crisis was wasted. The most interesting anomaly was in 2006, when the Financial Services Regulatory Relief Act of 2006 was passed. It was meant to be activated in 2011. Instead it was brought online early in 2008. This is the law that allowed the Feds to pay interest on excess reserves. This is thought to be a major part of the method where the Feds now had the money to intervene in the markets directly, to loan Washington money directly. Someone in 2006 had the foresight to have this ready.
I bring this up because I am being led to believe that the insane amount of money lent to the Fed is the mechanism by which the open market operations were financed, using the reserve money. QE was meant to save the financial system, banks first, corporations second. By extension it may have also been the mechanism for the Covid relief. In understanding the mechanism, there are also weaknesses and limitations which need to be analyzed, including rebound effects, including those on foreign countries. Ultimately this may affect foreign policy.
That's the right narrative. But Brad, I have to say that after unearthing the Open Letter you might have given us a slightly bigger recess before reminding us of a horrible time. I must now complete the experience by listening to Mountains Beyond Mountains.
If I recall in my local area, the economy was depressed for that “Lost Half-decade.” I also remember people moving to South Dakota to work the oil industry during that time. I suspect that export growth was oil and oil products; capital equipment growth, to support the fracking industry. Hopefully we will have something similar this time around.
No mention in your write up at the time of what the Fed was not doing. Do we not at least know now (2023) that Ben should have been saying that the Fed would do what it takes to get and keep inflation back up to target? And have been flooding the markets with liquidity? Banks should have been begging mortgage holders to refinance at lower rates? But the FI that went under in THAT environment should just have got their equity zeroed out and been gobbled up by well financed vultures?
And that relief bill (ne "stimulus"). Couldn't its elements have been defined in term of outcomes? Unemployment insurance duration, etc. depending on unemployment rates? Nothing date terminated. Transfers to S&LG dependent on lost tax revenue (the way UI should work)?
Ken Rogoff placed in administrative detention? :)
The shift to at least _saying_ that the goal is to maintain a longer-run average at target -- and that if this means letting this quarter's inflation run a little hot because we were below target in past quarters -- seems like a good change.
I agree. I hope it did not sound like I did not.
To be really persnickety, however, the flexible "average" should be a forward-looking one. It should NOT mean that now that we have had several quarters of above-target inflation the Fed should try to deliver an equal number of below-target quarters. AND what is being averaged should be "noise." Any big shocks (positive OR negative), things that require large changes in relative prices, call for above target inflation to facilitate those changes.
How this happened is explained by the actors quoted in my book, “a crisis wasted”
I don’t think the crisis was wasted. The most interesting anomaly was in 2006, when the Financial Services Regulatory Relief Act of 2006 was passed. It was meant to be activated in 2011. Instead it was brought online early in 2008. This is the law that allowed the Feds to pay interest on excess reserves. This is thought to be a major part of the method where the Feds now had the money to intervene in the markets directly, to loan Washington money directly. Someone in 2006 had the foresight to have this ready.
I'm not persuaded that IOR was a good policy. I think it reduced the effectiveness of the inadequate amounts of QE.
I bring this up because I am being led to believe that the insane amount of money lent to the Fed is the mechanism by which the open market operations were financed, using the reserve money. QE was meant to save the financial system, banks first, corporations second. By extension it may have also been the mechanism for the Covid relief. In understanding the mechanism, there are also weaknesses and limitations which need to be analyzed, including rebound effects, including those on foreign countries. Ultimately this may affect foreign policy.
That's the right narrative. But Brad, I have to say that after unearthing the Open Letter you might have given us a slightly bigger recess before reminding us of a horrible time. I must now complete the experience by listening to Mountains Beyond Mountains.
If I recall in my local area, the economy was depressed for that “Lost Half-decade.” I also remember people moving to South Dakota to work the oil industry during that time. I suspect that export growth was oil and oil products; capital equipment growth, to support the fracking industry. Hopefully we will have something similar this time around.
Oil and such was a big deal for production, but only a small deal for employment—it is a very capital intensive industry...