This is a long read but worth it. I don't like to only complain but praise too, so good on the writer Christopher Leonard. The part about low interest rates causing a farm land bubble in Kansas was enlightening. I lived through the extreme interest rates of the late 70's and subsequent crash caused by the policies of Paul Volcker and it wasn't pretty, but then I was able to buy a house in the mid 80's at a decent interest rate.
Agree. It had an unusually clear explanation of how different types of bubbles are tied to Fed policies. Pointing out the effect of shifting of assets from poorer to richer segments of society was another interesting point in the article.
Hoenig's arguments are quite different from the "deficits don't matter" spiel of Krugman and others. Krugman's argument that we don't see ill effects of current policies could be just as much a failure of imagination as lack of data.
Krugman is nothing but an idiotic hack. He has been so consistently out of touch and wrong about everything that I almost consider him to be malicious. He just blatantly is a spinster for the democratic party, but hides behind his pedigree and pretends like his opinion is obviously correct. It's that classic snooty elitism, the grandstanding, the self-righteousness - the same things that alienate moderates from the democratic party.
Agree. Krugman is really good on pure economic questions like trade theory. Unfortunately he is a lot less trustworthy on issues where economics and current politics intersect, e.g., NYT opinion pieces. I read those with a fair degree of skepticism though he has produced a few that were economic gems.
Well according to the article it destroyed a lot of banks when asset prices stopped rising.
> “You could see that no one anticipated that adjustment, even after Volcker began to address inflation. They didn’t think it would happen to them,” Hoenig recalled. Overall, more than 1,600 banks failed between 1980 and 1994, the worst failure rate since Depression.
I had not personally made that connection to S&L failures but getting out of a bubble has to impose costs to somebody.
This glosses over the outright fraud within the banking industry that was at the heart of the S&L crisis. Without the fraud there would have been enough assets and financial incentive to consolidate instead of liquidations. The Fed policies only had the effect of forcing the industry to account for the rot within.
higher prices for gas, goods and automobiles being fueled by the Fed’s unprecedented money printing programs
Really? These are not caused by low interest rates. But the current housing prices are caused by low interest rates, and that's not even discussed in the article.
I think it’s kind of silly to blame gas prices on Fed action since 2008-2011. Even in nominal terms, gas prices are lower now than the peaks of that time, and for much of the time, gas prices were FAR lower.
Inflation was low for over a decade. We hit a huge pandemic and inflation ticked up. Let’s not crown him vindicated about inflation like a clock that’s right one or twice a day. He has a decade of low inflation to answer for first, and countless examples of monetary austerity giving rise to recessions in other countries as counterfactual.
The article makes a point that Hoenig did repeatedly not mentioned inflation. Instead his main point is about the inequality as well as asset bubbles QE would cause.
I think he is right, also about the point that you cannot walk back without causing massive pain in the economy. I too think central banks have painted themselves in a corner, as when central banks drop even a slight hint of changing course, panic in the markets follows.
He mentions that asset prices (primarily stocks, but also housing) was rising during the earlier portion of the last decade, but I'm curious to know what is take would be on why we didn't see a lot of inflation outside of those assets until the supply chain issues due to covid popped up. Perhaps the supply chain issues were the match that lit the inflation fire?
I think the supply chain problems are a separate issue. The reason that the stocks-and-housing asset inflation hasn't spilled over into the monetary economy yet is that not much of it has been sold so far. God help us when the retirees will have to cash out.
Inflation of assets and goods and services are two completely different phenomenon's with different causes.
Inflation of assets are caused by lowered by interest rates, they don't spiral and they don't effect the cost of living. Just a straightforward result of net present value calculations.
Inflation of goods is caused by a supply shock or too much demand (too much spending chasing two few resources).
Everyone needs a roof over the head, and the proportion of household income that went into housing has been steadily going up since the 1980's. So it's not correct that asset inflation does not affect everyday cost of living.
We need to disentangle housing the good the thing you pay rent for, from a house an asset that produces housing.
Why would low interest rates cause rent to increase? Intuitively I would think that low interest rates would make it cheaper to fund the creation of new housing lowering rents.
I imagine the increase in rents is because we've made it more difficult to build things because of zoning, permitting etc..., and we're building better houses that are more insulated, fire proof, more outlets, etc...
We also haven't made builders that much more productive over the last 40 years.
Housing prices went up 20 % between 2016 and now because zoning became more difficult? That doesn't compute.
Clearing price is set by the maximum payment mortgage a household can afford, i.e. principal + interest. If the interest rate is lower, that results in a higher cash price, and that's what we see.
Of course politicians at all levels and households who have already are uninterested in seeing a change to the status quo, so no surprise that there are supply constraints as well. All that started when housing became a popular investment vehicle sometimes in the late 1970's.
The fact that entry-level housing is extra scarce because it's less profitable for the builder than a doctor's palace doesn't help either.
That's households that are priced out of a mortgage, so they have no alternative but to rent. In emergencies you can go to a food bank, but you absolutely need a roof over the head.
But so is the supply/demand curve. Housing supply is regulated by zoning and cannot freely increase with the changing market, and housing demand increased due to many Millennials reaching family and home buying age.
Those are both also factors, not only interest rates.
> Inflation of goods is caused by a supply shock or too much demand (too much spending chasing two few resources).
It was my understanding that increase in the money supply caused severe inflation in Spain during the 1500s. [0] If true how does that square with the argument that goods inflation is from a supply shock or excess demand?
There was also population growth as well as an increase in the velocity of money, compounded by the fact that the rural nobility was on fixed incomes, because taxes and levies were not adjusted to inflation. The inflation rate was 2 % or so, completely manageable with contemporary approaches.
The money supply doesn't directly effect inflation. The money supply causes an increase in demand which triggers inflation.
If you printed 10 trillion dollars and shot it into orbit around the Sun prices wouldn't change. People have to spend it creating increased demand. This is one of the reasons quantitative easing had little effect. They printed a bunch of money but it just sat in banks and was never spent.
We were seeing these issues before CO-VID - when the employment rate is over-heating and the inflation rate is ticking up, the Fed takes on their dual mandate and starts raising rates. The Fed began raising their rate in 2016 topping out in mid 2019. This recession was predicated based on the yield curve of that 2019 top. This latest recession was interesting because the Fed and Congress did such a good job in handling it that coming out of it the job market was still booming, unlike most others that allow the inflation rate to cool down with many losing their jobs.
When new money is created, it can be spent on consumption goods, creating inflation, or it can be spent on investment goods, causing a change in the velocity of money.
Smart money will make a guess as to which one will soon be more scarce in the near future, money or assets. When the money supply is increasing at a rate greater than the rate of nominal incomes, assets will tend to increase. When the reverse is true, currencies tend to increase, so you will sell your assets while they are still worth something.
In our current post-gold standard environment when the Fed lowers interest rates below the natural rate of a stable velocity, this causes the velocity to drop, and therefore it's a great time to speculate on assets. It's well understood therefore that when new money is created it does not initially create any inflation, but as this article argues, that inflation arrives with a time delay.
When the Fed raises the interest rate above the natural rate of a stable velocity, the money supply will now rise slower than nominal income and that makes the crash an inevitability. This cycle the Fed dot plot is planning for this to happen around the end of the year 2022, and then it takes about 6 months after the yield curve inversion for the actual crash to occur.
The Fed's mandate "so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates"
It does not mention asset price bubbles, or inequality.
> stoke dangerous asset bubbles
Maybe low interest rates increase the risk of asset bubbles, but there were plenty of asset bubbles when interest rates were higher than today. But are we willing to accept less than full employment for the risk of maybe causing an asset bubble that will lead to less than full employment? It's trading something bad today for a risk of something bad tomorrow. Seems like a poor trade to me.
> enrich the biggest banks over everyone else
Investopedia doesn't think so, but who cares if banks get rich if it means we have full employment.
> that would deepen income inequality
There is plenty of evidence that full employment helps reduce income inequality. Anecdotally the recent shortage of employees means I'm seeing gas stations advertising $15/hr instead of the $8 they used to pay. Meanwhile everyone I know who was making $100k didn't see a 100% raise.
Research backs up that full employment reduces inequality [1].
Full employment is objectively impossible under capitalism. If nothing else, that is what the interest rate is for regulating. It’s to ensure full employment never happens so that capital will always have a surplus labor market to barter with.
That quote about maximum employment, stable prices, and moderate interest rates caught my eye. For years people have spoken about the Fed's 'dual mandate'. That third part about moderate interest rates seems to be fictionalized.
The main problem with the 70s comparison and the reason the inflation subsided eventually, other than the Volcker Rule, is because the U.S. still had a strong reserve currency after. That will probably change this time and unless the U.S. can find a new China to bring into the financial system... The inflation will likely be getting worse.
The big question is that after the fed raises rates and markets crash some point later, will the fed go right back to easy money or keep rates high? Everybody seems to be assuming the former...
The paragraph that struck me the hardest in this was the following:
"To execute quantitative easing, a trader at the New York Fed would call up one of the primary dealers, like JPMorgan Chase, and offer to buy $8 billion worth of Treasury bonds from the bank. JPMorgan would sell the Treasury bonds to the Fed trader. Then the Fed trader would hit a few keys and tell the Morgan banker to look inside their reserve account. Voila. The Fed had instantly created $8 billion out of thin air, in the reserve account, to complete the purchase. Morgan could, in turn, use this money to buy assets in the wider marketplace."
I still need to research what this means but is it essentially saying that the fed is just giving these large banks money for free under the assumption they will buy assets to pump the market? It seems crazy that the fed is actively selecting winning institutions this way.
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[ 2.8 ms ] story [ 89.6 ms ] threadEdit: Volcker
Hoenig's arguments are quite different from the "deficits don't matter" spiel of Krugman and others. Krugman's argument that we don't see ill effects of current policies could be just as much a failure of imagination as lack of data.
https://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Econom...
> “You could see that no one anticipated that adjustment, even after Volcker began to address inflation. They didn’t think it would happen to them,” Hoenig recalled. Overall, more than 1,600 banks failed between 1980 and 1994, the worst failure rate since Depression.
I had not personally made that connection to S&L failures but getting out of a bubble has to impose costs to somebody.
Really? These are not caused by low interest rates. But the current housing prices are caused by low interest rates, and that's not even discussed in the article.
But the government is missing in action.
Inflation was low for over a decade. We hit a huge pandemic and inflation ticked up. Let’s not crown him vindicated about inflation like a clock that’s right one or twice a day. He has a decade of low inflation to answer for first, and countless examples of monetary austerity giving rise to recessions in other countries as counterfactual.
I think he is right, also about the point that you cannot walk back without causing massive pain in the economy. I too think central banks have painted themselves in a corner, as when central banks drop even a slight hint of changing course, panic in the markets follows.
Inflation of assets are caused by lowered by interest rates, they don't spiral and they don't effect the cost of living. Just a straightforward result of net present value calculations.
Inflation of goods is caused by a supply shock or too much demand (too much spending chasing two few resources).
Why would low interest rates cause rent to increase? Intuitively I would think that low interest rates would make it cheaper to fund the creation of new housing lowering rents.
I imagine the increase in rents is because we've made it more difficult to build things because of zoning, permitting etc..., and we're building better houses that are more insulated, fire proof, more outlets, etc...
We also haven't made builders that much more productive over the last 40 years.
Clearing price is set by the maximum payment mortgage a household can afford, i.e. principal + interest. If the interest rate is lower, that results in a higher cash price, and that's what we see.
Of course politicians at all levels and households who have already are uninterested in seeing a change to the status quo, so no surprise that there are supply constraints as well. All that started when housing became a popular investment vehicle sometimes in the late 1970's.
The fact that entry-level housing is extra scarce because it's less profitable for the builder than a doctor's palace doesn't help either.
But what is your theory for the mechanism by which lower interest rates causes an increase in the price of rent?
But so is the supply/demand curve. Housing supply is regulated by zoning and cannot freely increase with the changing market, and housing demand increased due to many Millennials reaching family and home buying age.
Those are both also factors, not only interest rates.
It was my understanding that increase in the money supply caused severe inflation in Spain during the 1500s. [0] If true how does that square with the argument that goods inflation is from a supply shock or excess demand?
[0] https://en.wikipedia.org/wiki/Price_revolution#Spain
If you printed 10 trillion dollars and shot it into orbit around the Sun prices wouldn't change. People have to spend it creating increased demand. This is one of the reasons quantitative easing had little effect. They printed a bunch of money but it just sat in banks and was never spent.
When new money is created, it can be spent on consumption goods, creating inflation, or it can be spent on investment goods, causing a change in the velocity of money.
Smart money will make a guess as to which one will soon be more scarce in the near future, money or assets. When the money supply is increasing at a rate greater than the rate of nominal incomes, assets will tend to increase. When the reverse is true, currencies tend to increase, so you will sell your assets while they are still worth something.
In our current post-gold standard environment when the Fed lowers interest rates below the natural rate of a stable velocity, this causes the velocity to drop, and therefore it's a great time to speculate on assets. It's well understood therefore that when new money is created it does not initially create any inflation, but as this article argues, that inflation arrives with a time delay.
When the Fed raises the interest rate above the natural rate of a stable velocity, the money supply will now rise slower than nominal income and that makes the crash an inevitability. This cycle the Fed dot plot is planning for this to happen around the end of the year 2022, and then it takes about 6 months after the yield curve inversion for the actual crash to occur.
It does not mention asset price bubbles, or inequality.
> stoke dangerous asset bubbles
Maybe low interest rates increase the risk of asset bubbles, but there were plenty of asset bubbles when interest rates were higher than today. But are we willing to accept less than full employment for the risk of maybe causing an asset bubble that will lead to less than full employment? It's trading something bad today for a risk of something bad tomorrow. Seems like a poor trade to me.
> enrich the biggest banks over everyone else
Investopedia doesn't think so, but who cares if banks get rich if it means we have full employment.
> that would deepen income inequality
There is plenty of evidence that full employment helps reduce income inequality. Anecdotally the recent shortage of employees means I'm seeing gas stations advertising $15/hr instead of the $8 they used to pay. Meanwhile everyone I know who was making $100k didn't see a 100% raise.
Research backs up that full employment reduces inequality [1].
[0] https://www.investopedia.com/ask/answers/041015/how-do-inter... [1] https://equitablegrowth.org/wages-full-employment-reducing-i...
The Fed branches still call it a dual mandate.
https://www.chicagofed.org/research/dual-mandate/dual-mandat...
'... to foster economic conditions that achieve both stable prices and maximum sustainable employment.'
I still need to research what this means but is it essentially saying that the fed is just giving these large banks money for free under the assumption they will buy assets to pump the market? It seems crazy that the fed is actively selecting winning institutions this way.