"After eight plus years of ZIRP, the Fed took its first baby step towards rate “normalization” in December. Rather than accept that capital markets will need to – sooner or later – re-price themselves to “normal,” the Fed’s response to Q1’s equity and credit market volatility was cringe worthy. January’s clear guidance that rates would be heading higher was replaced with Yellen’s March statement that from now on the Fed’s guidance would be market dependent. Sorry, but that is not “guidance” – it is all but a confession that the Fed, having missed its off-ramp to raise rates for this cycle, no longer knows whether rates should go up, down, or sideways. The Fed has painted itself into a corner, and knows it." Consider the above quote from the Guru: This is stuff we have all heard, in different guises, a thousand times. Frankly it doesn't offer much evidence that the Guru has any more insight than the Fed, and apparently a lot less. Would the Guru have preferred that the Fed had ignored "market conditions" and pressed ahead with further rate increases? If the Fed has "painted themselves into a corner", as the Guru claims, why not wait until the paint dries and then tip toe out? The suggestion that the Fed is floundering and does not know what it is doing is absurd, considering that the Fed just engineered a brilliant rescue of the developed world's banking system, and have become the model for central banking around the world. This long-winded piece is just more bullshit. It is far too general to be of any use to investors, and it certainly is of no help to traders. It takes a page to say the obvious, viz., that reward is inversely related to risk, and it does not say what it should say to investors, viz., rates will rise in due time. Therefore one should, if one has the luxury of a very long time horizon, look for investments that can take advantage of today's extraordinarily low rates, e.g., real estate, and the high probability that both interest rates and inflation will eventually rise some.
Truth is born in a debate. I agree with both piezoe and the article. This issue is too complex to simplify as some try to. But in essence, the bubble and the leverage were created by the Fed in the first place, in my opinion, because the Fed was under too much pressure from the public, the govt and other factors (such as keeping the economy afloat, even "for a while", which might be years or a decade) to take the right action as outlined in the reasoning presented in the article and by many others before it. Essentially, it seems like the Fed's leaders play a game of "pass along", where each successive leader is too afraid to take the right course as prescribed by sound principles, and instead try to wade through the storm in as calm a manner as possible, keeping the current public good in common. Hard to blame them. At stake is the whole world economy, in view of American economy's reach, and the first cause of all this was the wrong passage taken by Mr. Greenspan and arguably, many other before him. It seems to be the best course of action that the Fed be dissolved and the workings behind monetary policy be given light of day by members of Congress wisely trained in economics and coming from all economic schools of thought.
So you really only have your opinion that the writer is incorrect. Nothing to show other than that. Point noted. We all know you're a rabid Federal Reserve supporter. That's fine. Cheer lead all you want. But that doesn't make anything in the article wrong - it just makes it opposite your view. Any credible person on the street knows the Fed is trapped.
Sounds like you agree with the article. What is it that Piezoe claims is that which you also agree with?
I certainly agree with that sentiment, and many others do as well. Much has been written regarding Greenspan's insouciance in the face of all the warnings and reports he had at his disposal. He did not act, and his inaction was the major factor leading to the crisis. Had he clamped down on mortgage industry fraud and demanded reasonable underwriting standards, there would have been, most likely, a real estate/construction fueled recession. There would have been no way to correct the situation without some fall out. But he did nothing and that inaction eventually resulted in a banking breakdown and crisis. I believe his inaction was rooted in his economic philosophy , a philosophy now thoroughly discredited.. (There are volumes posted on this topic.) To Greenspan's credit he has, finally, admitted he was wrong to not act. And he has made it clear that his inaction was rooted in his steadfast belief that Bankers would not act against their own self-interest. That I think is not quite a correct assessment, and it suggests to me that Greenspan still has not properly analyzed the defects in his personal economic views. Whereas personal liability might have given them pause, Bankers near the top of the offending institutions walked away with millions of ill begotten gains because the were protected from liability by the corporate structure. The reason we have Corporate structure in the first place is to protect against personal liability. Green span has not thought this through to the level he should have. Underlying Greenspan's economic philosophy was his unshakable belief in classical, textbook, equilibrium theory. Namely, that markets left alone will spontaneously return to equilibrium. The implication is that the further they get from equilibrium the more likely they will return. However this is far too simple a view, and quite wrong. Real markets don't act in this way. Real markets out of equilibrium are just as likely to continue moving away from equilibrium as toward it. Some would say that in the earlier stages of disequilibrium they are much more likely to move further out of equilibrium. I find myself in this camp because it nicely explains bubbles -- but it is not the fundamental cause of bubbles. Furthermore, markets spend far more time out of equilibrium then they do close to equilibrium. And when bubbles finally burst and the market tries to "spontaneously return to equilibrium," it doesn't do so harmlessly. It is then a question of how much harm will result. The reality is very far removed from the classical, Adam Smith view of market equilibrium being driven by supply and demand. The reality versus the simple theory accounts for the inevitable failure of laissez faire government policy --something Greenspan, at one time, firmly believed in. Here we would strongly disagree. Members of Congress are political animals, I wouldn't want them anywhere near monetary policy or banking regulation! The Fed, among its hundred or so PhD. economists, incorporates by far the most expertise, and differences of opinion, on economics that is available in any one place. Though the Fed, particularly the Branch Banks, are not as isolated from potential conflicts of interest as we might like to see, our U.S. Fed system works better than any other method of banking regulation and monetary policy setting than we have enjoyed in our brief history as a nation. The Fed today is more open, much more! Today every transaction that can be posted on the internet is posted, much of it in almost real time. Transactions that can't be posted immediately are eventually posted. Though the Fed is, by law, somewhat isolated from political interference, as I believe it should be, the Fed is not protected from FOIA challenges via the courts, as I believe it shouldn't be. The Fed lost an FOIA challenge to Bloomberg. In that case, the Fed had what I thought was a reasonable reason for wanting to delay the disclosure of some transactions. (Virtually all of the day to day transactions carried out by the Branches, particularly the New York Branch [ See NYfed.org.] are disclosed. You will probably be amazed at the detail of information on bond transactions that is available to you. Similarly, U.S. Treasury transactions are transparent . See Treasury.gov, and look up the TARP account, for example.) See also, federalreserve.gov, the parent sight of the entire system. It's very informative.
if politicians ran the fed at least we would have some certainty. Nobody would raise rates in an election year.
My favorite part of his Fed narrative is that it was Greenspan's loose monetary policy that fully justified the Bernank's ULTRA loose policy which leads us to Yellen's uber dovishness... He doesn't consider the possibility that the Fed is a bubble making machine.