Again, I don't think anything will come of this. However, it's still worth reading and understanding how things work, because if the system remains as is, we're virtually guaranteed to have another great bubble and another great crash. The reason it's worth understanding is because one can at least profit from all this mess by playing the market correctly. Understanding macro cycles is helpful in that regard.
A couple nice paragraphs from the article:
In successive financial boom-busts over the past 30 years, the Fed undertook smaller versions of what Ben Bernanke did over the past 12 months. In the Latin American debt crisis of 1982, the savings-and-loan crisis of the late 1980s, the Asian financial crisis and the collapse of Long-Term Capital Management in 1998 and during the bursting of the dot-com bubble in 2001, you saw the same pattern: First, of course, the financial system grew rapidly, bank profits were large and a bubble emerged. At a certain point, we reached the market peak and stared down the mountain. Bankers frantically called the Fed, and it dutifully stepped in to prevent an economic collapse — by lowering interest rates and providing credit to “maintain liquidity.”
...
In today’s nascent global recovery, we are already seeing bubble-like rises in the prices of real estate and assets, from Hong Kong and Singapore to Brazil. And many more emerging markets will likewise soon boom. The details of who makes which crazy loans to whom will no doubt be different from what they were from 2002 to 2007, but the basic structure of incentives in the system is unchanged. The same people are running the American banks, and the same regulators are regulating them, so you can easily get the same outcome here as we have just seen.
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Philosophically speaking boom and bust are a way of life and that is the way it should be. Fed should not try to anticipate a boom and nip it in its bud. How would the Fed know in advance that a bubble is going to happen. These things are evident only in hindsight (which of course is 20/20 for TV and market pundits). Fed's job as Greenspan and Bernanke have said before should be that of a mopper rather than a boom-breaker.
ReplyDeleteWhy is it that "boom and bust" is the way it should be? Would it not be better to target steady, sustainable growth rather than extreme run-ups followed by sharp letdowns over and over?
ReplyDeleteBy suggesting that "Would it not be better to target steady, sustainable growth" you are probably saying that Fed knows two things: 1. the number for steady, sustainable growth. Is it 3% per year, is it 5% per year, is it 8% per year? Which number should Fed use? Depending on which number you pick then the next question is 2. How do you know that is a correct number? China is growing at more than 8% per year. Should Chinese Fed have tried to rein in this party long time back because 8% is such a big number?
ReplyDeleteThis is similar to Monday morning Quarterbacking. Most people's hindsight is perfect.
Mopping up post party is much better than reigning in the party prematurely.
http://blogs.forbes.com/streettalk/2010/02/02/death-taxes-and-market-crashes/?partner=dailycrux
ReplyDeletePlease see the above link (sent to me by someone else). Boom and bust are inevitable. If something is running very smooth its cause for concern as it might point to under-utilization of resources i.e. a smooth running economy almost by definition would not be utilizing its resources to the optimum.