1/31/2008

01-31-08 - 2

Historically economies have always gone through boom & bust cycles. I guess it's an open question whether that's a fundamental characteristic of the system or if it's just a flaw we can fix. In any case, the US Fed in recent years has been on an unprecedented campaign to attempt to smooth out the down cycles in the economy. Certainly in theory if you have an economy that is going up and down but always trending slowly upwards, you should be able to reduce the swings and make it just a more stable rise. That, however, is not what we have been doing. Bernanke has specifically said that he doesn't think it's right for the Fed to try to prick bubbles or slow down overheated growth. On the other hand, any time we have a slow down we pull out all the stops to try to get the engine moving again.

Part of the reason for the subprime bubble was in fact the Fed's actions trying to get us out of the dot com bust, when they put the funds rate down to 1%, which pumps a shit load of cheap capital into the big banks, then the banks have to find instruments to put that capital in to get a profit. At some point you pump in so much cheap capital there just aren't enough good loans out there to make, so you start looking harder and harder to find somewhere to make a profit from that free money. I have no idea how this "zero recessions" philosophy will work out in the long run, nobody does because it's never been done before, we're in the middle of a big economic experiment.

No comments:

old rants