Adam Posen, writing in comments at Martin Wolf's Economists' Forum, says: Adam Posen, Economists' Forum: Martin unfortunately perpetuates a popular canard amidst some good points. He asserts a risk [of monetary easing] is "a further round of the very asset bubbles and credit expansion that created the present crisis ... the direct result of past Fed efforts at the risk management." This is false... No matter how many times people say it..., activist monetary policy did not cause the bubble. Looser money is a necessary pre-condition for a bubble, but it is not sufficient to cause one on its own. This can be seen in the ample research, including the frustrated attempts by monetary moralists, to show a direct link between monetary ease and asset prices - all of which failed to do so. Too many times there has been ease without any bubble or harm from asset prices. Rather than recap that econometric research, consider the following. You walk out your door one February morning, slip on an ice patch, and fall. While this may confirm your preference for summer, you do not say "winter made me fall" if your concern is to prevent future crashes. You say: "Why wasn't this walk cleared of ice? Why didn't I look where I was going? Should I be wearing boots when it ices over?" While one does not slip on ice in summer, winter did not cause the accident, and that season is not something one can feasibly prevent even locally. The same is true for asset price bubbles. If there is a problem from them, it is because of regulatory and supervisory failings, and market participants being foolhardy, not because of monetary ease - even if it takes place against a background of monetary ease, the practical steps for improvement and repair are the micro not the macro. It is time for us to focus on the regulatory reforms we need, and stop blaming monetary policy for what supervisory failures caused. One doesn't shake one's fist against the weather if one wants to do more than emote. Source. So saith the wise Posen. -Jon To darkness I condemn you... | Post Points: 65
Adam Posen, writing in comments at Martin Wolf's Economists' Forum, says:
Adam Posen, Economists' Forum: Martin unfortunately perpetuates a popular canard amidst some good points. He asserts a risk [of monetary easing] is "a further round of the very asset bubbles and credit expansion that created the present crisis ... the direct result of past Fed efforts at the risk management." This is false... No matter how many times people say it..., activist monetary policy did not cause the bubble. Looser money is a necessary pre-condition for a bubble, but it is not sufficient to cause one on its own. This can be seen in the ample research, including the frustrated attempts by monetary moralists, to show a direct link between monetary ease and asset prices - all of which failed to do so. Too many times there has been ease without any bubble or harm from asset prices. Rather than recap that econometric research, consider the following. You walk out your door one February morning, slip on an ice patch, and fall. While this may confirm your preference for summer, you do not say "winter made me fall" if your concern is to prevent future crashes. You say: "Why wasn't this walk cleared of ice? Why didn't I look where I was going? Should I be wearing boots when it ices over?" While one does not slip on ice in summer, winter did not cause the accident, and that season is not something one can feasibly prevent even locally. The same is true for asset price bubbles. If there is a problem from them, it is because of regulatory and supervisory failings, and market participants being foolhardy, not because of monetary ease - even if it takes place against a background of monetary ease, the practical steps for improvement and repair are the micro not the macro. It is time for us to focus on the regulatory reforms we need, and stop blaming monetary policy for what supervisory failures caused. One doesn't shake one's fist against the weather if one wants to do more than emote.
Adam Posen, Economists' Forum: Martin unfortunately perpetuates a popular canard amidst some good points. He asserts a risk [of monetary easing] is "a further round of the very asset bubbles and credit expansion that created the present crisis ... the direct result of past Fed efforts at the risk management." This is false...
No matter how many times people say it..., activist monetary policy did not cause the bubble. Looser money is a necessary pre-condition for a bubble, but it is not sufficient to cause one on its own. This can be seen in the ample research, including the frustrated attempts by monetary moralists, to show a direct link between monetary ease and asset prices - all of which failed to do so. Too many times there has been ease without any bubble or harm from asset prices.
Rather than recap that econometric research, consider the following. You walk out your door one February morning, slip on an ice patch, and fall. While this may confirm your preference for summer, you do not say "winter made me fall" if your concern is to prevent future crashes. You say: "Why wasn't this walk cleared of ice? Why didn't I look where I was going? Should I be wearing boots when it ices over?" While one does not slip on ice in summer, winter did not cause the accident, and that season is not something one can feasibly prevent even locally.
The same is true for asset price bubbles. If there is a problem from them, it is because of regulatory and supervisory failings, and market participants being foolhardy, not because of monetary ease - even if it takes place against a background of monetary ease, the practical steps for improvement and repair are the micro not the macro.
It is time for us to focus on the regulatory reforms we need, and stop blaming monetary policy for what supervisory failures caused. One doesn't shake one's fist against the weather if one wants to do more than emote.
Source.
So saith the wise Posen.
-Jon
To darkness I condemn you...
Of course, our current regulatory regime has caused the problem to become even worse then it otherwise would have.
"Follow the rules and we won't let you fail," would cause problems even without monetary expansion.
...and that season is not something one can feasibly prevent even locally.
Which, if for no other reason, shows why the analogy falls over.
Here's a question. Even if it is possible to have an expansionary monetary policy that doesn't result in booms and busts because we have designed the perfect regulatory framework to keep it in check, what's the point? If a tight monetary policy allows for a relatively stable economy that is largely self-regulating, isn't that better? Furthermore, if we somehow mamaged to design the perfect regulatory framework, wouldn't it effectively counteract the effects of EMP, leaving us no better off but with the cost of a huge regulatory framework in place?
"It is time for us to focus on the regulatory reforms we need"
We must take great care on how to proceed with such regulatory reforms. Countries such as Venezuela, Bolivia and Ecuador recently had their "ultimate" regulatory reforms in the form of the Constituent Assemblies, which redrew constitutions and ended up granting more power to very corrupted and inefficient governments.
Art transcends ideology.
http://mises.org/Community/blogs/ruben
No matter how many times people say it..., activist monetary policy did not cause the bubble. Looser money is a necessary pre-condition for a bubble, but it is not sufficient to cause one on its own.
Philosophically your argument is correct. However, lets go back to principles of supply and demand. You are a bank, I am the Fed, I sell you everyday cheaper loans; explain to me why wouldn't you lend it back in the first place knowing that you can very well be bailout.
Greed is a decease i hope we take into economic consideration. Greed is the enemy of self interest. Greedy people act against themselves in the long run; its a decease.
RESPONSE FROM WOLF
Martin Wolf: Let me also add a comment on Adam’s remarks.
Let us agree that monetary ease is merely a necessary condition for a bubble, not a sufficient one.
I would put it as follows. Aggressive monetary ease is like pouring petrol on straw. That may well not start a fire, as Adam writes: the straw may be wet, for example, or the people around the straw may be responsible. As it happened, these people were pyromaniacs. But the Fed did next to nothing to discourage them. On the contrary, it was opposed to tighter regulatory standards. This was the combination that created the credit blaze. So the combined policies - monetary easing along with regulatory laxity - do indeed bear responsibility for what happened.
I will go further. Since the chances of serious regulatory tightening (the subject of my next column) are close to zero (in my judgement), I fear the same danger still exists. If the Fed pours on petrol once again, the pyromaniacs will try to restart the fire.
I agree that the straw is very wet at the moment. So this will take a while. I also agree with Adam that this does not have to be the case if effective regulatory changes are made. But since I do not expect the latter to happen, I fear the longer-term consequences of present policies.
Jeffrey TuckerEditorial VP, Mises
Since everyone agrees that "loose" money is a necessary precondition for a bubble, why isn't the logical conclusion to rid ourselves of the "looseness", being the Fed?
Also, I think Martin Wolf mis-identifies the "pyromaniacs". It seems from his response that he thinks the pyros are wall street investment banks/hedge funds etc..., but it seems to me the pyromaniacs in the equation are the investors themselves.
It's the responsibility of the investor to know what he's investing in. The ability to make a profit comes along with the responsibility of making good decisions, and the chance of loss. If you just hand your money over to a financial advisor, you deserve what you get.
I've only been paying attention to these things since my colleg years (the mid-nineties), so I've gotten to see the tech bubble and now the housing/financial bubble. One thing that they both have in common is rampant fraud. We had the IPO fraud of the wall st. investment houses during the tech bubble, then the rampant mortgage fraud of the housing bubble, pushed by the wall st. investment houses. If you haven't figured out yet that these people are full of shit, and still want to give them your money, once again, you deserve what you get.
Activist monetary policy set the stage, but greedy people caused the bubble. What we need are smarter investors, and apparently they need more painful lessons to smarten up.
hardway: Since everyone agrees that "loose" money is a necessary precondition for a bubble, why isn't the logical conclusion to rid ourselves of the "looseness", being the Fed?
Well, we can't get rid of it because according to Posen it's like winter... and we can't get rid of winter.
*gasp*
I'm drowning in this ocean of false analogies.
Mises Community Natural Rights Discussion Group
Julio: No matter how many times people say it..., activist monetary policy did not cause the bubble. Looser money is a necessary pre-condition for a bubble, but it is not sufficient to cause one on its own. Philosophically your argument is correct. However, lets go back to principles of supply and demand. You are a bank, I am the Fed, I sell you everyday cheaper loans; explain to me why wouldn't you lend it back in the first place knowing that you can very well be bailout. Greed is a decease i hope we take into economic consideration. Greed is the enemy of self interest. Greedy people act against themselves in the long run; its a decease.
Greed is self interest, and is the driving force in any non-socialist economy. Greed is in no way the negative thing that it has been made out to be pseudo-socialists, or economists with false pretenses like yourself. If people could and would not act in their own interest, there would be no true action.
But we can get rid of the fed, so the analogy is faulty.
Wht about the theory that explains the explosion of credit on the large levels of savings in the east? These were used to fund the large levels of borrowing in the west. Discussed in more detail here: http://mises.org/Community/forums/t/4560.aspx
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