08-27-2013, 10:01 PM
(08-27-2013, 07:25 PM)kandrathe Wrote: Here is the chart. Clearly, the period following 9/11 needed stimulus in the form of easing interest rates, but there was at least a one year delay before they were ratcheted up again. Only 2006 saw them anywhere near previous levels, and by then the bubbles were ripe and ready to pop. It was about this time I remember being pretty uneasy about an overheated global market, and oil price spikes were disrupting the overall economy. In response to the 2008 financial crisis, they unloaded all their guns (well almost -- they dropped the rate to 2%). But, by then they had little ammunition left to fight off the economic malaise. 2008 was payback for the prior 5 years, or more maybe of exuberant mal-investments. The housing derivatives were the weak link that broke it then, but that is hardly the only weakness in our economic system. The next crash will reveal a different "scam". The common denominator in all these interventions has always been obfuscated financial instruments with insufficient industry (or government) oversight.
I agree with most all of that. The problem was obfuscated financial instruments, which caused a massive, systemic underappraisal of risk, and the construction of colossal towers of leverage on top of assets that, while believed to be secure, were actually crap.
What I don't understand, is how a long period of easy money can lead to the ZLB. The only way to the ZLB is for investors to believe that the government is a really good credit risk. That comes in one of two flavours: Either people believe very strongly in central bank credibility in fighting inflation, or the risk of everything else goes through the roof.
If the problem was excessively easy money eroding confidence in the system, then inflation would go up, forcing bankers to increase rates to maintain positive real interest rates. The problem we have today is the opposite - bankers can't get nominal interest rates low enough.
-Jester