“Yet some Fed officials want to pull the trigger on rates much sooner. To avoid a “Great Inflation,” says Charles Plosser of the Philadelphia Fed, “we will need to act well before unemployment rates and other measures of resource utilization have returned to acceptable levels.” Jeffrey Lacker of the Richmond Fed says that rates may need to rise even if “the unemployment rate hasn’t started falling yet.”
I don’t know what analysis lies behind these itchy trigger fingers. But it probably isn’t about analysis, anyway — it’s about mentality, the sense that central banks are supposed to act tough, not provide easy credit.” -Paul Krugman
-Bull. Right there is proof that this guy hasnt learned crap since 1940. The massive downturn was a credit collapse, one set off by residental morgages (other forms of credit are hurting too, CRE anyone), better known as a housing bubble. The housing bubble was instigated by two governement forces, deliberatly.
1)Ultra low interest rates set by the Fed, and keeping them there for too long.
2)Favorable tax and investment policies set by governement agencies. (250k cap gains deduction, morgage interest deducation, low to no down morgages, (up until very reciently) seller financed DP’s, Multiple ‘primary’ homes (10 primary home loans????)
This created a massive bubble, which we are suffereing the after effects of now. The entire reason rates were left so low for so long was because of the ‘jobless recovery’ after the stock bubble of the late 1990’s bust in 2000. Now the solution is to do it again, only stronger, thinking we can’t get another bubble? Says who? In the past decade we have had three bubbles pop. Stocks, oil, and Housing. None of them has been plesant or easy on the USA.
Last time the Fed did what Krugman wants it waited until 2004 to raise rates, well into the housing bubble. It moved slowly, and was hesitant to put regulation on banks that may have helped slow the bubble, until it was way way way to late.
If the Federal reserve waits until unemployment is 7% or less they will already have another raging bubble on their hands somewhere else. As so many bulls are fond of saying about our GDP recovery, unemployment is a lagging indicator. So the FED would be waiting until AFTER the recovery was well inplace to begin to withdrawl this aid. By that time the damage will have already been done and we will have to suffer through another recession/bubble bursting. They didn’t even see the housing bubble coming in 2006 and thought it was contained up until it blew up in their faces. Now they are gonna be better about it and avoid a new bubble, cause ‘this time it is different’?
BULL.
