[quote=Leorocky][quote=livinincali][quote=Leorocky]Can anybody show me evidence of “massive asset price bubbles” and show me how the Fed (I’m assuming via QE) caused it.[/quote]
QE is a relatively new monetary policy it’s effects are yet to be seen. As for the Fed helping to create and encourage bubbles just look at internet bubble of 2000 or the housing bubble of 2004-2007. [/quote]
The dotcom bubble started a few years prior to 2000 and I don’t think the Fed had much to do with it
[quote=livinincali]In 1999-2000 the fed increased the money supply because of worries about y2K and bank runs. The banks took that money and invested it temporarily which helped fuel the tail end of the internet bubble. When the fed decided to pull that liquidity after the y2K scare was done we had the huge collapse. [/quote]
First I’ve heard of this theory. We had a minor recession in 2001. The market starting correcting big time in April 2000 IIRC. I’m not sure there was any huge collapse caused by the Fed.
[quote=livinincali]In the housing bubble the fed keep interest rates low for way too long which helped fuel the housing bubble. They felt they could keep rates low because there wasn’t much inflation in the CPI but CPI didn’t measure the excessive speculation in housing prices. Just like CPI is low now but it doesn’t account for the excessive speculation in shale oil, junk bonds, and stocks. The fed can make money cheap to borrow but it can’t determine what that money is used for. If it’s used for financial engineering and speculation rather than productive investment when the rates go up all that speculation has to be unwound because it no longer is profitable. [/quote]
I suggest you research what exactly is included in the CPI. Can you provide evidence that there has been some appreciable increase in “speculative” lending because of the Fed’s recent actions?
[quote=livinincali]If I borrow $100K at 2% and invest it in VZ stock to get a 3.5% dividend I’m making a small percentage but if my borrow rate goes up to 3 or 4% I’m immediately going to sell my stock because it’s no longer profitable to have that arbitrage play on.[/quote]
Do you really think lot’s of people do this?[/quote]
I’d say (intuitively, with nothing to back it up at this point) that the Fed’s interest rate policy can be even more destructive than QE, at least the size/type that we’ve seen.
Let’s consider the fact that many investors are either required or expected to earn a yield above a certain percentage. If the Fed forces interest rates below this level — especially if they are held there for a long period of time — these investors will begin to move further out on the risk curve, and many of them will begin to use more leverage in order to boost returns. If the Fed is manipulating things, then risk is mispriced. This forces up the prices of things that can be bought with speculative money and leverage.
This makes the prices of things more vulnerable to any kind of shock — financial or otherwise. When leverage is drawn down, this alone can cause the collapse; but there are often other factors — often related to the assets that are being purchased with this speculative money — that usually cause the leverage to be wound down (highly-priced internet stocks of companies that will never make money…or a lack of owner-occupied homebuyers because everyone who can afford to buy, even with gimmicky mortgages, is “all in”…or new oil supplies/reduced demand for oil, etc.). Once these investors begin to sense the risk and decide to exit, the selling can become intense because few can cover their positions when prices fall because they are so leveraged. Everything collapses.
Unfortunately, too many people think of the collapse (correction) as being the the cause of the damage. In truth, it’s the inflation that sets everything up for a collapse that is the problem, not the correction.
Yes, a LOT of people are doing this, especially the ones with all the money.
