Federal Reserve Montary Policy in Light of An Asset Bubble

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Submitted by DaisyDuke on January 31, 2007 - 3:17pm

I found this January 17, 2007 speech made by Frederick S. Mishkin of the Federal Reserve Board. It is about the Reserve and Federal Monetary Policy with regard to the housing asset bubble (or other asset bubbles). I wanted to share it with the rest of you.

Would like to hear your feedback.


Submitted by gold_dredger_phd on January 31, 2007 - 6:28pm.

Mortgage rates will not be coming down.

Submitted by drunkle on January 31, 2007 - 10:43pm.

just one comment on his analysis of the japanese market...

it doesn't add up. despite the japanese central bank's "slow response", he doesnt address 2 simple things. 1) the indebtedness or bankruptcy of those caught in the crash and 2) public insecurity. neither of these things can be addressed after the fact of the crash, regardless of the speed of reaction. the fact that bubbles and the subsequent crashes are allowed to occur at all reinforces public insecurity while bankruptcy limits the ability of "investors" to reenter the market.

oh, and japanese pride. they would have simply killed themselves in the "old" days (like what, 50 years ago?) if they became indebted/bankrupt.

Submitted by DaisyDuke on January 31, 2007 - 11:05pm.

Thank you both for reading the article. I appreciate your feedback.

I don't see rates coming down either. Could the FedR really stand to lower them farther? I don't think so.

One thing though is I like the philosophy of this speaker in that he feels the Feds shouldn't wield their weight like they did in the stock market crash of the 30's. Everything I have read tells me that the Federal Reserve Bank, by implementing monetary policy, caused the crash, or at least I've seen a speech by Barnake at some guy's 90th birthday where he outlines facts that the Federal Reserve caused the crash by implementing monetary policy and that he wouldn't permit that again. (sorry I'm not more articulate. If anyone is interested I will pull up names and articles).

While the Fed Reserv isn't coming right out and saying it, they are acutely aware of the predatory lending and as recently as September 2006 have implemented "supverisory" guidance over lending institutions to protect [the stupid/ignorant] consumers . . . which I almost was, until I tripped on a bubble on the internet and then this site. Thank you Lord.

Submitted by Daniel on January 31, 2007 - 11:55pm.

The guy in question was Nobel laureate Milton Friedman, and he died a few months ago. He was famous for many things, among them for arguing that the Great Depression was primarily caused by the disastrous policy of the Fed at the time (the Fed sharply raised rates as markets tanked!). Friedman compared the 1930s depression, the Japanese crash of the 1990s, and the US stock crash of 2000-2002, and concluded that the vast differences in outcome were primarily due to central bank policies. From catastrophic (1930s Fed raised rates) to so-so (1990s Japanese central bank lowered, but not fast enough) to brilliant (2000s Fed slashed rates to 1% extremely fast, resulting in only a mild recession). Now, I know that Greenspan & Co don't have many friends on this board, but I believe they did the right thing, and we dodged a very big bullet. True, they probably kept the rates low for a year or so too long (they should have started raising in mid-2003), but hindsight is 20/20.

Submitted by DaisyDuke on February 1, 2007 - 2:56pm.

Smarty Pants! I knew there were intellects on this site. This economics stuff is so interesting to learn.

I understand why Inflation is a concern to the FedRes and why they would raise rates. But, in some articles I have seen that employment is an indicator they follow. Can you explain how employment would affect their decision to raise/lower the rates . . . or am I just reading things wrong?

Economics novice. DD

Submitted by bubba99 on February 1, 2007 - 3:34pm.


I think you are dead on. The country needed a boost after combined results of 9/11 and the Tech crash. But they did too much for too long.

The interest rates were one step, but we also had "Liar Loans", new Negative Amortization Loans, 100%+ loan to value loans. The market suddenly changed by bringing in thousands of previously unqualified buyers. And when the FED should have been raising rates, they were still cutting in June of 2003.

Prices are still sticky today in part because low interest teaser rates are still available along with Liar Loans.

Submitted by 4plexowner on February 1, 2007 - 6:53pm.

There is almost always a bigger picture if we will back up and look for it.

The bigger picture here is to realize that it was Federal Reserve policy that CREATED the bubbles in the first place - how the Fed reacts to the bubbles when they crash is not the most important thing to focus on.

Read "The Creature from Jekyll Island: A Second Look at the Federal Reserve", by Edward Griffin. This book lays out how the Federal Reserve was created and why. The book then details how the banking cartel/Federal Reserve instigates wars because they are profitable.

Gotta run ... will write more later

Submitted by PerryChase on February 1, 2007 - 7:41pm.

Milton Friedman also said that the Federal Reserve should be abolished. He also supported the legalization of drugs and prostitution as well as free immigration. He was a brilliant and a great man in my view. A true hero. The "heros" you hear about on TV these days don't even compare.

Submitted by bob007 on February 1, 2007 - 8:07pm.

I have no trouble with the Fed response after 9-11. I have troubles with their responses to the East Asian problems of the mid-1990s, margin requirements in the 1990s

Submitted by bob007 on February 1, 2007 - 8:07pm.

I have no trouble with the Fed response after 9-11. I have troubles with their responses to the East Asian problems of the mid-1990s, margin requirements in the 1990s

Submitted by 4plexowner on February 1, 2007 - 8:18pm.

DaisyDuke - inflation is not a concern of the Federal Reserve - inflation is one of their main GOALS!!!

There are two ways that governments can pay for doing the things that governments like to do:

1) tax the citizens - this works well but can't be done to excess because of things like the guillotine - ie, the
citizens eventually get fed up with being over-taxed and revolt

2) institute a fiat currency and print money as needed - this solves the immediate issue of how to finance government but it debases the existing money supply - every new dollar that rolls off the printing press decreases the value of all the other dollars currently in circulation - the debasement occurs very gradually so the citizens tend not to notice

Implementing Option 2, the fiat currency plan, is easier if you can also do these things:

> over-complicate the federal financing system so the citizens will choose not to dig too deeply into the details

> have public officials and academics poo-poo the idea that currencies should be backed by something tangible - hopefully the media will pick up on some phrase like "gold is a barbarous relic" and repeat it mindlessly to the unthinking population

> intentially remove all economic and financial material from the public education system

> get the citizens to believe that a small amount of inflation is acceptable and even desirable

> always present the spin that rising prices are being caused by greedy middle-men and speculators - never talk about how it is actually the slow, steady debasement of the money supply that results in rising prices

> manage the price of precious metals so they do not rise in the face of monetary debasement

> provide funding for economists who believe in Keynesian economic theory - grant them Nobel prizes if possible - do everything possible to support Keynesian economics while ensuring that Austrian economic theory is discredited along with that "barbarous relic"


Read "Creature from Jekyll Island" and you will see how all of this has been accomplished here in America.

Submitted by Wiley on February 1, 2007 - 9:20pm.

The Fed is only thinking about two things right now...

Raise rates and the economy crumbles

Lower rates and the dollar tanks

The ultimate catch 22.

PS. I second the book recomendation. Should be required reading in every high school.

Submitted by Mark Schoenenberger on February 2, 2007 - 12:10am.

Petrodollars & Goldman Sacks

Thanks Daisy for posting Mishkin's article... My thoughts are that BOTH commercial and residential real estate prices have been pumped up by-

  •  low interest rates from 2001-2004 (courtesy of the Federal Reserve fighting the DOTCOM bubble the Enron/Worldcom collapse, and 9/11 market dislocations).
  •  Exponential expansion of derivatives in the financial markets. (These instruments severely obscure the risks involved in mortgages and other commercial paper, allowing risky deals to gain higher credit ratings, and lower borrowing costs). This has allowed the proliferation of sub-financial, no down payment, and variable rate mortgages.
  • Huge liquidity (dollar denominated cash) in the world market looking for a high yielding investment. ("M3" = all US dollar denominated money in the world market is currently increasing at over 10% per year). M3 has been increased to fuel the monopoly Petrodollar recycling scheme where virtually all world petroleum trade is done in dollars. The dollars that exporters collect need a home, and that has increasingly been US real estate, since it serves as a hedge against dollar depreciation.

All three of these phenomena are linked in a world financial system rigged to get the USA the oil it needs to import by manufacturing debt (the US current account deficit & and overhang of T-bills).

 My opinion is that the FED KNOWS that the US treasury has printed too much money, and that the SEC and the FED have not regulated the derivitive and private equity markets adequately...

 At this point, the FED can't lower interest rates because the US government needs higher yields to attract increasingly skeptical foreign investors to buy Treasury securities. If they don't, the government shuts down, or the Treasury prints more money and drives up inflation much higher than the +5% it is at right now. (Remember the 20% Fed interest rate in 1980 downstream of Vietnam war deficits and high oil prices caused by the Iranian revolution?).

 The Stock bubble burst in 2000, and the residential real estate bubble burst in 2006 are symptomatic of America's oil addiction and profligate government spending. HIGHER INTEREST RATES AND DOLLAR DEVALUATION ARE INEVITABLE!

The real reason that the FED doesn't pop asset bubbles, is that the Fed Governors are afraid they will cause a depression (because of the fragile condition of the US trade balance and government debt)... They don't want to be blamed for economic pain.

Submitted by DaisyDuke on February 2, 2007 - 1:29am.

W O W . . . I've got my homework to do. Having just been slammed with information, I'm at a loss for words. Much as you say I have quickly (I think) learned within the last 60 days some (minus the wine glasses at 11:00 p.m.) since entering the "seller's/buyer's" market after being blindly idle for 20 plus years . . . Them damn (_____)! Please, fill in the blank.

Okay, where do we start the new America?

Submitted by DaisyDuke on February 2, 2007 - 1:31am.

One last reply . . . Bush says the economy is strong.

Is this where I vomit?

Submitted by PerryChase on February 2, 2007 - 9:44am.

Let's not forget the Fed's pumpinp the economy full of liquidity in 1999 on the eve of the supposed Year 2000 bug collapse. Remember that everyone was predicting a shutdown on Jan 1, 2000?

So the Fed actions one, after another compounded the problems.

Submitted by Mark Schoenenberger on February 2, 2007 - 1:20pm.

The New America-

Dear Daisy... I do have an optomistic vision of the New America. It will require considerably more cooperation, honesty, and sacrifice than we have shown in the last 60 years.... I am encouraged by the new congress (David Obey), and the fact that the Republican party (which radically ran up the national debt over Regan and the two Bush's terms in office) seems to be permenently out of power for the considerable future....

I think that the only hope of avoiding a big economic meltdown in the U.S. is if the majority of citizens and businesses bite the bullet and INSIST that both the banking/finance industry and the federal government quickly shift to a pay-as-you-go economy where debt accumulation is eliminated.

  • The Federal Government (the citizens of the United States) must report total debt including Social Security and Medicare in its books, and institute policies to both decrease expenditures and raise taxes to show a budget surplus sufficient to reduce public debt burden over time. (Are Americans willing to give up government services and pay higher taxes?)
  • The SEC & the FED have to institute credit policies sufficient to reduce the leveraging ratios on private assets. (Are banks and businesses willing to carry higher cash positions instead of leveraging every last dime?)
  • The general public has to SAVE MONEY and reduce its dependence on debt to fuel its lifestyle. This of course would require their choice of a more frugal lifestyle... (Are Americans willing to drive less in smaller more fuel efficient cars, live in smaller homes, prepare their own food, and do less shopping?)

These are big hurdles for America to surmount if we are to really have a "soft landing". Of course we can ignore the problem and have a "hard landing" where the eventual outcome is the same with considerably more suffering.

Submitted by PerryChase on February 2, 2007 - 11:23pm.

I finally got a chance to read the Mishkin speech. It sounds to me like the Fed will intervene if there's a housing crash "to ensure that it will not do serious harm to the economy."

I read this as meaning that if the housing downturn affects the general economy, the Fed will lower rates to provide households some "breathing room." So far consumer confidence and spending are holding up but if the consumers tighten too much, the Fed will act decisively to lower rates.

This will only prolong the pain in real estate but save the general economy. I say don't buy RE in 2007 because there are more price decreases in store in 2008.

I predict a rate decrease as the economy weakens towards the end of 2007.

Submitted by Zeitgeist on January 27, 2010 - 5:16pm.

Time to clean house:

"A Republican senator said Tuesday that documents showing Federal Reserve Board Chairman Ben Bernake covered up the fact that his staff recommended he not bailout AIG are being kept from the public. And a House Republican charged that a whistleblower had alerted Congress to specific documents provide "troubling details" of Bernanke's role in the AIG bailout."


Submitted by Aecetia on July 16, 2010 - 1:47pm.

More bad news from Bernanke:
"WOW!!!! Fed Bernanke came out and said the economy won't recover for five to six years. When did he suddenly get so enlightened?!! He didn't know that until now? He didn't see this coming? Seriously? He went from we're recovering just fine to five to six years. Good job commander!!! We're so proud of you."


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