Originally Posted by Gone4Good
I have many thoughts:
3) What would a policy of Fed tightening (raising short rates) do to the yield curve? It seems hard to imagine a scenario where the curve would steepen as a result: short rates go up (flatter), inflation expectations come down (flatter), economic growth expectations come down (flatter). Bill doesn't explain why this wouldn't be true. I'd love to have him explain it.
4) Bill Gross has a very good track record, but he's called the current environment pretty badly. Bill Gross apologizes for poor performance
(largely because of bad calls on the impacts of monetary policy on interest rates)
5) The idea that "zero rates haven't helped much" ignores the counterfactual - What shape would the economy be in if the Fed had been less aggressive.
As I said I am not nearly smart enough to figure out what we should do instead. In many ways we need a threat of future inflation to raise interest rates and get people interested in investing in things like housing.
I guess it is ok that 0% interest have forced people like myself into higher equity AA to generate enough income to support my lifestyle. I more or less understand what is going on.
However, there are plenty of retirees out there who get roughly 1/2 their income from investments, this war on savers means these people need to cut back on consumption. One of the ironies of course is that senior have more wealth than any other groups so they can actually spend money they have (rather borrow to spend like some younger folks use to do) But they are tightening their belts because the 3-5% they use to have are now being replaced with 1% CDs
Originally Posted by Koolau
I guess we'll never know since they didn't try being less aggressive first. The ironic thing is that getting a mortgage is HARDER now (even with EXCELLENT credit) than it was when rates were higher and housing prices were higher (and, therefore, theoretically, payments would have been more difficult to pay by mortgage holders.) I'm not claiming to have the answers, but it's clear to me the Fed plans to clear out the debt on the backs of folks who didn't cause the problem. Of course, anyone is welcome to another opinion. YMMV
I agree with Koolau we have a very weird situation with very low interest rates, but pretty tight credit. It seems like we have the worst of both worlds savers aren't getting income they need, potential borrower aren't being able to borrow the money they want.
Perhaps what we need is higher interest rates and lax credit requirements. Sure we may get more defaults, but the higher interest rate lenders get will perhaps compensate for their loss. Higher interest rates will loosen the purse strings of savers generating economic activity. Yes I realize this what help bring on the crisis in the first place.
Right now the velocity of money is very low in no small part because of low interest rates. Right now I have $1800 check in my wallet it has been there for a couple of weeks cause it hardly seems worth the $.50 stamp to mail it to the bank. This is a not healthy cause in the past while I am lazy abut many things, making sure my money is working hard for me is not one of them.