The Fed simply did what it does, it accommodated monetary policy towards the reality of the US economy. That is partly a tendency to favor money flow at the expense of investing which has its roots partly in the 80s. But it is something really good as well.
There was a large flow of money within the economy in the run up to the crisis from cash generated from loans predicated on house values amongst other sources. A number of elements supported these calculations. The sheer numbers and dynamic (new ones added) involved made the aggregation of these valuations self supportable for a while. The valuations were referenced to themselves.
This was expressed but not created in instruments which aggregated these valuations. The reference decayed as always when the valuations were no longer supported by rising values and new ones added (a similar dynamic was seen in the tech bubble). Like in the markets they then had to reference fundamentals.
But unlike assets in the market they could not simply deflate. What they did was deflate currencies and the market itself. Remember they were expressed in tradable instruments which made the aggregates reference not themselves but the market, that was how risk was moved away from them.
If one wants to blame Wall Street for the crash one can ask did these instruments really support these valuations or did they accelerate the decay of self-supportability. Remember at the time nearly everybody felt these valuations could sustain or increase forever, essentially. That was the premise of these aggregations.
Their risk was precisely the time decay factor in self-supportability, one might speculate the instruments delayed this, whether they magnified it or not is another matter. Using physical systems to model this kind of system behavior is problematic (a criticism made by both Buffett and Volcker) because the market is not precisely a physical system as this blog has noted and the market is where valuations come home to roost.
However I believe the policy of getting mortgages to as many as possible is correct. I believe as well, restrictions, high barriers to mortgages are themselves risky, and what happens is the market adapts itself to this, making a resulting fall even worse. Now that is food for thought, the crisis was inevitable, but was a lot less severe than it could have been.
One could conjecture, because this did not work there is some inherent flaw in the system or the system worked, or this was simply a stage in the evolution of a system. This system would be a democratization of credit. It does seem that the US has to have such a system. It is difficult to see how the US could have a system such as Canada's where the barrier to mortgages is high.
What I am saying is, the nature of the US necessitates the people having access to credit and real credit, not simply a card, the ability to use your house as a generator of large sums of cash. So how do you do this over a sustainable period of time ?
Well, you can do exactly what has been done and deal with the revaluation. Or you can prevent the markets from revaluing or you can make the consequences of this revaluation a systemic property. It could be asked is that the point of the 'too big to fail' concept.
The basic problem is money flow. Sloshing money about the economy produces asset rises in and of itself. And it is still being done. Slosh cheap dollar derived cash about the market and you get a miraculous rise despite an economic nightmare.
But a rise which starts to get revalued down. The solution to all this is an investing economy (restricting the valuations of the market is not a good idea). It is exactly what the US is good at, because the US has what an investing economy needs, creative people.
At the heart of an investing economy is people turning ideas into efficient forms, which can be inputted into the economy. If I were to pick the process which results in the miracle of the US economy, it is this.
But what does this derive from, the equality of opportunity and that is what giving mortgages to the people is all about. The US innovates ideas themselves. The ideas of the Constitution took time and wars to make efficient.
Credit to the people is one of them. Hiding risk is not a bad thing per se, especially if it one step towards dealing with it, efficiently. That is to say, the markets process this democratic idea, not wars or even congress. And we are going through such a processing, perhaps with the help of the Fed.
Systems like the market are structural. This differentiates them from natural systems (whose structure is essentially undefinable), but does not seem to differentiate them from the processes underlying natural systems, the structure of matter and time itself.
That is why physical models are used to model the market. But as this blog has suggested the input of minds and its creative output does change this system and makes it unlike even such structures. It's that creative intentionality expressed in markets.
So what is the solution. An investing economy will generate sufficient wealth to effectively insure another attempt to give credit to the people. This provides a moral incentive for the way Americans do capitalism. That was the problem with the most recent attempt as many pointed out, real incomes were not rising during the housing bubble. Well, fix that.
That is not up to Fed Funds target rates, but it could be argued an investing economy needs to have that conduit targeting funds away from dollar assets removed. In all events, what happened thus becomes a structure which the economy can process, like it did with the concept in Internet tech in the late 90s.
Yes it crashed, but Internet tech is a major and growing dynamic in the economy now. Democratic credit may be such a possibility as well.
© 2010 Guy Barry - All Rights Reserved.
