Monday, January 25, 2016

Faith in markets is highly selective

Daniel Thornton has a frustrating piece at Alt-M today.  The putative theme of the piece is that the Federal Reserve lacks faith in markets to heal and adjust to changing contexts.  That is all well and good.  But, the faith in markets Mr. Thornton projects is awfully selective.

He categorizes much of the past 20 years as "bubbles".  Apparently Mr. Thornton has a higher opinion of his own pricing calculations than he does of the market's.  His complaint is that the Fed was easing - in the spring of 2009!  Because, I guess, the one thing that the market can't adjust to, in Mr. Thornton's estimation, is having a bit of money.

He says:
It is impossible to know for sure.  But there is little doubt that the Committee failed to recognize that healing takes time.  Monetary policy had already eased considerably by March 2009.
Core inflation was 1.8% in March 2009 and fell to 0.6% by October 2010, even with the Fed's belated support in 2009.  What would Mr. Thornton had preferred?  Maybe if we had had 1% deflation still in late 2010, Mr. Thornton could have comforted us about the delayed benefits of those brief, early 2009 interventions, and the inflationary relief that would soon come.

He says:
This action paved the way for the FOMC’s nearly 8-year zero interest rate policy, which has encouraged risk taking, redistributed income to the wealthy, contributed significantly to the rise in equity and house prices (which have surpassed their previous “bubble” levels), and created considerable uncertainty.  If the FOMC had maintained some confidence in markets’ ability to adapt, it would have waited a little longer to act and might have avoided an incredibly long-lived policy that will be extremely difficult to exit.
Oh, you say that your rent has been rising and you can't qualify for a mortgage to buy your own home?  Well, please understand, markets are wonderful aggregators of decentralized information.  Your rising rent is the market's magical, wonderful way of confirming your state of deprivation.  But, you see, the one thing markets can't handle is money.  If we let you get your hands on some, you might go out and build a home.  And, then, as the esteemed Mr. Thornton could explain to you, you would be insulated from those rising rents.  You would be living in a bubble.  Markets are God's way of letting Mr. Thornton know that you feel your deprivation honestly.

I wonder what the theory is behind bubbles that don't lead to an increase in quantity.  I get the feeling that people like Mr. Thornton are operating with the notion that after a decade of severe, depression level housing starts, we are still working off the excesses of the housing starts of the 2000s.  (See that little blip there in the graph, next to that giant, crater of deprivation?  That's it.  That little blip.)  Have they bothered to look at a single graph of housing starts?  Have they bothered to even reconcile their housing valuation concerns with the problem that rent inflation is the largest cost-of-living problem we have right now?

So, you say we have a problem that the left in this country doesn't have faith in markets?  Show me a single right-wing candidate that has any more faith in markets than Mr. Thornton - including the libertarians - then talk to me.

1 comment:

  1. You know, there is a sado-comic, or black humour aspect to this.

    It goes like this: the Fed sees economic prosperity, and that some asset markets are appreciating.

    The Fed decides the asset appreciation is a "bubble."

    The Fed tightens up, causing a recession. Asset appreciation becomes depreciation.

    The Fed concludes it was correct, it was a bubble. See? It popped!

    Now, assets depreciated and recession in hand, the Fed says the market must heal itself. Now it believes in efficient market theory.

    You know, a sociologist or sociopathologist is required in this circumstance. Evidently the Fed regards only depressed asset values as reflecting EMT.