Researcher at San Francisco Fed warns of Excessive Easy Monetary Policy
Today we see an article, Betting the house: Monetary policy, mortgage booms and housing prices by Oscar Jorda, Moritz Schularick, Alan Taylor. They warn of excessive easy monetary policies.
Their research uses a large data set.
“In our new paper (Jordà et al. 2014), we analyse the link between monetary conditions, mortgage credit growth, and house prices using data spanning 140 years of modern economic history across 14 advanced economies. Such a long and broad historical analysis has become possible for the first time by bringing together two novel datasets, each of which is the result of an extensive multi-year data collection effort.”
Their research gives a warning that low interest rates will be detrimental to the stability of the economy.
“These historical insights suggest that the potentially destabilising by-products of easy money must be taken seriously and considered against the benefits of stimulating flagging economic activity… Resolving this dichotomy requires central banks to make greater use of macroprudential tools alongside conventional interest rate policy. “
The implication may be that conventional interest policy would suggest a higher Fed rate than we currently see.
Keynes also wrote that low interest rates used to stimulate an economy could eventually produce more waste than benefits. (Chapter 22 of General Theory)
“… it is, I think, arguable that a more advantageous average state of expectation might result from a banking policy which always nipped in the bud an incipient boom by a rate of interest high enough to deter even the most misguided optimists. The disappointment of expectation, characteristic of the slump, may lead to so much loss and waste that the average level of useful investment might be higher if a deterrent is applied.”
The Federal Reserve would like to get out of the Zero Low Bound business, if they can.
One evening I pulled out of a long gravel drive onto to a level concrete street. I immediately realized that the street was completely covered by a sheet of ice.
At that instant, I feared that I would lose control but the truth was that I had already lost control. The speed that I had attained while on the gravel drive was continuing as I moved onto the concrete street. I very very gently applied the brake and immediately swerved into a bank where my spring loaded bumper compressed and then shoved me back onto the road.
My little adventure ended without any permanent damage but let’s just say that the optics were less than desirable. (Smiling here)
Metaphorically speaking, the FED is on a sheet of ice and they know it. Anything they do is likely to have a negative effect on the economy. In these circumstances it takes real courage to act.
Threatening to act may be making speculators nervous. That is a positive effect and is not a trivial accomplishment. But in the end, the FED has to act.
Lowering interest rates should have always been seen as a drug which would produce adverse side affects and could mask important symptoms. Instead it was over prescribed. That is my opinion anyway.
This is great but where was everybody with research like this back in 2002 when the real estate boom was still going strong? Economists seem to be able to analyze data and obtain 20-20 hindsight with great regularity. The most glaring example was the famous chart of the debt to GDP that showed two huge peaks–one at the Great Depression and one at 2008. I always wanted to haul that one out at Bernanke’s re confirmation hearing and ask him if he thought he–and the entire financial regulatory apparatus–might have missed something. I guess being Fed Chair means never having to say you are sorry.
William your comment ended up in moderation. Why? Dunno.
Sorry for the publication delay.
He is new
Considering real gdp has probably grown at least 4% for close to 2 full years and the last 18 months especially, it explains the policy normalization tone.
“grown at least 4% for close to 2 full years ”
Unless you mean 4 percent from 2012 to 2014, you are using different data than everyone else.
I think the analysis is tragically incomplete without looking at housing starts. Housing starts in 2014 were just over 1 million, still not up to the 1990 level which was the lowest since 1959. The danger to the wide economy is not here yet.
House prices will incentivise building, but people will remember 2007, so there will be a lag. Demographics may reduce the need for growth in housing stock, but population growth is 86 percent of long term and housing starts are only 69 percent. It may not be easy, but clearly a more complete analysis is needed.
How do economists distinguish between low interest rates and easy credit? Right now we have low interest rates and tight credit, so a lot of talk about raising rates seems rather irrelevant.