A lack of slack?

W

WaitingToBuyByAndBy_IHB

New member
Does anybody else see the U.S. falling into the same post-bubble trouble as Japan had in its "lost decade" (<a href="http://en.wikipedia.org/wiki/History_of_Japan#The_.27Lost_Decade.27">en.wikipedia.org/wiki/History_of_Japan#The_.27Lost_Decade.27</a>).





Looking at the last three major peak-to-trough values for the Federal Funds Rate, I've noticed the peaks and troughs have been lower and lower:





From 1981 to 1987 the rate dropped from about 19.00% to about 5.85%, a range of 13.15 points. What crazy days those must have been.


From 1989 to 1993 the rate dropped from about 9.85% to about 3.00%, a range of 6.85 points


When the Fed acted after 9/11, the rate came down from 6.50% to 1.00% for a peak-to-trough range of 5.50 points.





To be fair, I'm eye-balling the peaks and troughs as they appear on a graph of the rate (<a href="http://en.wikipedia.org/wiki/Fed_Funds_Rate">en.wikipedia.org/wiki/Fed_Funds_Rate</a>). So for example, between 1981 and 1987 there are certainly a few peaks and troughs. I guess what I've picked might be considered the global maxima and minima. Again to be fair, I'm neither a mathematician nor a statistician. Feel free to poke holes.





Anyway, when the rate is at 19%, there seems plenty of wiggle room for lowering the rate to stimulate the economy. In contrast, though, the rate stood at about 1% for a year back in 2003-2004. It's almost as if the Fed was afraid to go below the 1% line for fear we would end up like Japan did (6 years at zero percent rate).





So my eye-balling the graph suggests the last peak (in 2006) left us at 5.25%. The current rate is 4.25% with the markets assuming a cut to 3.75% by the end of the month. Assuming the Fed were willing to cut all the way to zero, this would leave a range of just 3.75%. If the Fed's plan is to slowly cut the rate as we enter recession, and they cut by half a point each month (ala 9/11), they could cut the rate for 7 months before ending up at the 1.00% barrier. If they then cut by a quarter point, they could lower the rate across 4 additional months. If the recession lasts one year, this could work. If we instead enter the Great Depression II, then I'm thinking we will likely be stuck at 0% until other market forces bring the economy back to health.





Related to this, does it seem more painful for everybody in the long run to artificially stimulate the economy rather than simply choosing a reasonable lending rate and letting the chips fall on those who speculated?
 
It is unlikely that we will fall into the deflationary spiral that Japan did, particularly with Bernanke at the helm. In his paper (which is linked somewhere in the forums) he talks about why the Japanese we unable to generate inflation with a near zero interest rate, and he concluded it was because they were unwilling to do what was necessary to devalue their currency -- i.e. print money. Since the most recent lowering of the FED funds rate has kicked inflation into high gear, we will not run into Japan's problem. When the goal of monetary policy is to stimulate the economy, it is only necessary to get the FED funds rate below the rate of inflation. This stimulates borrowing because the money you pay back is worth less than the money you borrowed assuming you can find a relatively risk-free investment paying more than the rate of inflation. It is the FEDs way of giving away money.
 
<p>In short - no.</p>

<p>Japan has no JDM version of the American SEC. Banks were taking deposits and putting them into stocks and RE. When the party ended it wasn't pretty. Just like the Great Depression, although not nearly as severe. They got lucky because the rest of the world saw an economic boom in the 1990's that saved them from getting crushed.</p>

<p>As much critisism as our Fed gets, one would do well to study Japan's central bank just to compare and contrast on what works (US) and what doesn't (Japan).</p>

<p>To me, this is just a cyclical economic slowdown like we've had before and we'll have again.</p>
 
<p>In times like these I say cut expenses and hoard cash/liquid/semi-liquid. But unfortunately i don't know if it will be enough. It would be interesting to see interest rates spike so I can get some nice CD's. We will see though.</p>

<p>-bix</p>
 
<p>This is not the end of the world people!</p>

<p>We don't have soup lines and half the population of Oklahoma and Arkansas moving to California because they 1. cant' see and 2. are starving!</p>
 
We've already exported the lending misery to China ... I get a bad feeling we'll soon be exporting the above misery too when the factories shut down...
 
I am one of the major housing bears, still sticking with my forecast of late 2009 prices being 45% off of the 2006 peak in LA/OC. However, I've done some in-depth models of the effects, and in the long term it's not that bad.



In order to counteract the overall negative effects of the housing bust, any of the following would make things much better: much lower energy prices, ending the war in Iraq, quickly moving people from the residential real estate and construction industry to other places. Oil imports at current prices are about $400 billion per year, that bill could easily drop by $100 billion with higher production, conservation, etc. The Iraq war costs over $110 billion per year. The faster you get people out of real estate, the less pain they feel, and hopefully they are productive members of society in their new jobs. I am strongly in favor of cranking the annual real estate licensing fees way up, to about $1000/year. That will help the State's budget and nudge marginal real estate agents to move on.



The poster above also aludes to one of the oddities that results from the lenders being in different locations than the borrowers. If the loans stay current, lots of money is exported from CA to other parts of the US and the world. Once you've blown through the owner's equity, most of the loss goes to people outside of CA. Over time, the drop becomes more and more the problem of lenders outside of CA. The benefits of housing getting cheaper primarily go to CA residents.
 
At the end of a recession, the excesses are purged, and the economy is generally positioned to move forward on solid footing. One of the positives that will come out of this will be a dramatic reduction in housing costs and the percentage of income being put toward servicing housing debt. This will suck for investors in mortgages, but once the system is purged, consumer spending will pick up again because people will have more disposable income.
 
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