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HershOstropoler
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So we have 3 years to go.
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HershOstropoler
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quote:
Originally posted by Kidicious
A little more than 2 actually. |
We were talking about the 2003-06 period, ie including 2006, were we not?
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HershOstropoler
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I remember the time period of a similar bet. IIRC I used 2006, based on the last hurray of the Greenspan bubble. But who knows, maybe they really go unconventional and it works for a while, then I'll lose this bet.
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Saras
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Vilnius, Lithuania
Apr 1999
time: 06:30
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Roland will love this, esp. the last section.
quote:
Do Asset Prices Belong in Central Banker Toolkit? Caroline Baum
Nov. 13 (Bloomberg) -- We can thank better monetary policy for taking much of the volatility out of the business cycle over the past two decades. Recessions are fewer in number, shorter and shallower in nature, with Japan's lost decade of the 1990s the exception to the rule.
Central banks in developed countries have achieved price stability through either an implicit or explicit inflation target, obviating the need to slam on the brakes and cause a recession to ``cure'' inflation.
Reduced volatility in the real economy has gone hand in hand with increased volatility in asset markets. It's as if there's ``a kind of moral hazard of economic policymaking: the more stable/predictable the economic environment, the more risk taking, investment, and innovation take place,'' writes Bob Keleher, chief economist at the Joint Economic Committee of Congress, in an April 2003 paper, ``Monetary Policy and Asset Prices.''
If financial imbalances and asset bubbles are occurring in low inflation, stable economic environments, and if the size of asset markets relative to the economy has soared, then perhaps there is a role for asset prices in the conduct of monetary policy above and beyond their standard transmission mechanism function.
``From 1950 to 1982, housing was roughly equal to gross domestic product in the U.S.,'' says Joe Carson, head of global economic research at Alliance Capital Management. ``Now it's 40 percent bigger than GDP. From 1965 to 1995, equity market capitalization was 50 percent of GDP. Now it equals GDP.''
Recession Drivers
At the peak of the 1990s stock bubble in March 2000, the market value of U.S. stocks hit a high of 183 percent of GDP, according to Jim Bianco, president of Bianco Research.
The issue is not whether asset prices matter; they do. They create wealth for consumers and businesses and determine how capital is allocated.
The issue is whether central bankers should respond to perceived asset bubbles in the same way they react to inflation and other events that have the potential to destabilize the economy.
Consider that the last two recessions in the U.S. and series of recessions in Japan in the 1990s were arguably the result of popped asset bubbles. In the U.S., the bubble was in real estate in the late 1980s/early 1990s and in the stock market in the late 1990s. Japan had a double whammy -- overvalued real estate and equities -- in the bubble economy of the 1980s.
Misallocation of Capital
Residential real estate is booming in the U.S., and some analysts think stock prices have outrun the fundamentals yet again.
``Ignoring inflation in the asset markets and its potential influence on the allocation -- and misallocation -- of capital can have significant adverse macroeconomic consequences,'' Carson says.
Carson advocates using a broad price index, which includes a weighted average of real estate and stock prices in addition to consumer and producer prices, to assess the stance of monetary policy. Currently, the gap between the growth rate in his proprietary broad price index and the federal funds rate is the widest in 20 years.
One of the side effects of a rapid rise in asset prices is excessive debt accumulation -- to finance even more asset accumulation, Carson says. ``It is this misallocation of capital and rapid asset price inflation that's missed by the current analytical framework (for gauging inflation), creating the risk of another boom/bust cycle.''
Lacking Prescience
In raising interest rates last week, both the Bank of England and Reserve Bank of Australia noted a booming housing market and rapid credit growth.
All central bankers take asset prices into account, but only to the extent that they affect the real output and inflation. They readily admit they don't have superior information to the private sector when it comes to diagnosing a bubble.
The main argument -- and there are many -- against responding to perceived asset bubbles is the most basic: Bubbles are difficult to identify in real time, except under the vaguest of doctrines established by the late Supreme Court Justice Potter Stewart to define pornography (``I know it when I see it'').
Loose Definition
``Just because asset price misalignments are difficult to measure is no reason to ignore them,'' writes Steve Cecchetti, professor of international economics and finance at Brandeis University in Waltham, Massachusetts, and former research director at the New York Fed, in a May 9, 2002, Financial Times op-ed article. ``If central bankers threw out all data that was poorly measured, there would be very little information left on which to base their decisions.''
What about the squishy concept of the output gap, the difference between potential and actual GDP? The gap ``is notoriously difficult to measure in real time, yet it remains an important input to central bank inflation forecasts,'' writes Kevin Lansing, senior economist at the San Francisco Fed in the bank's Nov. 14 economic letter, ``Should the Fed React to the Stock Market?''
Another argument against a monetary policy response to asset prices is the lack of a ``consistent relationship between changes in stock prices and changes in inflation,'' the JEC's Keleher writes.
Caveat Emptor
If the stock market has no reliable correlation to inflation, and low, stable inflation is what central banks care about as a means to the attainment of maximum sustainable growth, then maybe asset prices have no place in the central bankers' toolkit.
Where most economists agree is on the appropriateness of a monetary policy response once the asset bubble bursts.
``The biggest mistakes -- in the case of Japan, for example -- are what they did afterwards,'' says Frederic Mishkin, professor of banking and financial institutions at the Columbia Business School and a former New York Fed research director. ``The focus should be on financial stability rather than the stock market.''
Asset bubbles don't erupt involuntarily. In most cases, they are an outgrowth of excess credit creation, which originates with the central bank.
For example, the Fed lowered short-term rates by 75 basis points in the fall of 1998 to counteract the ``seizing up'' of financial markets. As it turned out, the seizing markets had zero effect on the economy. The Fed's largesse soothed the Nasdaq Composite Index to an 86 percent increase in 1999.
Maybe the issue isn't asset bubbles themselves but the policies and conditions that give rise to them. Those are the purview of the central bank.
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05-11-2003 12:31
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