I wrote:
> >The way in which US individual, external,and (to a lesser extent)
> corporate indebtedness were increasing -- the Three Bears attacking the
> Goldilocks economy -- suggests that the boom was unsustainable. (Godley &
> Izureta's (sp?) view is similar.) That in turn suggests that Alan the G's
> interest rate hikes determined only the _timing_ of the bubble's >collapse.
Andrew writes:
>But couldn't interest rates, set to levels higher than necessary, lead
>to an excess of available capital, therfore an excess of lending, and
>therefore an excess of debt?
yes: high interest rates during 2000 attracted funds from abroad, fueling
the increase in private-sector debt. Of course this says that the immediate
negative effect of AG's interest-rate hikes is far from certain.
>Borrowers would be tempted to take out loans, even at high interest
>rates, because the economy is growing and the expectation is that the
>debt can be paid off.
more likely for 2000, the booming stock market (which reflected extremely
optimistic profit expectations) implied that the richer consumers were
tempted to take out loans even a higher rates. This is the famous "wealth
effect" and I think it created the expectation that consumer debts would be
paid off. (The high stock market was partly the _result_ of corporations
buying up their own stock -- mostly by getting deeper into debt.)
Andrew had written:
> >>A further regrettable impact of Greenspan's hawkish anti-inflation
> >>policy has been to overly strengthen the dollar. This has contributed
> >>to the ongoing huge current account deficit,
I wrote:
> >the high dollar was _also_ due to the bubblish boom itself (as folks
> >abroad wanted to get a piece of the action).
Andrew now writes:
>This seems like a chicken and the egg problem. The speculative bubble
>must be attributable somewhat to the inflow of foreign funds. So were
>the foreign funds attracted by the speculative bubble or were they the
>cause of it? Can we tell the difference?
any process of cumulative causation involves chicken/egg problems. Did the
bubble encourage the inflow of funds or did the inflow of funds encourage
the bubble? Yes.
>It seems like Greenspan & Co. cannot be held totally responsible for
>overly high interest rates. The budget deficits and public debt of the
>80's and early 90's probably led to upward pressure on interest rates.
but the government budget surpluses of the late 1990s didn't create any
pressure for high interest rates. Au contraire.
Is AG "totally responsible"? probably not, since the world is uncertain.
No-one knows what the NAIRU is (and if it really exists), while private
spending is not under the Fed's thumb. Contrary to some of the fantasies of
Krugman (endorsed by deLong), the Fed cannot fine-tune the economy. The
boom economy of the US during the late 1990s was not AG's doing as much as
his luck. He's not a god or even a demigod. Similarly, he's not totally
responsible for what's happening in 2000.
AG's experience in 2000 reminds me of what the MF (and Anna J. Schwartz)
wrote about monetary policy in the late 1920s: Federal Reserve policy was
"too easy to break the speculative boom, yet too tight to promote healthy
economic growth." With a financial bubble inflating, the Fed can face a
conflict between two goals: deflating the bubble slowly and keeping the
economy going (or getting merely a "soft landing").
Jim Devine [EMAIL PROTECTED] & http://bellarmine.lmu.edu/~jdevine
