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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Archive for December 29th, 2009

Monetary Policy and the Housing Bubble

Posted by WARREN MOSLER on 29th December 2009

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>   (email exchange)
>   On Tue, Dec 29, 2009 at 8:55 AM, wrote:
>   Do you agree with their conclusion that monetary policy (low rates) didn’t affect housing
>   prices?

Yes, seems that way to me, too.

>   I guess they did raise rates from 2003-06.
>   Seems the very low short rates DID contribute to the ability to buy “more house” or qualify for
>   any house.

Maybe some.

>   For me it was the bush 2003 fiscal adjustment- spending increases, retro tax cuts, etc. that got
>   the deficit up to 200 billion by q303 which was about 8% of gdp annual. Then after a few years
>   the sub prime housing fraud started with loan officers on commission pushing fraudulent
>   appraisals and fraudulent income statements that turned the recovery into a mini boom that
>   actually didn’t get all that large before it crashed when the $trillion fraud was discovered.

Fed: “Monetary Policy and the Housing Bubble”

Our findings are both clear and limited in scope.

We find little evidence that the setting of U.S. monetary policy could have directly accounted for a substantial share of the strength in U.S. housing markets between 2003 and 2006. In particular, the rise in house prices or housing activity during this period was much faster than the pace consistent with the overall macroeconomic environment at that time.

But we also find that housing-specific developments were unusual in this period—and not only with respect to prices and activity. The form of mortgage finance—the prevalence and nature of mortgages with adjustable rates versus fixed rates, the role of other “new” or exotic mortgage features, and the role of different types of lenders and securitization paths—all shifted during this period. These shifts undoubtedly fed on each other, with strong demand for housing and rising house prices spurring unsustainable evolution in the nature and perceived risks associated with mortgage innovations and vice versa. This finding is quite limited in that it describes developments but does not explain why such developments occurred.

Nonetheless, our clear finding that traditional channels of monetary policy accounted for little of the rise in housing markets and that housing-specific factors involved the interaction of shifts in demand and mortgage finance suggest two important lessons for policy and certainly for subsequent research. In particular, our discussion connects to the questions of whether monetary policy should “lean against the wind” in the face of asset price bubbles and of how complimentary financial policies (for example, macroprudential regulation) may interact with monetary policy.”


Posted in Fed, Housing, Inflation, Interest Rates | 24 Comments »

Why health care will keep us ill

Posted by WARREN MOSLER on 29th December 2009

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The flaw in the annointment is that our out of paradigm legislators and administration have apparently agreed that whatever healthcare they pass will be a ‘tax now, spend later’ arrangement.

This will only serve to reduce aggregate for the time leading up to the additional spending, which looks to be, perhaps, three years.

While it may not be enough to throw us back to negative growth, it will work against any transition back towards full employment we might have had otherwise.


Posted in Employment, GDP | 18 Comments »

Iron ore in China

Posted by WARREN MOSLER on 29th December 2009

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Yes, China is very large and in many ways ‘untouched’ and will most likely continue to find its own resources, rather than cause world wide shortages.

China says it may have 10bln tonnes of iron ore reserves in Hebei

Dec 26 (Reuters) — The eastern region of China’s northern Hebei Province may hold iron ore reserves of more than 10 billion tonnes according to exploration work done in the area, reported the official Xinhua news agency on Saturday.

The China Metallurgical Geology Bureau said a total of 3.44 billion tonnes of iron ore has been verified in five mines in the province.

The discovery of the deposits would ease the shortfall in China’s domestic iron ore supplies and contribute to the sustainable development of China’s steel industry, Yan Xueyi, director with the bureau, was quoted as saying.

Spot iron ore prices have recently fallen from three-month highs struck in late November, and some analysts said China, the world’s biggest iron ore consumer, may seek to put pressure on prices to win more favourable terms in annual talks with global miners.

China reported on Friday that iron ore production in November rose 3.5 percent from October even as total crude steel output dropped 8.7 percent. China’s iron ore imports in November rose 12.3 percent from October.

(Reporting by Melanie Lee)


Posted in China, Comodities | No Comments »