As for lessons that were forgotten, one is that persistent ultra-low interest rates means the economy is still short of safe, liquid stores of value, and thus in need of further monetary expansion.DeLong begins with the fact of "persistent ultra-low interest rates". In order then, he offers an observation about that fact, and draws a conclusion.
But "persistent ultra-low interest rates" was not the first thing that happened when the shit hit the fan ten years ago. Therefore, DeLong's sentence is not necessarily correct. It is very likely incorrect.
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I looked around for problem-solving. George Polya turned up. And this:
Even if we accept DeLong's definition of the problem -- "persistent ultra-low interest rates" -- he has to work backwards from there to "determine the root cause(s)". I don't see that happening.
2 comments:
But "persistent ultra-low interest rates" was not the first thing that happened when the shit hit the fan ten years ago.
I don't know your definition of when TSHTF but the interest rates DeLong is talking about (short term securities) started to collapse in mid 2007 and by the end of that year were already in ultra low territory. the Fed responded by selling off almost half their treasury holdings in an attempt
to jack up interest rates that succeeded in getting interest rates up to 1.8% for a few weeks and then the market rates collapsed to close to zero in early 2008. That was before Bear Stearns and Lehman Bros went under.
https://fred.stlouisfed.org/graph/fredgraph.png?g=omQR
DeLong is not saying low interest rates caused the financial collapse. He is saying it (just like high unemployment) is a treatable result of the financial collapse.
DeLong's analysis that persistent ultra-low interest rates means the economy is short of safe, liquid stores of value is correct, however IMO the question is not how to provide more safe liquid stores of value but what is it that is driving the huge demand for them?
The low interest rates are a result of high demand for more safe liquid stores of value.
"IMO the question is not how to provide more safe liquid stores of value but what is it that is driving the huge demand for them? The low interest rates are a result of high demand for more safe liquid stores of value."
EXACTLY!
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"I don't know your definition of when TSHTF..."
Well it looks like you got me on that one. I said "persistent ultra-low interest rates" was not the first thing that happened when the shit hit the fan ten years ago. But from your description it looks like falling interest rates WAS the first S to hit the Fan.
I should have said it differently. By the time the S hit the F 10 years ago, many years of debt growth etc etc had already set the stage for catastrophe.
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