KQED Forum: Inflation, the Federal Reserve, and the Housing Bubble

Wed, Sep 19, 2007 -- 9:00 AM: Inflation and the Housing Bubble:

Amid the Federal Reserve's cut of U.S. interest rates on Tuesday, the show examines what the central bank has done, why and what it portends for the U.S. and the global economy. Guests include John B. Taylor, professor of economics at Stanford, senior fellow at the Hoover Institute and author of "Global Financial Warriors"; Brad DeLong, professor of economics at UC Berkeley and research associate at the National Bureau of Economic Research; and Ethan Harris, chief U.S. economist at Lehman Brothers Holdings, Inc.

http://www.j-bradford-delong.net/2007_audio/KQED_9_19_07.mp3

http://web.mac.com/jbdelong/Brad_DeLongs_iWeb/Coffee_and_Tea_Audio_Podcasts/Entries/2007/9/19_The_Subprime_Crisis_and_the_Federal_Reserve.html

Comments

[wood turtle]

"Global Financial Warriors"? So, Brad DeLong, where do you keep your light saber? HaHa.

[wood turtle]

I hate to be the one to tell you this, but financial people are not in the Warrior Class. They are in the Squirrel Class.

How's your acorns? HaHa.

[Chris]

When will the weak dollar show up in higher inflation?

[Matt]

Here is a clue. The economy, when stable, will be a gaussian white noise time signal. At that point the spectral yield curve is guassian, minimum phase, centered and risk is allocated appropriately.

When the economy has a forcing, cyclic volatility, like season variations, then we would expect seasonal variations. This would show up as a spectral peak in the yield spectrum (in both the asset and liability side).

If you predict your future wealth ten years from now, you will predict no better than the seasonal variation, the minimum noise variation would be set for economies with longer outlooks.

The argument, extended, tells us that the economy can do no better in long term prediction than whatever short term variation exists. In other words, if there is a spectral peak in the yield curve, then the peak must either be amoritized with a business process and removed; or the economy must operate on higher noise levels in its markets so the overall spectral shape returns loosely to minimum phase.

Spectral peaks will appear in both the asset side and liability side. When we have a small, constant, and slightly assymmetric peaks, just off of DC, then we are likely going through a long term trend.

[Matt]

When the fed changes interest targets, it is the sole seller of money in that venue, the monopoly data point.

Prediction theory tells us that the single market point is very innovative, it tells the users of money something very true and certain, so they herd slightly in that direction. This is the fundamental problem with monopoly anything, a phase shift that cannot be removed.

If the phase shift is unavoidable, then simply look at past federal reserve rate changes to see the primary driver of inflation cycles. (Which are very small since the "Great Moderation")

The money guys, when efficient, will be producing an uncertainty in money rates, equal in percentage to the uncertainty of all other financial risky things, in a balanced economy. Risk is equally shared in proportion to wealth.

If one could measure the inflation spectrum, one could discover if it is asset leaning or liability leaning. On that basis, the inflation spectrum could be placed on the X axis, and we could identify the wealth classes who have been given differential advantage!

[Kelly]

If I understand Brad's feelings on the four categories of people that are being hurt by the housing bubble popping;

1. We feel your pain, but oh well.

2. You got a good deal on rent. What's the problem

3. I hope you get it good buddy.

4. The Fed should help these poor saps out.

So; Except for the people who got into this without really knowing it by investing in products that were tied in through convoluted paths, everyone should feel all the pain that comes to them and nobody can or should really interfere?

Is that a fair understanding?

[David Lloyd-Jones]

In Canada, at least, regional home-ownership percentage correlates with regional poverty. People who are stuck with their property are less likely to follow the opportunities.

Therefore the Bush Administration has just engineered the most daring and forward-looking move toward economic efficiency in generations.

Q.E.D.

Corollary: Kicking all those working people out of their houses is the greatest thing since Katerina.