07-16-2017, 09:44 AM
(07-15-2017, 03:01 PM)ChrisP Wrote:(07-14-2017, 01:23 PM)Mikebert Wrote: 3. The Fed WILL intervene. But the effectiveness of such intervention has been declining. After the stock market bubble burst in 2000, Fed action converted what should have been a fairly strong recession into a mild one by stoking a "counter bubble" in real estate. But this led o a real estate bubble which after it popped, led to a much stronger recession. The Fed again acted but interest rate reductions were unable to reduce the recession strength. Instead there was financial panic and a seemingly permanent reset to a weaker growth mode. THe Fed followed with massive money creation during the expansion that worked only weakly. Next time the Fed policies will be even less effective.
I agree that the Fed's interventions are becoming less effective in stimulating economic activity; however, they remain effective in propping up asset markets, namely, the stock market. It seems clear that the Fed's main task is keeping asset markets elevated. I would assert that well before the market corrects 55%, the Fed will massively intervene into asset markets, which likely will keep stock market losses well below 55%. It won't necessarily help the economy recover quickly, but the Fed can't do much about that anyway.
Fed intervention is ineffective against "damaged" asset classes. Hence the Fed intervention in 2001-2002 did nothing to stop the decline of the stock market (which was damaged because it had recently been in a bubble.) It boosted real estate because it was not damaged (yet). In the next recession stocks will be damaged, and so the Fed will be ineffective with that asset. Real estate is still damaged (its recovery occurs over a Kuznets cycles--20 years, it won't be back for another decade. So neither of these asset classes are going to respond this time.