Exit Strategy (ramblings)

I believe the last two times the Fed raised rates it did cause problems. In the early 90s you had the Mexican-peso crisis when the Fed raised rates. I'm less clear about the 2000s. They did raise rates but seems like the bubble had run its course and we had a Minsky moment.

I think Krugman made a good point in his recent column* about how the discussion of blowing the bubble is overblown when countercyclical policy to close the output gap has been so lacking.

But for some reason I'm less worried about the Fed's exit strategy this time around. They'll say they'll raise the interest rates on excess reserves (IOER) giving more of a subsidy to the banks, who investors don't trust anymore. (The cash nexus dissolves all bonds of trust into air.)

I'm more worried that we're turning Japanese and will NEVER recover given the governments poor demand management on the monetary and fiscal fronts. Senseless deficit cutting and fears of inflation. But there is hope across the sea with Abenomics and the general sense the economy will always turn around as people forget about the housing bubble and financial crisis and it all starts over again. But maybe that won't happen.

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* "Why did spending plunge? Mainly because of a burst housing bubble and an overhang of private-sector debt — but if you ask me, people talk too much about what went wrong during the boom years and not enough about what we should be doing now. For no matter how lurid the excesses of the past, there’s no good reason that we should pay for them with year after year of mass unemployment."