The Bear's Lair: Get on with it!

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http://www.prudentbear.com/2014/09/the-bears-lair-get-on-with-it.html#more

The Bear's Lair: Get on with it!
September 22, 2014 posted by Martin Hutchinson

The Federal Reserve last Wednesday did not even remove the "considerable period" from its language about when it might start raising interest rates, thus delaying the likely start of rate rises even further than expected. This repeats its mistake of 2004-06, when it raised the federal funds rate at only one-quarter of a percent per meeting, undertaking 17 such tiny rate increases over a two-year period.

The cost of this dilatoriness can be easily calculated: moving twice as fast would have killed the housing finance bubble a year earlier, removing some $2.5 trillion of malinvestment from the system and making the 2008-09 recession (probably occurring in 2007-08) correspondingly less severe. The AIG bailout and TARP would not have been necessary, and Lehman Brothers and Bear Stearns (though probably not Countrywide) would still be with us.

You can calculate quite easily the amount by which a faster Fed tightening would have reduced the amount of bad assets in the system. The Federal Open Market Committee began raising federal funds interest rates from the low of 1 percent at its meeting in June 2004 and raised them by a quarter percent at each of its eight annual meetings for the next two years, reaching a peak rate of 5.25% at the second anniversary of the first tightening, in June 2006.

It took the Fed until early 2006 to achieve positive real interest rates, since 12-month consumer price inflation was running around 4% at that time. It is not 20-20 hindsight to criticize the dilatory nature of the Fed's interest rate rises in 2004-06; this column did so on several occasions at the time.