Reply to: Deflation

[Freamon]

It's behind you



To be fair, I'm not trying (can't be bothered) to have an argument, just pointing out some holes in yours.

To be fair, you haven't really pointed out any holes, you've just said there are holes, but not explained what they actually are.

[AtW]

To be fair, I'm not trying (can't be bothered) to have an argument, just pointing out some holes in yours.

There is a hole in Freamon's mind.

[Ruprect]

Clearly you disagree, although you haven't really explained why. Your counter-argument so far has essentially consisted of "oh no it doesn't".

It's behind you



To be fair, I'm not trying (can't be bothered) to have an argument, just pointing out some holes in yours.

[Freamon]

Again you're creating your own cause and effect without backing it up. Trouble is I suspect now you're so entrenched in your own argument that you'll keep digging regardless of what anyone else suggests

Clearly you disagree, although you haven't really explained why. Your counter-argument so far has essentially consisted of "oh no it doesn't".

[Ruprect]

The reason the packaged debt marked imploded was that the models used to price those packages all had the assumption that the valuation of the assets behind them (houses) was not a bubble valuation and that those asset values could never fall. For the regulators to spot that issue, they would have needed to have accepted that the underlying asset valuations were wrong, i.e. the credit bubble existed. So, in my view, the lack of regulation was in large part thanks to the philosophy of the regulators that as long as they could "control" "prices" i.e. RPI/CPI they did not have to worry about asset bubbles and by extension the fallout that the bursting of those bubbles would cause. King even says so in the quote above, when he cites Greenspans view that regulators could just "mitigate the fallout when it occurs".

Again you're creating your own cause and effect without backing it up. Trouble is I suspect now you're so entrenched in your own argument that you'll keep digging regardless of what anyone else suggests

[AtW]

You seem wilfully oblivious to this.

RA RA RA I am very oblivious to this

[Freamon]

Like I said, indirect at best. Lack of regulation around packaged debt was a little more significant IMO

The reason the packaged debt marked imploded was that the models used to price those packages all had the assumption that the valuation of the assets behind them (houses) was not a bubble valuation and that those asset values could never fall. For the regulators to spot that issue, they would have needed to have accepted that the underlying asset valuations were wrong, i.e. the credit bubble existed. So, in my view, the lack of regulation was in large part thanks to the philosophy of the regulators that as long as they could "control" "prices" i.e. RPI/CPI they did not have to worry about asset bubbles and by extension the fallout that the bursting of those bubbles would cause. King even says so in the quote above, when he cites Greenspans view that regulators could just "mitigate the fallout when it occurs".

[Ruprect]

You don't think that low RPI/CPI was used as a justification to ignore rising asset prices (a sign of the credit bubble)? This is what Mervyn King said in 2003:



Basically he is saying that central banks can ignore asset prices and just concentrate on "inflation".

Or you don't think that the asset/credit bubble was a significant contributory factor to the subsequent economic collapse?

Like I said, indirect at best. Lack of regulation around packaged debt was a little more significant IMO

[Freamon]

Regardless of who is right here (as if right has any place in economics), why did they do so? Surely they must have seen house prices rising as clearly as the general public. [Although to be honest I know a lot of people who didn't see anything about houses rising at an astronomical rate as anything to be concerned about, though more titters were forthcoming regarding the official inflation figures, much as they continue to be widely disbelieved today].

They genuinely believed that if they could keep an arbitrary measure of the average price of an arbitrary basket of goods (which they called "inflation") at or around an arbitrary level (2.0%) that everything in the economy would be fine and therefore they could ignore the credit bubble, 125% mortgages, the fraudulent mortgage backed securities/CDO market, massive increases in personal debt, 0% balance transfer credit cards etc etc.

[Freamon]

cause (yours)


effect (yours)

Not correct. Indirect relationship at best.

You don't think that low RPI/CPI was used as a justification to ignore rising asset prices (a sign of the credit bubble)? This is what Mervyn King said in 2003:

In the United Kingdom, we have also had to
deal with our fair share of large movements in asset prices during recent years - a 20% rise in
the effective exchange rate in the late 1990s and, more recently, house prices rising at more
than 25% per annum. This, of course, is in addition to the rapid rise and fall in equity prices
during the past five years. Recent Bank of England policy has arguably been similar to that
of the Federal Reserve, which is described by Greenspan as ‘mitigat[ing] the fallout when it
occurs’. It is hard to forecast asset price movements accurately or to identify asset price
‘bubbles’. Even if we could identify them, it is not clear how effectively we could in practice
control them. Greenspan points out that most of the tightenings during his period of
chairmanship were followed by a rise in equity prices, leading to the conclusion that only a
severe rise in short-term rates, and the associated economic downturn, would have been able
to keep the stock-price ‘bubble’ in check.

Basically he is saying that central banks can ignore asset prices and just concentrate on "inflation".

Or you don't think that the asset/credit bubble was a significant contributory factor to the subsequent economic collapse?

[TimberWolf]

In what sense? Throughout 1997-2007 the BoE and govt continually trumpeted the fact that "inflation" was under control due to low RPI/CPI, and repeatedly used this as justification to ignore the biggest credit and asset bubble in history, which resulted in the subsequent economic collapse...

Regardless of who is right here (as if right has any place in economics), why did they do so? Surely they must have seen house prices rising as clearly as the general public. [Although to be honest I know a lot of people who didn't see anything about houses rising at an astronomical rate as anything to be concerned about, though more titters were forthcoming regarding the official inflation figures, much as they continue to be widely disbelieved today].

[Ruprect]

In what sense? Throughout 1997-2007 the BoE and govt continually trumpeted the fact that "inflation" was under control due to low RPI/CPI,

cause (yours)

and repeatedly used this as justification to ignore the biggest credit and asset bubble in history, which resulted in the subsequent economic collapse...

effect (yours)

Not correct. Indirect relationship at best.

[Freamon]

Bit of a mix of cause and effect here methinks

In what sense? Throughout 1997-2007 the BoE and govt continually trumpeted the fact that "inflation" was under control due to low RPI/CPI, and repeatedly used this as justification to ignore the biggest credit and asset bubble in history, which resulted in the subsequent economic collapse...

[Freamon]

It is, in fact, correct.

It's simple matter of maths - increase in prices over period is inflation FFS.

Now you might have something more relevant to you (but not 99% of the remaining population int he world) that you prefer to call inflation, and it is entirely possible that is also correct usage within that context, however as I said inflation for most people is increase in retail prices.

On the contrary, for 100% of the population, "prices" (or rather the particular attempt to measure prices that is known as CPI/RPI and passed off incorrectly as "inflation") is far less relevant than changes in the overall supply of money and credit. They just don't know it. You seem wilfully oblivious to this.

[TimberWolf]

In 1997 a fresh faced Chancellor called Gordon Brown promised he would not allow house prices to get out of control.

Gordon Brown said: ‘I will not allow house prices to get out of control and put at risk the sustainability of the recovery.’
Gordon Brown and broken house price promises - This is Money

And then proceeded to fiddle with housing on the inflation index to make (price) inflation look low. The Tories said nothing during the whole Blair era so are probably co-conspirators.