End of the Intermediate Trend?

[Dustie]

That's an interesting perspective considering the last year or two. It seems the danger comes from both too tightly and too loosely to me and the fallout is the same regardless because growth, innovation, and employment seem to be in pretty bad shape currently. Would you attribute the current economy to a Fed that over-tightened things too much during the last decade? I understand your concerns but I'm confused about how you could be worried about over-tightening when it appears to me we've just been through a cycle of over-loosening and could use some tightening up. Granted we should always be worried but some correction in the conditions that led to the last 2 years should be warranted in my view. Being worried about over-tightening at this point is like worrying about the accelerator on a car going down hill with no brakes. I'm a fiscal moderate clearly and boom and bust cycles drive me crazy.

What concerns me the most is the fact that we always get burned by these cycles. We must not have the proper indices or the appropriate critical alerts when the existing indices hit certain levels. Why can't we steer the economy somewhere in the middle? Why does it always have to be at the point where we grow as much as we can get away with? To over use the car metaphor, why is it best to drive as close to the speed limit as the law will let you get away with? We know that at those speeds accidents are more likely to be fatal.

The nature of the beast is that policy always lags behind innovation and as innovation and the economy grow the policy making bodies have to grow in kind and it seems to me that this didn't happen.

I'm actually fascinated by behavioral economics and I don't think you can accurately discuss the economy without discussing human behavior at the same time. But I have to get back to work.

I agree there is danger in being too tight or too loose. I mentioned too tight because that the general trend in discussion recently. I agree with the Buffet types that worry about the coming inflation. Just keep things in perspective as you think about cars speeding down a hill. We just had the worst economic crisis since the Great Depression and 90% of us are still working (of people who want to work). Milk still costs the same thing it did last month. Gas prices are down. Natural gas prices are down. There's no mass starvation or homelessness (although I'm sure it's ticked up). It's really quite a good system that we and most other developed countries are using. Our homes are worth less, but for most people they can still easily afford a place to live (even if it's 1 or 2 bedrooms smaller then their last house).

As far as catching these problems before they occur, that would go against your acknowledgment that economics is also a social science. You can't adjust a knob and make consumers more willing to spend vs save. You can adjust a knob and make it easier for consumers to spend or to save, but you can't ever predict all of the unintended consequences. That's why every economic theory you'll read will start with "all else equal, such and such will lead to higher consumer saving (or whatever)"

It's kind of like saying, "Why didn't we predict the invention of the light bulb and make electricity distribution regulations and plans ahead of time. Then, we'd have a nice well thought out plan and power grid." I also like to use the example of the statue on top of the Capitol building in DC which is pointing east. The city grew and developed to the west, exactly opposite of the direction where most city planners believed new development would occur. There are some things that even the smartest among us can't predict.