All posts by Dr. Douglas Rice

Neutral rate

A Federal Funds rate of  3-4% is neutral, and when rates were at 1-2% they were stomping on the gas trying to get the economy going. It wasn’t that long ago they went to 6% to slow the economy. So until they get past 4% we need to consider this a move back to neutral.

The Fed is concerned, for good reason, about the housing sector. But that doesn’t mean they will move because of it. That would be too harmful as it would affect everyone, not just the speculators. If they really want to pop housing, I would think you would hear more about tightening credit controls on second and third homes. That would send the message that it can’t continue and hopefully allow the market to unwind slowly avoiding the precipice that’s approaching.

Loosen currency controls

The main problem for the Thai Baht is that it was fixed to the dollar. This seems like a good idea, especially in the short term, but when you think about it a bit, you’ll see that when an imbalance occurs, instead of the market moving slowly in tiny increments, the adjustment is a crisis. This is basically what happened. Instead of the baht devaluing slowly over time, slowing the economy over a period of years, the pain all came at once in a matter of days.

This is exactly why China must start to loosen it’s currency controls now. If an imbalance were to occur, it could be a global disaster.

Fall out

Today there were reports that the housing bubble isn’t a systemic problem. Basically, they are saying that the fall out won’t effect the rest of the economic system. The housing bubble not being systemic doesn’t mean it will be a good economic event and the fall out will still hurt a lot of people. Plus…they could be wrong.