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64 comments on Minimal Behavioral Adaptations to Oil Shocks

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Gloomy on October 21, 2005 - 11:53am Permalink | Subthread | Parent | Comments top
You definately swap the cause and effects here.
With few exceptions recessions are caused by overinvestment in assets that turn to be unproductive in the long run. Of course FED can artificially cause a recession as it did in the 80-s, but usually it follows the economy not directs it.

For the current situation I expect that it will try to cool down the economy by raising the interest rates gradually in the near future.

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Eroie Van Tanstaafl on October 21, 2005 - 12:37pm Permalink | Subthread | Parent | Comments top
With few exceptions recessions are caused by overinvestment in assets that turn to be unproductive in the long run.

Overinvestment occurs because interest rates are too low - and those rates are set by the Fed.  But recessions also happen when interest rates are too high, choking investment and starving marginal enterprises of liquidity or revenues.  Recessions happen for lots of reasons.

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Gloomy on October 21, 2005 - 1:11pm Permalink | Subthread | Parent | Comments top
Overinvestment occurs because interest rates are too low

Not always, sometimes it is because of a bubble (like in 2000) and sometimes there is simply a change in the environment. If you take a different point of view the oil shock recessions were actually caused by long-term overinvestment in unsustainable oil-dependant way of life.

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Bigelow on October 22, 2005 - 5:57pm Permalink | Subthread | Parent | Comments top
Bad investments or misapplication of resources should be traced back to behavior indicating market potential when no potential would exist if credit inflation and ensuing bubbles were not influencing individual's consuming decisions. It is not really a chicken or the egg situation because market conditions would differ from present conditions if the FED wasn't involved.
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Gloomy on October 24, 2005 - 4:22pm Permalink | Subthread | Parent | Comments top
Sure I agree (to some point).
What the FED has to balance is capital flow in market bubbles and bad credit (unproductive assets) and expensive money and investment mostly in T-Bills (also unproductive assets).

But there are also changes in environment that cause significant adjusments hence drop in GDP. Consider the oil shocks of the 70-s - much of the pain came from the USA auto industry which was totally unprepared for oil supply constraint. Or consider the number of the local boom-and-bust cycles, e.g. the oil shale mania of the late 70-s.

FED may cause economy slowdown/expansion by dropping/raising money supply but it can not control resource constraints or international market events. In other countries weak local currencies are also a factor of the business cycle.

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