Indeed. That is one of the primary reasons why the RBNZ generally keeps rates within a 1% of neutral and moves only very incrementally.

Also the estimated lag is about 18 months methinks.

“While fiscal policy is probably subject to shorter lags, politics has shown us that while turning the tap on in bad ties is easy, turning it off again is much harder.”

I do not think fiscal policy is subject to shorter lags when the decision making process is included – fiscal policy is incredibly untimely.

I agree with your point that it is hard for governments to change policy as an institution – ultimately, I don’t think fiscal policy should be used as a counter-cyclical instrument outside of “automatic stabilisers”.

There is always another bubble coming.

However, from a policy perspective it would be pointless going after them for that reason. ”

We can always “blame people”. I mean, the reason I can’t get a 50 inch TV for super cheap right now is because other people are “bidding up the price” – so I could blame them for it.

I am never keen to blame people for acting in their own self-interest – especially when the consequence of their actions on other people is not clear (as in the financial market case).

What gives me greater concern is that usually serious and sensible people (and I include John Key in that group) are suggesting that we return to a system of coordinated counter-cyclical macro policy that was tried and found wanting on both strong theoretical and empirical grounds.

Has anyone seen a serious critique of Friedman’s view that monetary policy is subject to long and variable lags? That is, you simply can’t run counter-cyclical monetary policy because you will not know when it will have effect.

While fiscal policy is probably subject to shorter lags, politics has shown us that while turning the tap on in bad ties is easy, turning it off again is much harder.

This is where the Australian Treasury’s idea of “go hard, go early, go households” worries me. While most of the spending is in one-off lump sum form, some of it is in ongoing programmes (pensions, family assistance).

To some degree people are to blame but because they wanted to exploit the absence of regulation in various ways.

However, from a policy perspective it would be pointless going after them for that reason.

Massive informational asymmetries played a big role – and it may well be that regulation is required to ensure that the sellers are providing enough information on the underlying assets.

Nevertheless, financial markets are good at finding arbitrage opportunities and it’s only a matter of when they find the next asymmetry to exploit.