You say rates should be set by market forces but you complain about the effect of the “carry trade” which is a market force. I describe a simple solution for a purely market phenomenon and you respond by saying that a better solution is to find some way (a way you don't specify) to solve an economic policy problem by keeping it in a “nonfinancial world”. You ignore the fact that I'm not talking about that part of the problem at all.
I think it's pretty clear that you know who it is you think is the villain in this circumstance, and I think it's hard for you to get past the idea that I'm culpable in some way because of my choice of careers. But the truth is, I don't think you've actually read my piece at all, or if you did, then I guess you didn't understand it. I'm talking about solving one kind of problem, and you're talking about addressing a completely different one. Your insistence that they are really the same and that your claim that I don't understand the connection are unfounded.
You're clearly a smart guy (please excuse the gender assumption) but you're talking only about the causes of the last problem, while I'm talking about preventing the next one.
What's worse is that you don't seem to understand enough about financial markets as they are now to know that without a change like the one I'm proposing, your solution can't be had without catastrophic effects to overall economy. When a crisis like this occurs, the Fed see’s itself as having it's hands tied. They see themselves as doing what must be done to avoid economic catastrophe. The thinking is that you can't do anything about inflation by putting some high percentage of Americans out of work.
But if a solution like mine was implemented, we take the crisis out of the equation which would free up the fed to take a longer term view and do more of what you would like them to do. And eventually (not quickly as you seem to well know... but eventually) address the very issues you complain about.
Either way though, I think it's pretty clear that we're not speaking the same language.
The problem of growing the credit bubble to solve a credit contraction does not solve anything. Your solution for the asset bubble which is created from the credit bubble does not solve any problem, it will merely result in shifting the bubble into a wide range of assets. Asset bubbles as we would both agree are very psychological and there is no doubt that the housing bubble had that element in Phoenix, Miami, Las Vegas. People in those places argued that their location was different, everyone wanted to move there, or ocean front was limited, or there was a huge population growth for some other reason.
The problem with pinning all the blame on the psychology is that it largely doesn't happen without credit. It's basically an easy come easy go situation. It is too easy to get leverage and flip. Your solution would presumably dampen the bubble in particular places, but would not slow it overall. The same availability or glut of credit will have the same effect, just more spread out.
On two other points, the carry trade is the market response to artificially low short term rates. It borrows short and lends long which means there is a problem somewhere (either short rates are too low or long rates anticipating inflation are too high). On the nonfinancial world, my friends in the housing business would like to start new businesses but cannot get a loan of any sort to do so. It doesn't matter what the Fed sets rates to, it won't help them at all. The problem is essentially that I am unwilling to loan them my money for the long run while they get going because I know the Fed is inflating right now, so I speculate in short assets instead. I don't like to do that, but the Fed has given me no choice.