Bernanke

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The Fed Acts

Look for Bernanke to be burned in effigy at the next meeting of the Republican Party leadership. In defiance of the brazen attempt to interfere with Fed independence by that leadership – if that word is appropriate – the Fed announced today that it was going to engage in yet another new trick in order to support the economy. Citing continued, and possibly worsening, economic weakness the Fed unveiled a new trick.

It is a variant on the “twist” strategy last deployed in the 1960’s. In this latest version the Fed will sell off about $400 billion in short term treasury bonds, and buy an equivalent amount of longer term bonds. The idea being that this will influence the slope of the yield curve – the difference between short term and long term interest rates. A large shift into longer term, and thus more risky, assets should drive those rates down. By adding its own demand to the normal market demand for longer term securities the Fed will have the effect of driving down their interest rates. Conversely it will, of course, have the opposite effect at the short term end of the maturity spectrum. The net result will be to reduce the risk premium on longer term assets and thus makes investment more attractive. The desired outcome of the entire effort being to encourage business and household investment by reducing the cost of borrowing in the range of maturities normally associated with private sector activity in the real economy.

Will it work?

Well the 1960’s attempt at a similar thing is widely regarded as a flop. But circumstances were different back then. Now we are in a liquidity trap; businesses are awash with cash; and households are still digging out of debt. This is not an auspicious combination. So the context for the Fed’s initiative is not good. Still, we should give them marks for effort. Which is more than we can say for the folks over in Congress. There, it seems, all the effort is being applied to doing nothing.

As an addition, and just to rile the Republicans even more, the Fed also said it was going to reinvest more of its maturing cash flows in mortgage backed securities rather than in regular Treasury bonds. This is aimed to help provide more help to the real estate market, via an inflow of liquidity. Again, it might have little effect. But at least Bernanke is trying.

One last thing: the usual suspects on the Fed Board opposed the initiatives. Those people – Plosser, from Philadelphia; Fisher, from Dallas; and Kocherlakota, from Minneapolis, all objected to any kind of stimulative effort. According to these three the economy is in ruddy health, needs no help, and thus any stimulus will ignite horrible hyperinflation. They have all been wrong consistently since the crisis erupted, so it is re-assuring to see them maintain that consistency. It means we assuredly need to do something. Probably a lot more drastic than what was announced today.

But we are forced to accept what little help we can.

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Republicans and the Fed

In the category of bald faced hypocrisy, this week’s attempt by the Republican Congressional leadership to strong arm the Fed, must surely scale new heights. Here’s the Associated Press story:

WASHINGTON (AP) ‰ÛÓ Republican leaders of the House and Senate are urging Federal Reserve policymakers against taking further steps to lower interest rates.

On the eve of the Fed‰Ûªs two-day policy meeting, the leaders sent a letter to Fed Chairman Ben Bernanke warning that the Fed‰Ûªs policies could harm an already-weak U.S. economy.

The letter, sent Monday, was signed by Senate Republican Leader Mitch McConnell of Kentucky, Senate Republican Whip Jon Kyl of Arizona, House Speaker John Boehner of Ohio, and House Majority Leader Eric Cantor of Virginia.

The letter followed criticism from several Republican presidential candidates that the Fed efforts to boost growth are raising the risk of inflation.

‰ÛÏThe American people have reason to be skeptical of the Federal Reserve vastly increasing its role in the economy,‰Û? the lawmakers wrote.

It is rare for lawmakers to try and sway policy action at the Fed, which operates independently of Congress and the White House. It was also sent at a time when Bernanke, a Republican, has faced growing criticism from members of his own party.

Former Fed official Joseph Gagnon, senior fellow at the Peterson Institute for International Economics, called the letter ‰ÛÏoutrageous. It‰Ûªs incredible.‰Û? He said it‰Ûªs been several decades since such high-level politicians tried so directly to influence the Fed.

‰ÛÏThe fact that it‰Ûªs in print and signed by the leaders of the House and minority leaders of the Senate raises it up a notch,‰Û? Gagnon said.

David Jones, head of consulting firm DMJ Advisors and the author of four books on the Federal Reserve, said he cannot remember another time when members of Congress had made such a direct approach to the Fed in the week that the central bank was meeting.

Digest that all slowly it might make you ill.

What we have in this communication is an expression by one of our two major political parties that the Fed, whose mandate extends to limiting unemployment and keeping inflation within bounds, should not exert itself to do either such thing. It should, according to the GOP leaders, do nothing.

Nothing, that is, to help the economy.

Read that again to make sure you have the story correct.

The Republicans want the Fed to sit idly by and let the economic malaise linger. They want unemployment to stay where it is. They want no action on inflation. This amounts to a desire to have the economy fester, to have households suffer, and to have businesses lose profit.

This nakedly political request is sickening. And it is deeply disturbing. It means that the Republicans really meant it when they said their goal was to defeat Obama. It means that all their posturing to offer policies to improve the economy was a sham. It means they would prefer decline and loss over recovery and profit. It means they have abandoned any pretense to being a loyal opposition, for this is profoundly disloyal. It is borderline treason, if by that word we mean acting against the national interest.

What the GOP leaders have done is to make clear that their interest – winning the next election – is more important to them than solving the nation’s economic problems. What is good for America is not good for the Republicans. And vice versa.

Now many of you are Republicans: are you not ashamed of this display of disloyalty?

Are you not sickened by the cynicism?

Are you not disgusted by what amounts to an open revolt against our national wellbeing?

It is all well and good to debate the Fed’s role, or to discuss the efficacy of what it does. Those activities fall within the realm of loyal and open discourse. But urging it to take no action to help us, when it is clearly a major aspect of the Fed’s reason for being to do just that, is completely out of bounds.

Obviously the Republican intention is to halt all attempts to kick start the economy. Having stymied any implementation of fiscal stimulus, and now well down the road with anti-social, anti-growth austerity measures – both at the Federal and State levels across the country – the GOP, if it is to starve the economy completely, needs to make sure that monetary policy is also neutralized. So they are asking Bernanke to join them in their brazen disloyalty and anti-American positioning.

Did they adopt this attitude during the Bush years? Did any of these same leaders speak up against the enormous devaluation of the dollar during the Bush regime’s tenure? Did they criticize the over-accomodating stance that led to the bubble? Of course not. That would require consistent economic thinking rather than the twisted cynicism of modern Republican politics.

Is there a more benign explanation? I don’t think so. This was pure politics. Disloyal politics. Disloyal to America.

The GOP is exposed.

I wonder if voters will notice.

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Bernanke: Mr Long Run

Relax. In the long run it will all be OK. Between here and there … well now, that’s an interesting question, and one that we all ought to ponder, be sensible about, and generally discuss. The one thing we now know is that the Fed is not seriously involved in offering a solution to the near term bumps it sees ahead.

That’s about it. Bernanke’s speech this morning in the annual Jackson Hole shindig was something of a damp squib. He carefully avoided saying anything controversial, and he absolutely avoided suggesting that the Fed was going to engage in policies designed to assist us through the choppy waters we find ourselves in.

In short: the Fed is on the sidelines.

Let’s think about this for a moment.

With fiscal policy sidelined by the emergence of a veto exercised by our extreme right wing, and with austerity measures about to become a drag on growth, it is a little disheartening to hear that the other wing of our policy elite has also decided to absent itself from the fight.

We are on our own.

Having said that I was not a big fan of the Fed setting up a new QE program. Monetary policy at this point is pretty much useless, and while the stock market loved the idea – why not? all that cash would probably float stock prices up anyway – not many others saw any value in it. The entire point of a further easing would have been to nudge long term interest rates lower in order to stimulate borrowing, but rates are already very low and having little effect in the face of continued debt aversion amongst households and vast war chests of cash sitting around at our large corporations. In view of these factors monetary policy has little chance of success. Let me correct that: it has zero chance of success. So Bernanke is right to sit this one out.

This is a moment for fiscal policy, which, as I said above, is ruled out on ideological grounds. Which is absurd, but there it is.

As if to put all this in context we were treated, this morning, to the monthly update in the GDP numbers. There was no surprise. Second quarter GDP was anemic at an annualized 1.0%. Add this to the first quarter’s even worse 0.4% and the first half of this year scarcely registered growth at all. Yet Bernanke spoke of the economy being now nine quarters into a recovery. Technically correct. Substantively missing the point.

For those of you who read my forecasts will recall that I was always less upbeat than most others because of the drag I see – and still see – created by the need for households to retrench. We have made some headway towards getting the average household balance sheet repaired, but there is still some way to go. Not as far, though, as I feel it appears. The biggest current problem is no longer the repair job itself, but the fear of another round of erosion. In particular, the combined weakness in wages and the labor market create an atmosphere within which even a stable balance sheet inspires little confidence. People are still shell shocked at the decline in home values, and weak wages give them no margin for error. Consumption is less a priority than building up the ramparts to withstand another bank created shock.

So we have been lingering in a kind of no-man’s land between decline and growth. In a word: stagnation has set in. And there is no obvious motor available to power us out and back into a self-sustaining growth pattern.

Given this, I expect GDP growth to get back into the 2.0% – 2.5% range it had wallowed around in for a few quarters before the Japanese disaster and its consequent supply side shock set us back earlier this year.

To this extent I agree with Bernanke.

Where I differ is that I see nothing beyond that. I expect GDP to stick at around that pace for a while longer. The Congressional Budget Office released a new forecast this week with a projection that we would get back to our historic growth rate of between 3.0% – 3.5% by 2015. Quite what they think will give us sufficient kick to get there I don’t know. They didn’t explain, and their forecast seems to be built more on hope than a coherent view of how an economy beset by debt restructuring an de-leveraging behaves.

There’s a lot of that going around: far too many of the comments I read in the media compare this recovery with a “normal” one after a “normal” recession. This is as if the recession was in the slightest bit “normal”. It wan’t. So we should not expect the recovery to be either. And, thus far it hasn’t been. Surely this should have sunk in by now.

Meanwhile our underutilization of resources – both labor and capital – is extraordinary. We are leaving vast piles of wealth on the table never to be recaptured. One estimate is that we will lose, permanently, about $5 trillion by the time we get back on our feet. That’s a wicked waste. One that is not necessary. And one that makes the cost of a stimulus package designed to limit the damage comparatively cheap. Why our leadership doesn’t see things through that prism I cannot explain, other through recourse to a toxic combination of lack of fortitude and ideologically driven obstinacy.

Given that policy blockage I find Bernanke’s speech depressing. He spent a few words gently chiding Washington for its childish and destructive debt ceiling spat. But he spent more words on describing the halcyon days ahead after we make our way through the short term problems. He expects us, in the long run, to have experienced no permanent damage from the crisis. All will, apparently, be well.

In the long run.

But, as someone, whose name I will not utter for fear of being cast as someone who is not serious, once said: in the long run we are all dead.

It’s the short term we have to worry about. And on that Bernanke was entirely mum.

Oh well: carry on as best you can. Our policy elite will follow along behind us all. Way, way, behind us all.

As I said: we are on our own.

Addendum:

Maybe it’s just me, but I think Bernanke should focus a little more – no a lot more – on unemployment. So concerned is he not to break with the hallowed ranks of central bankers, that he scarcely mentioned jobs at all in his speech. The first reference was half way down Page 6, after he had gone through avery dull and needless reprise of the crisis. Hey: Ben, we all know what happened. What we want to know is what you are going to do about it.

What’s worse is that when he did finally warm to the task of talking about the problem of unemployment, he promptly punted the responsibility of finding a fix to Congress, knowing full well the probability of such a fix emerging from that election fevered swamp is near zero.

And having carefully avoided taking a stand, and having run on about the virtues of price stability for a page or so, he dared to end with the platitude that, and I quote:

“The Federal Reserve will certainly do all that it can to help restorehigh rates of growth and employment in a context of price stability”

Given what went before these parting words, he clearly doesn’t mean them. Indeed, I careful listener would conclude just the opposite: the Fed is doing everything it can to avoid getting involved. Just like Congress. Just like the White House.

Oh well.

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The Fed at Bay

Just a very quick note about two aspects of the Fed’s announcement on interest rates today.

First: it is obviously worried about the economy. Very much so. Enough to announce that it will be keeping rates unchanged until at least 2013 – or as long as the economy stays this weak, which from my perspective amounts to the same thing. Duh. On the surface this is a clear signal of intent to combat malaise. To tell the market that rates will stay at the current lows for two more years is a profound signal. Or it ought to be. It lets everyone plan. It removes uncertainty. It ought to shock. I am left a little skeptical, though, mainly because nowhere in the Fed’s release was there much hint of other measures in the pipeline. That is unfortunate, because the economy could do with a big dollop of help right about now. In the absence of any sensible fiscal policy, and in view of the weakness of the economy, the Fed is being forced further into uncharted waters. Still, doubts aside, I am glad it is prepared to go there.

But.

Second: there is obviously great disagreement within the Fed about basic economic matters. Three of the governors, the usual gang of hawks, who objected publicly to the use of the specific time period for interest rates. These hawks, who have been wrong consistently about practically everything since the crisis first hit, are sticking to the tired and discredited theory that pumping the economy full of cash will inevitable lead to higher inflation. Note the word “inevitably”. The causal connection may, or may not, be there under normal circumstances, but it is absolutely not there in our current near depression circumstances. We are bang up against a zero interest rate boundary that invalidates normal theory. Instead it invokes the need for alternative ideas which, fortunately, the other seven governors have embraced, albeit cautiously . Still, the vocal opposition to the Fed’s new direction from the hawks, represents the strength of the old ideas and mimics the position taken by the extremists in Congress who advocate the equally discredited supply side notions and austerity policies that are undermining the recovery.

When you have an element of your leadership actively engaged in advocacy of policies that will disrupt and harm the economy you are partially crippled. It makes it harder to marshal the public behind the kind of bold action we need to avoid outright depression and a long term malaise.

We are well and truly limping at the moment. Hobbled and without leadership capable of putting in place the policies to solve the crisis.

But at least the Fed, or at least the seven governors who supported today’s action, are trying a wee bit. Which is much, much, more than we can say for the cowards in the White House and the extremists in Congress.

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Bernanke At Bay … Again

Poor Bernanke. He has to explain in almost childish language some things that he probably assumes any half way engaged politician or business person knows well.

That’s the price economists pay for being deliberately disengaged from the economy. A century of self indulgent discussion and increasingly arcane mathematics has made economics impenetrable to anyone not accepted into the inner sanctum of academia. Instead those actively engaged in running the economy tend to pick up the tricks needed by way of direct experience, hearsay, gossip, and old fashioned trial and error.

Nonetheless people like Bernanke have, periodically, to mingle with the other side – those who form what we can call the actual economy. This produces a clash between the mind game economies of the theorists and the rough hewn ones of the practitioners. It is always fun to watch the dialog.

Like yesterday, when Ben came down and opined on the economy.

It is, he said, in a transition state. What is this we wonder? A transition between what and what?

Well the transition seems to be from good to bad to good. With us being in that bad bit in the middle right now. No fear though: it will pick up. This is because, Ben tells us, that the rotten things that rocked the economy in the first quarter are transitory. Transition – transitory: get it?

Take oil prices. They are high but trending lower. All sorts of bad things happened to oil prices earlier this year. Middle Eastern turmoil – although I, for one, don’t see this as unusual – caused uncertainty to rise and hence prices went up. Supply was disrupted, and demand is rising sharply as the emerging economies suck in more oil. Thus prices went up even more. None of this, please note, was due to the Fed flooding our economy with dollars. It wasn’t the Fed’s fault gas prices rose sharply. We should all blame those Middles Eastern types rallying for democracy, and those emerging middle classes around the world who aspire to drive cars all over the place.

He’s right. It wasn’t the Fed’s fault. It was those oddball things. And, yes, oil prices will calm down. Anyone with half a brain could look back over the last few decades and see similar blips up and down. The long term trend is upwards as cheaper sources of oil dry up and are replaced by much more expensive sources – the much ballyhooed oil shale in the US, Canada, and Europe is only worth exploiting if prices stay high, so even if they provide a good supply prices won’t drop.

So the blip in inflation will go away – as we all thought it would. And the cash drained from everyone’s pockets, and thus not spent on other stuff, will return and thus be available. Consumers will feel more at ease, and the economy should recover a bit.

A bit.

The rest of Ben’s talk was along similar lines: explaining simple things to an audience that has been whipped into an inflation fearing hysteria by a torrent of bad information and wrongheaded analysis.

The facts are ordinary now. The economy has slowed down from its modestly good pace of late last year. There are some reasons, like the ones Ben highlighted, that make this slowdown more dramatic than it might have otherwise been.

But is that all?

No. Not by a long way.

The point is that the economy was going to slow down anyway because the efforts to get it growing were never sufficient to give it the oomph – a technical economics term – needed in the first place. No one in power wants to admit this, so we are treated to this transition conversation as if it is the sole explanation of what’s going on.

It isn’t.

All this is common currency though, so I need not repeat it. Those of us who care about the average household need to hold our leadership accountable for any slow down. It was avoidable. If the economy was so weak that a few storms and supply chain disruptions in Japan can push us towards a double dip recession, then it wasn’t very robust to begin with. Those things happen routinely. That’s why uncertainty is central to any understanding of an economy. Robust economies withstand that kind of buffeting. Ours, evidently, cannot. That should tell us all we need to know about the efficacy or recent policy.

Ben assures us that this bad patch is temporary. We will be growing again nicely soon. Just you wait and see.

I wish that he hadn’t pointed to a recovery in the labor market as evidence of his expected pick up. It’s not a good example. Nor should he focus on the overseas profits of our biggest businesses, that doesn’t help our workers one bit. Nor should he prattle on about how the recent rise in stock prices has restored household wealth – not unless he wants to restrict his definition of household to the top 10% of families.

Oh. Wait.

Of course he does.

Silly me.

I forgot his target audience and the people he is concerned for.

Ben Bernanke is one of our leadership elite culpable for the current malaise. He is not alone, so we should not single him out. But nor should we forget his role. It might be tiresome for him to have to engage with the public. But they are, after all, his ultimate judges. If he fails them, he has failed totally. He might feel surrounded by reactionary ideologues calling for tighter monetary policy to combat an inflation that doesn’t exist. And he might feel constrained and unable to maintain the Fed’s series of extraordinary actions in support of the economy. But he could have the decency to say something not couched in circumlocution, bureaucratic obscurantism, and technical mumbo jumbo.

Oh. Wait.

Of course he talks that way.

He’s an economist. And a political one at that.

Aren’t they all?

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