Free Markets, Free People

Federal Reserve

Observations: The QandO Podcast for 09 Feb 14

This week, Michael and Dale ask why Progressive politics are so attractive.

The podcast can be found on Stitcher here.

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Stitcher. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here.

Observations: The QandO Podcast for 16 Sep 12

This week, Bruce, Michael, and Dale talk about the week’s events.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.

QEIII: It’s ON, bitches! (Text updated with more details)

Ben Bernanke, the Chairman of the Federal Reserve, announced today that the Fed will embark on another round of Quantitative Easing, beginning immediately. The Fed will increase its holdings by an estimated $85 billion per month in securities, about half of which will be long-term Treasury bonds, and the remaining $40 billion or more will be agency mortgage-backed securities. The agency paper will be purchased with new cash, while the long-term Treasuries will be acquired in exchange for short-term Treasury paper, as a continuation of Operation Twist.

There is no ultimate target amount or end date specified for this round of easing. Essentially, the Fed will buy or exchange $1 trillion in securities per year, until chairman Bernanke says to stop. It is completely open-ended. Additionally, the Fed expects to keep interest rates at or near 0% until sometime in 2015.

Let’s be clear about what this announcement means: The Fed will print $500 billion per year in new money, and inject it into the economy by buying agency paper (Freddie Mac, Fannie Mae, et al.), while also flooding the market with $500 billion of short-term paper in exchange for long bonds. That new money is not based on any realistic estimate of economic growth, or economic requirement to expand the money supply. It is pure, Keynesian monetary stimulus.

This will, of course, be done in a completely responsible way, and there is no threat whatsoever that this will cause an increase in inflation, and in any case, the Fed is fully prepared to sterilize this move at any time conditions warrant. Seriously, it’s best for the Fed to do this, and nothing could possibly go wrong.

Some may disagree.

Anyway, here’s some video of the first round of this open-ended QE being implemented:

qeiii

Image via Max Keiser

~
Dale Franks
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Did the Fed cause the recession to be bigger and deeper?

That’s what a former member of the Fed claims.  James Pethokoukis has the story:

But a book by Robert Hetzel, a senior economist at Federal Reserve Bank of Richmond, says it wasn’t Bushonomics or greedy bankers or broken markets that caused the Great Recession. In The Great Recession: Market Failure or Policy Failure, Hetzel pins the blame squarely on the Federal Reserve and Team Bernanke.

Oh, the downturn first started with “correction of an excess in the housing stock and a sharp increase in energy prices” — the housing bust and the oil shock. Indeed, those two things were enough, in Hetzel’s view, to cause a “moderate recession” beginning in December 2007.

But only a moderate one. It was the Fed’s monetary policy miscues after the downturn began that turned a run-of-the-mill downturn into a once-in-a century disaster.

Said Hetzel:

A moderate recession became a major recession in summer 2008 when the [Federal Open Market Committee] ceased lowering the federal funds rate while the economy deteriorated. The central empirical fact of the 2008-2009 recession is that the severe declines in output that in appeared in the [second quarter of 2008 and the first quarter of 2009] … had already been locked in by summer 2008.

Anyone.  What has been blamed for the “Great Depression”?

The irony here, of course, is that Federal Reserve Chairman Ben Bernanke is a much-noted student of the Great Depression and of the work of the late Milton Friedman whose landmark book, A Monetary History of the United States, pinned the blame for the Great Depression on a too tight Fed. As Bernanke told Friedman and his co-author, Anna Schwartz, on the economist’s 90th birthday a decade ago, ”You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”

But if Hetzel is right, the Fed blew it again.

Irony?  Yeah, supreme irony.  Unfortunately, the irony impaired left won’t get it (or choose not to) because it isn’t at all as useful politically in “blame the GOP” statements like Obama is fond of:

But I just want to point out that we tried their theory for almost 10 years … and it culminated in a crisis because there weren’t enough regulations on Wall Street and they could make reckless bets with other people’s money that resulted in this financial crisis, and you had to foot the bill. So that’s where their theory turned out.

As an aside, speaking of reckless bets with other people’s money, see “Nevada’s epic “green energy” failure” below.  The bets this administration has made in those sorts of areas can be characterized as nothing less that “reckless”. 

However, more to the point, if this theory by Hetzel were to be more commonly known, it would destroy the meme that it was 10 years of Republican economic malfeasance, loose regulation and Wall Street greed which caused the downturn.  And of course anyone who has taken the time to actually look into the downturn already knows that’s not the case.  But putting the blame on the Fed, where it may indeed belong, would remove a key talking point for Obama.

So I look for this theory to be roundly ignored by the left.

~McQ

Twitter: @McQandO

Worst-Case Scenario

Ever since the Fed began the first round of what is now called Quantitative easing, massively expanding the money supply, I’ve been worried about what would happen when demand began rising, and the Fed had to somehow try and draw all that extra cash out of the economy before it became inflationary—or even worse—hyperinflationary.

That’s still a worry for me, because I have, let us say, less than absolute confidence that Chairman Bernanke and his colleagues can pull that monetary sterilization off without a misstep.

Happily, that is becoming a secondary worry for me. Unhappily, that’s because it’s been replaced by a new worry, articulated by Paul Brodsky, bond market expert and co-founder of QB Asset Management. Mr. Brodsky maintains that the real inflationary danger lies elsewhere. I mean, it still lies at at the Fed and other Central Banks, but for a different reason.

The world has simply gotten itself into too much debt. There are creditors that expect to be paid, and debtors that are having an increasingly difficult time making their coupon payments. No amount of political or policy intervention is going to change that reality. (Unless a global "debt jubilee" transpires, which Paul thinks is unlikely).

Looking at the global monetary base, Paul sees it dwarfed by the staggering amount of debts that need to be repaid or serviced. The reckless use of leverage has resulted in a chasm between total credit and the money that can service it.

So how will this debt overhang be resolved?

Central bank money printing — and lots of it — thinks Paul.

The problem has been exacerbated by the fact that, when faced with an economic depression brought on by the collapse of a debt bubble—mainly in mortgages—the preferred policy solution pushed by governments all over the world, has been to try and re-inflate the debt bubble via stimulus spending. That is to say, overcoming the collapse of the mortgage debt bubble by creating a new, even bigger, sovereign debt bubble.

We have a pretty good idea of how much money there is in the world. We also have an idea of how much debt there is, from the sovereign debt of the united states, to credit cardholders in Finland. And it appears that there is not enough of the former, to pay off all the debts contained in the latter. If so, then that means a lot of banks—perhaps most of them—are in trouble. And we can’t have that.

What policy makers do not want to see is bank asset deterioration. That would lead to all sorts of bad things. You would see banks fail. You would see bank systems fail. You would see debtors fail and it would just feed on itself in an accelerating fashion. And so monetary policy makers have no choice but to deleverage in the other way, which is to colloquially print money; to manufacture electronic credits and call them bank reserves.

And to the degree that that extends into the private sector where debtors begin to fail en masse, that would increase failures of the bank assets in turn. And it would end the mortgage bond securities market, for example, and the leveraged loan markets, and end the private sector shadow banking system. So it does not work for anybody to have credit deteriorate. The only way to deleverage an economy is as we are saying: to create new base money with which to do it.

In other words, if central banks want to prevent entire banking systems from failing due to the collapse of the debts they hold as assets, they have no choice but to ensure that there is enough money available for everyone to meet their debt payments. To do that, they have to start printing out long sheets of beautifully engraved C-Notes. This will, of course, lead to massive inflation that will allow everyone to pay off their mortgages for the cost of a nice hat, while, at the same time, destroying the value of the world’s life savings.

This will clean up everyone’s balance sheets, and allow the world to create a brand new monetary base—let’s call it New Dollars—which, central banks having learned their lessons, will be impossible to over-borrow or inflate.

Hahahahahahahahahahahahaha! Woohoohoohoohoo! Hehehehehehehehehe. Heh heh. Ahhh. Sometimes I kill myself.

I’m just kidding with you. Seriously, they’ll try to start a new fiat currency that they’ll borrow on and debase until it collapses on our grandchildren, and screws them, too.

~
Dale Franks
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What a difference a percentage point makes

Especially when you’re talking about GDP growth:

The "new normal" is a term coined by the brain trust at the giant bond fund PIMCO. Anthony Crescenzi, a PIMCO vice president, strategist and portfolio manager, is part of that brain trust.

"The difference between 2 percent growth and 3 percent growth is of major importance and has major implications for the entire economy, for financial markets, for the budget," he says. And the heart of the problem is job creation.

Crescenzi and his colleagues argue that the U.S. economy could actually grow 2 percent a year without adding any new jobs. That’s because the productivity of current workers is rising at about 2 percent a year. "In other words a company can produce 2 percent more goods and/or services a year even if it doesn’t increase the number of people it employs," he says.

Smaller Incomes Mark Zandi, chief economist at Moody’s Analytics, thinks some new jobs would be added in an economy growing 2 percent a year, but far fewer than one growing 3 percent. "In a 3 percent world we’d create roughly 1.6 million jobs a year," he says. But he says that in a 2 percent world, job creation would be less than half — around 700,000 jobs.

Meanwhile, in China, growth hit 9.5%.  So what is China doing, policy wise, that the US isn’t?  Well, for one thing it is encouraging businesses and has established a positive business climate.  Additionally, it isn’t borrowing money to pump into some black hole it calls “stimulus” at a rate faster than we’ve seen in recent history. Etc.

It’s pretty bad when you have to look to China to point out what the US should be doing.   As Henry Kissinger recently said, the Chinese used to think we had the financial side of things pretty much figured out.   Then this mess and resultant stupidity in reaction to it.   The one thing we should have had the inside track on, we didn’t, because we chose to recreate the failed policies of the Hoover/FDR era without a world war to finally pull us out of the mess (or at least I hope that’s the case).

Is this the “new normal” as Crescenzi claims?   PIMCO, btw, is the world’s largest bond fund (almost 2 trillion).  PIMCO also recently announced that it would no longer be buying US debt.

Why?  Because no one is confident the Federal Reserve knows what it is doing:

Some Fed officials at the June meeting also said additional monetary stimulus would be appropriate “if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated,” according to the minutes.

Really? 

So they are considering a “QE3”?  Note the change from “last August” to now. 

Last August, when Bernanke signaled in a speech in Jackson Hole, Wyoming, that the Fed would embark on a second round of Treasury bond purchases, employers were cutting jobs, pushing up the unemployment rate to 9.6 percent. The weakness in the economy prompted Bernanke to focus on the possibility of deflation, or a broad-based drop in prices and asset values including homes and stocks.

The economy is in better shape now than in August, though hiring remains “frustratingly slow,” Bernanke said at a June 22 news conference. Employers added 18,000 jobs to their payrolls last month, the fewest in nine months, the government reported last week.

The Fed’s $600 billion Treasury bond-buying program, completed in June, was designed to spur economic growth, employment and consumer spending by lifting stock prices and reducing borrowing costs.

Is the economy in “better shape now than in August”?  I say ‘no’. And so do most of the economic indicators.  Dr. Robert Barro, Paul M Warburg Professor of Economics at Harvard University makes it clear where the current policy is leading:

Turning to quantitative easing, he warned that the US and UK are storing up inflation and that the Bank of England may be too complacent. Although there is no threat to inflation now, he said: "You have to have an exit strategy. Ben Bernanke [chairman of the US Federal Reserve] and [Bank Governor] Mervyn King are aware of this, but I think they are a little over confident about how they can accomplish it. Because you want to have this exit strategy without having a lot of inflation.

"That’s when the inflation would occur. If there’s a recovery and there’s all this liquidity and somehow the central bank has to reverse it."

That’s precisely where this is all headed – somehow at, at some point, the Fed has to wring out all this money it pumped into the economy.  And that stored up inflation is likely to explode during that process – a real economy killer.  Barro is saying he has little confidence in the Fed, deeming them “over confident” in their ability to do that while avoiding letting the inflation dragon out of the cage.

Meanwhile, in Europe …

Yeah, it’s a mess.  And given the propensity of our policy makers to recreate the policies of the Great Depression, I don’t see it getting better any time soon.  So yes, for at least the foreseeable future, the “new normal” may be 9.2% unemployment.  Because there is still no reason or incentive for US businesses to take the chance of expanding and hiring in such an uncertain economic atmosphere.

Until they are much more confident in the policies of this administration and the Federal Reserve, few if any are going to change the status quo.

~McQ

Twitter: @McQandO

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Observations: The QandO Podcast for 26 Jun 11

In this podcast, Bruce, Michael, and Dale discuss the Libya vote in the House of Represenatatives, the economy, and Gunwalker.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.

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Observations: The QandO Podcast for 06 Mar 11

In this podcast, Bruce, Michael, and Dale discuss the situation in Libya, and this week’s employment numbers.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.

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Observations: The QandO Podcast for 27 Feb 11

In this podcast, Bruce, Michael, and Dale discuss the demonstrations by public employee unions in Wisconsin, and the state of the economy.

The direct link to the podcast can be found here.

Observations

As a reminder, if you are an iTunes user, don’t forget to subscribe to the QandO podcast, Observations, through iTunes. For those of you who don’t have iTunes, you can subscribe at Podcast Alley. And, of course, for you newsreader subscriber types, our podcast RSS Feed is here. For podcasts from 2005 to 2010, they can be accessed through the RSS Archive Feed.

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Why you have to react to every story about government overreach

No, this isn’t a story about the “War on Christmas”, it’s a story that uses Christmas and its symbols as an example of government overreach.

A bank in Oklahoma was forced by federal bank regulators to remove Christian verses and symbols because the Federal bank examiners thought they were “inappropriate”.

Really?

This is the “separation of the church and state” and “non-discrimination” gone wild.  Last time I checked, most banks were private enterprises which were regulated by the federal government.  Furthermore the supposed doctrine of “separation of church and state” doesn’t apply to private enterprises.  It is a prohibition aimed at the  federal government.  And yes, I know it’s not found in the Constitution per se, but the phrase “freedom of religion” is enough for me to agree that the state should not be promoting a single religion.

That said, it has absolutely no say over what a private enterprise might promote or favor.

Which brings us to “non-discrimination”, which one assumes is the real basis for the ruling by the feds here.  The reason for the federal bank examiners decision is a regulation penned by bureaucrats with apparently no understanding of private markets and no concern whatsoever about the impact of their regulation on the real world.  And they essentially decided to interpret those regulations any darn way they feel like interpreting them:

Specifically, the feds believed, the symbols violated the discouragement clause of Regulation B of the bank regulations. According to the clause, "…the use of words, symbols, models and other forms of communication … express, imply or suggest a discriminatory preference or policy of exclusion."

The feds interpret that to mean, for example, a Jew or Muslim or atheist may be offended and believe they may be discriminated against at this bank. It is an appearance of discrimination.

BS.  Here’s a dirty little secret about private enterprises such as banks – if people feel “discriminated” against, they can go elsewhere.  Yup, they actually have a choice.   Don’t like bible verses and Christian crosses, bank at a bank that doesn’t have them.  There is no requirement for a Muslim or atheist to bank there.  None.  Don’t like the Perkins County Bank for that reason?  Go across the street to the Stroud National Bank for heaven sake.

When did the possibility that someone might be offended become the top problem we face, such that the federal government feels the need to move preemptively to ensure that doesn’t happen.

What’s next, the removal of all pork products from grocery stores because they may offend Muslims?  The removal of crosses from church steeples because atheists traveling by may take offense?  This is lunacy.

But, to the point of the title – this little story was picked up and blasted around the blogosphere.  Guess what?

The small-town bank in Oklahoma will be able to restore its Christian signs and symbols after all, thanks in part to public outcry against the Federal Reserve.

That’s right – the bureaucrats backed down.  Why?

The story garnered national attention overnight from bloggers and Twitter users who posted links to KOCO.com’s story.

This is the power of the blogosphere – something that is a force to be reckoned with when riled up and one that people seem to take rather lightly at times.  It’s also an example of why even the smallest stories of government overreach should be addressed.   In fact, it puts and exclamation point on the saying “the price of freedom is eternal vigilance!”

~McQ

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