Okay, President Obama didn't actually fire Federal Reserve Chairman Ben Bernanke. But it felt like that when the President strongly hinted a couple of days ago that he wouldn't nominate Bernanke for re-appointment. The stock market followed up with a two-day belly flop of almost 560 points. Much of that drop was because the Fed announced that it would indeed, contrary to infantile market expectations, eventually take away the quantitative easing punchbowl. But the backdrop to this announcement was Ben Bernanke's short remaining term as bartender-in-chief. That creates enormous uncertainty. The financial markets love Bernanke, even though not all market players will admit it publicly because he was a policy pragmatist (read heretic in the eyes of many purists). He gave the markets lots of sweets and never let them pout or fuss for long. He never met an asset class he didn't like and tried to puff them all up. (That's why virtually all asset classes are dropping now--Sugar Daddy is leaving town.) With Ben's helicopter thumping away toward the horizon, it gets a lot harder to predict what investments might have actual economic value, so investors renew their love affair with cash.
But why did Obama choose this moment to put Bernanke on the stagecoach going out of town? Obama is no economist, so it couldn't have been for an economic reason. The President is a consummate politician, though, so one has to entertain the sneaking suspicion that he did it for political reasons. A not uncommon reason for pulling the rug out from underneath an incumbent is because you foresee the need to blame him or her for something. Maybe the President was concerned that the eventual end of QE would cause the markets to fall, and he wanted to be able to blame Bernanke and say he didn't re-appoint him. But the very act of leaving Bernanke behind in the dust aggravated into prophecy fulfillment the markets' inclination to swan dive. So, if this was the President's thinking, he may have contributed to the problem he foresaw and could end up taking some of the blame for the market's hissy fit.
The President is having second-term hiccups in a variety of
ways--the IRS, NSA, State Dept., and DOJ come to mind. Is he losing his
grip? Bernanke was the last man standing when it came to federal officials doing something to boost the economic recovery. Why ax the most highly regarded civil servant in the country?
The financial markets hate uncertainty. And they've gotten a belly full of it recently. That's why the last two days have been bad for 401(k) accounts from sea to shining sea. And the picture probably won't get brighter for months.
Showing posts with label Ben Bernanke. Show all posts
Showing posts with label Ben Bernanke. Show all posts
Friday, June 21, 2013
Thursday, February 28, 2013
No Fiscal Discipline in the Stock Market
As the federal government belly flops into sequestration, the stock market merrily rolls along. Europe is sinking into recession, an inevitable result of its austerity and deleveraging policies. Japan is in recession, and has pledged to worship at the altar of monetary accommodation in an effort to revive its economy. American consumers are creeped out by continued government dysfunction, continued economic dysfunction and an increase in Social Security taxes. Retailers are reaching for the little paper bag in the seatback on front of them. But stocks are delirious.
Of course, it's all because Federal Reserve Chairman Ben Bernanke yesterday swore up and down that central bank accommodation is next to godliness, or something to that effect. If the most powerful agency in the United States government promised to subsidize you indefinitely, you'd be delirious, too.
By ignoring real world problems, and flying high on the Fed's fiat paper meth lab, the market is letting Congress off the hook. Without someone or something twisting their arms behind their backs, the members of Congress have little or no incentive to get real and work out the nation's fiscal problems. The stock market has the leverage to make Congress devote its full attention to a problem. In the fall of 2008, when the financial system teetered on the brink, Congress voted down a rescue package. The market promptly nosedived, and squashed 401(k) accounts from sea to shining sea. Constituents deluged Congressional offices with negative commentary (that's putting it mildly). Congress immediately reversed course and enacted the TARP rescue legislation.
Today, however, fed by the Fed with printed money, the market romps. Congress fiddles. And the rest of us get nervous about the smell of smoke that waffles through the air. By not holding Congress accountable, the market enables government dysfunction. The market can be quite effective when it imposes discipline. But an undisciplined market is scary.
Of course, it's all because Federal Reserve Chairman Ben Bernanke yesterday swore up and down that central bank accommodation is next to godliness, or something to that effect. If the most powerful agency in the United States government promised to subsidize you indefinitely, you'd be delirious, too.
By ignoring real world problems, and flying high on the Fed's fiat paper meth lab, the market is letting Congress off the hook. Without someone or something twisting their arms behind their backs, the members of Congress have little or no incentive to get real and work out the nation's fiscal problems. The stock market has the leverage to make Congress devote its full attention to a problem. In the fall of 2008, when the financial system teetered on the brink, Congress voted down a rescue package. The market promptly nosedived, and squashed 401(k) accounts from sea to shining sea. Constituents deluged Congressional offices with negative commentary (that's putting it mildly). Congress immediately reversed course and enacted the TARP rescue legislation.
Today, however, fed by the Fed with printed money, the market romps. Congress fiddles. And the rest of us get nervous about the smell of smoke that waffles through the air. By not holding Congress accountable, the market enables government dysfunction. The market can be quite effective when it imposes discipline. But an undisciplined market is scary.
Friday, September 14, 2012
The Fed's QE3: An Old Dog Pulling An Old Trick
Since the financial crisis of 2008, the Federal Reserve has striven to show that an old dog can learn new tricks. Its grab bag of novel programs have at various times propped a variety of financial markets, ranging from commercial paper to asset backed securities to U.S. Treasury securities, as well as banks and other financial institutions. Its aggressive use of quantitative easing has in particular stood out from Fed monetary policy of yore, in which discount and fed funds rate adjustments, along with changes in bank reserve requirements, were the only flavors of monetary policy served up.
The recently announced QE3 looks innovative: it's permanent until the labor market is doing 70 in a 35mph zone, will involve $40 billion of purchases per month, and is focused on mortgage backed securities. The Treasury securities market isn't targeted (although it's still being stage managed through Operation Twist to push down yields on long maturities). But QE3 is really just an old trick performed in a different way.
Going back to the new paradigm days of Chairman Alan Greenspan, the Fed has believed that the real estate market leads recoveries. One of the Fed's major frustrations with the Great Recession has been the moribund housing market. It remains badly hung over from over-indulgence in leverage, and battered consumer balance sheets make it difficult for many wannabe buyers to qualify for loans. QE3 is a direct shot of liquidity into the housing market, made with the hope of lowering mortgage rates, stimulating buyers and boosting the economy.
But we've heard this song before. After the 2000 tech stock crash and the 9/11/01 stock market swoon, Chairman Greenspan squashed interest rates with the intention of goosing real estate in order to keep the economy growing. It worked. Already in recovery mode from a downturn in the 1990s, real estate skyrocketed in the early and mid-2000s. The economy grew. Employment levels were good. Everything was peachy.
Until the bubble burst. Since 2007, we have paid the price for the Fed's campaign ten years ago to use the housing market as a way to foster economic growth. Too much of America's wealth was invested in real estate, and the resulting losses continue to choke the economy. One would think the Fed learned a lesson--that concentrating America's capital into a single market sector is risky and when that market sector turns down (as all markets do from time to time), the losses are exacerbated by the over-concentration.
But perhaps old dogs fall back on old tricks. There is serious concern that the Fed has run low on ammo. It can't push interest rates much lower. It can't keep distorting the U.S. Treasury market and give the federal government a very low cost way to run up the deficit. And banks don't want to lend no matter what the Fed signals, because loans are risky and the banks could take losses. So the Fed has decided to directly finance the mortgage markets by purchasing $40 billion per month in the MBS market. In other words, it's going to goose the housing market in the hope of stimulating the economy.
Some people like roller coasters. Others find them nauseating. The last time we got on this roller coaster, the ride ended badly. Nevertheless, the Fed is getting on again. Short term, it may enjoy success, just as the Greenspan Fed enjoyed success--for a while. But long term, the Fed faces a dilemma. In order to prevent another real estate bubble, the Fed has to maintain prudent lending standards. But prudence won't lead to the euphoric exuberance that could launch the economy into the dramatic rise that the Fed seems to be seeking. Will the Fed use its supervisory powers over the financial system to loosen up lending standards, with the concomitant risk of a housing bubble and bust, followed by a Greater Recession? Aroma of rat drifts into the ambient environment. QE3 may not really work unless it fosters really large risks. And we know what can happen when there's a lot of risk around.
The recently announced QE3 looks innovative: it's permanent until the labor market is doing 70 in a 35mph zone, will involve $40 billion of purchases per month, and is focused on mortgage backed securities. The Treasury securities market isn't targeted (although it's still being stage managed through Operation Twist to push down yields on long maturities). But QE3 is really just an old trick performed in a different way.
Going back to the new paradigm days of Chairman Alan Greenspan, the Fed has believed that the real estate market leads recoveries. One of the Fed's major frustrations with the Great Recession has been the moribund housing market. It remains badly hung over from over-indulgence in leverage, and battered consumer balance sheets make it difficult for many wannabe buyers to qualify for loans. QE3 is a direct shot of liquidity into the housing market, made with the hope of lowering mortgage rates, stimulating buyers and boosting the economy.
But we've heard this song before. After the 2000 tech stock crash and the 9/11/01 stock market swoon, Chairman Greenspan squashed interest rates with the intention of goosing real estate in order to keep the economy growing. It worked. Already in recovery mode from a downturn in the 1990s, real estate skyrocketed in the early and mid-2000s. The economy grew. Employment levels were good. Everything was peachy.
Until the bubble burst. Since 2007, we have paid the price for the Fed's campaign ten years ago to use the housing market as a way to foster economic growth. Too much of America's wealth was invested in real estate, and the resulting losses continue to choke the economy. One would think the Fed learned a lesson--that concentrating America's capital into a single market sector is risky and when that market sector turns down (as all markets do from time to time), the losses are exacerbated by the over-concentration.
But perhaps old dogs fall back on old tricks. There is serious concern that the Fed has run low on ammo. It can't push interest rates much lower. It can't keep distorting the U.S. Treasury market and give the federal government a very low cost way to run up the deficit. And banks don't want to lend no matter what the Fed signals, because loans are risky and the banks could take losses. So the Fed has decided to directly finance the mortgage markets by purchasing $40 billion per month in the MBS market. In other words, it's going to goose the housing market in the hope of stimulating the economy.
Some people like roller coasters. Others find them nauseating. The last time we got on this roller coaster, the ride ended badly. Nevertheless, the Fed is getting on again. Short term, it may enjoy success, just as the Greenspan Fed enjoyed success--for a while. But long term, the Fed faces a dilemma. In order to prevent another real estate bubble, the Fed has to maintain prudent lending standards. But prudence won't lead to the euphoric exuberance that could launch the economy into the dramatic rise that the Fed seems to be seeking. Will the Fed use its supervisory powers over the financial system to loosen up lending standards, with the concomitant risk of a housing bubble and bust, followed by a Greater Recession? Aroma of rat drifts into the ambient environment. QE3 may not really work unless it fosters really large risks. And we know what can happen when there's a lot of risk around.
Thursday, August 4, 2011
Inflation: the Last Bazooka
We seem to have had a little queasiness in the stock markets today, with the Dow Jones Industrial Average dropping over 50o points (more than 4%). Money is fleeing Europe, where investors have suddenly focused on the fact that the EU is dealing with its debt crisis by increasing, rather than paying down, its debt. That's like reaching for ever larger amounts of the hair of the dog that bit you. You may feel better for a little while. But a hangover is coming, and plenty of investors don't want to stay around to find out how bad it will be.
Meanwhile, back in the States, rumor has it that the economy is fluttering toward another recession. If not, then stagnation is clearly indicated by the economic data.
Because the government is expected to solve all problems that everyone has, the question now arises what can and will the federal government do. In terms of fiscal policy, the answer is nada. Tea Partiers and other conservatives in Congress now hold fiscal policy hostage. No significant stimulus, which would require one or more of increased federal spending, increased taxes and increased deficits, is politically possible. Hank Paulson's bazooka--TARP--is winding up, and there's no prospect of resupply.
That leaves only the Federal Reserve. It can't push rates any lower at the short end, because they're already at zero. It can (and probably will) do more quantitative easing, by buying longer term U.S. Treasuries and perhaps other debt instruments. The ostensible purpose of a third round of QE would be to lower already very low long term interest rates in the hope of stimulating growth. But QEII was done for that purpose, and its beneficial impact appears to be increasingly modest as statistics firm up. QEIII, in all likelihood, would offer even less benefit.
But QEIII might be inflationary. And that, dear reader, may be the point.
Debtors, like America, reduce their debt burdens by paying them down, refinancing them at better rates (and eventually paying them off), or, in the case of a nation, by inflating its currency. Inflation reduces the real cost of paying off old debt, with debtors using less valuable money to extinguish their obligations. Creditors, quite arbitrarily, take the hit from inflation. But in an overleveraged situation, losses are inevitable. The only question is how and where they will fall.
In many, and perhaps most debt crises, creditors take losses when debtors default. These losses appear as recoveries of cents on the dollar. But America cannot afford to default. That was the lesson of the recent debt ceiling debacle. The U.S. dollar is the foundation of the world's financial system, and a U.S. Treasury default simply cannot be allowed. But America's political system, paralyzed when it comes to raising taxes, cutting federal spending, and, most importantly, reaching reasonable compromises, can't figure out a way to pay off America's debt.
So the only way to reduce America's debt burdens is for the Fed to inflate the dollar. That's been done before. From 1945 to 1950, the Fed kept interest rates low and the price structure inflated by a third. Meanwhile, the economy grew briskly in real terms. The result was that the burden of paying off the war debt from the Second World War was significantly eased. In the 1970s, the U.S. was running large (for that time) deficits because of the Vietnam War. In addition, oil price hikes imposed by OPEC threatened an enormous transfer of real wealth from the industrialized West to the oil producing nations. The Fed responded by keeping money available on easy terms, allowing inflation to drive down the cost of debt repayment, and the amount of real wealth transferred overseas.
Today's Fed faces tremendous temptation to pull the same maneuver. No one else in the federal government will do anything. Ben Bernanke has made it clear that he'd rather do something controversial than nothing at all. The outcome is hardly clear. In the late 1940s and the 1950s, the Fed had a rapidly growing economy to leverage the debt reducing impact of inflation by providing more real wealth to pay creditors even as the value of the dollar shrank. In the 1970s, the economy grew hardly 1% a year. But personal income tended to keep up with inflation (in part because the work force was more heavily unionized in those days), insulating consumers from real sacrifice. Today, recession may return, reducing real wealth. And middle class Americans seem not to be able to keep up with inflation, cutting many expenses to have money for food and gasoline. But, rightly or wrongly, inflation may be the last bazooka for federal policy makers. And they could be taking aim even as we write.
Meanwhile, back in the States, rumor has it that the economy is fluttering toward another recession. If not, then stagnation is clearly indicated by the economic data.
Because the government is expected to solve all problems that everyone has, the question now arises what can and will the federal government do. In terms of fiscal policy, the answer is nada. Tea Partiers and other conservatives in Congress now hold fiscal policy hostage. No significant stimulus, which would require one or more of increased federal spending, increased taxes and increased deficits, is politically possible. Hank Paulson's bazooka--TARP--is winding up, and there's no prospect of resupply.
That leaves only the Federal Reserve. It can't push rates any lower at the short end, because they're already at zero. It can (and probably will) do more quantitative easing, by buying longer term U.S. Treasuries and perhaps other debt instruments. The ostensible purpose of a third round of QE would be to lower already very low long term interest rates in the hope of stimulating growth. But QEII was done for that purpose, and its beneficial impact appears to be increasingly modest as statistics firm up. QEIII, in all likelihood, would offer even less benefit.
But QEIII might be inflationary. And that, dear reader, may be the point.
Debtors, like America, reduce their debt burdens by paying them down, refinancing them at better rates (and eventually paying them off), or, in the case of a nation, by inflating its currency. Inflation reduces the real cost of paying off old debt, with debtors using less valuable money to extinguish their obligations. Creditors, quite arbitrarily, take the hit from inflation. But in an overleveraged situation, losses are inevitable. The only question is how and where they will fall.
In many, and perhaps most debt crises, creditors take losses when debtors default. These losses appear as recoveries of cents on the dollar. But America cannot afford to default. That was the lesson of the recent debt ceiling debacle. The U.S. dollar is the foundation of the world's financial system, and a U.S. Treasury default simply cannot be allowed. But America's political system, paralyzed when it comes to raising taxes, cutting federal spending, and, most importantly, reaching reasonable compromises, can't figure out a way to pay off America's debt.
So the only way to reduce America's debt burdens is for the Fed to inflate the dollar. That's been done before. From 1945 to 1950, the Fed kept interest rates low and the price structure inflated by a third. Meanwhile, the economy grew briskly in real terms. The result was that the burden of paying off the war debt from the Second World War was significantly eased. In the 1970s, the U.S. was running large (for that time) deficits because of the Vietnam War. In addition, oil price hikes imposed by OPEC threatened an enormous transfer of real wealth from the industrialized West to the oil producing nations. The Fed responded by keeping money available on easy terms, allowing inflation to drive down the cost of debt repayment, and the amount of real wealth transferred overseas.
Today's Fed faces tremendous temptation to pull the same maneuver. No one else in the federal government will do anything. Ben Bernanke has made it clear that he'd rather do something controversial than nothing at all. The outcome is hardly clear. In the late 1940s and the 1950s, the Fed had a rapidly growing economy to leverage the debt reducing impact of inflation by providing more real wealth to pay creditors even as the value of the dollar shrank. In the 1970s, the economy grew hardly 1% a year. But personal income tended to keep up with inflation (in part because the work force was more heavily unionized in those days), insulating consumers from real sacrifice. Today, recession may return, reducing real wealth. And middle class Americans seem not to be able to keep up with inflation, cutting many expenses to have money for food and gasoline. But, rightly or wrongly, inflation may be the last bazooka for federal policy makers. And they could be taking aim even as we write.
Tuesday, June 7, 2011
The (Second) Summer of Bernanke's Discontent
Today must have been tough for Federal Reserve Chairman Ben Bernanke. In public remarks at a conference in Atlanta, he didn't say anything. For a Fed Chairman who has made a priority of increasing transparency, having no news to announce was bad news.
Bernanke repeated the Fed's standard litany of the past two and a half years. Short term interest rates will remain at zero for an extended time, and the Fed stands prepared to "respond as necessary" to developments in the economic recovery. This isn't news. His acknowledgement of the economy's slowdown shouldn't have been news, either, although it did seem to contribute to a market drop at the close. The big problem, though, was that Bernanke didn't promise to wear a red suit and come down the chimney imminently with another bagful of gifts. No QE3. No other legerdemain that would amount to money printing. No promise to support current asset values.
Let's face it. The market, and economy, are addicted to government bailouts and subsidies. Everyone wants a federal guarantee for everything. Businesses want the Federal Reserve money printing press running 24/7 before they'll add a single person to the payroll. Investors want to see truckloads of cash moving off the Fed's loading dock before putting a penny in stocks. The big banks want the government's too-big-to-fail subsidy, but not the increased capital requirements and regulatory compliance costs that logically come with the unlimited support of taxpayers. Bernanke wanted to encourage people to invest in risk assets, but in actuality he's accomplished just the opposite. No one truly wants to take a risk any more. There's an easier way to make money--get Washington to guarantee profits.
Bernanke offered talk therapy, predicting that the economy would grow in the second half of 2011. He may be hoping that, if he can't add more money to the financial system to buy a recovery, he can psyche Corporate America into hiring more. But we've been stagnant for too long, and the Fed's been wrong on its predictions too many times.
Without financial methadone from Washington, the withdrawal symptoms could be painful. Scant growth, a good chance of rising unemployment, and falling stock prices. If the Fed adds more stimulus, the spectral presence of rising prices would shadow its every move.
Across the pond, the Euro sovereign debt crisis will either end badly, or worse. Wealthy northern Europe will absorb profligate Euro bloc member debt (possibly with a few token pennies thrown in the pot by creditors) and greater political power will be centralized in Brussels, or the Euro will go down in history as a very costly example of wishful thinking. Whatever the case, there won't be any stimulus to the U.S. economy from Europe. Economies in Asia are also slowing. We're on our own. What will happen?
We've already seen this video. Last summer, the same problems were tossing the economy and stock market around like rag dolls in a tornado--fading federal stimulus, sovereign debt crisis in Europe and everyone on Wall Street looking for a federal promise of profits. Ben Bernanke stepped up to the plate at the Federal Reserve's annual August conference in Jackson Hole, promised QE2, and hit what looked for a while like a home run. It's curving toward the foul pole now, but we don't yet have an official ruling from the umpire. If this summer follows the same path of economic stagnation and malaise in the stock markets, expect the Fed to step up to the table, bet its chips on a hard 8, and roll the dice one more time.
Bernanke repeated the Fed's standard litany of the past two and a half years. Short term interest rates will remain at zero for an extended time, and the Fed stands prepared to "respond as necessary" to developments in the economic recovery. This isn't news. His acknowledgement of the economy's slowdown shouldn't have been news, either, although it did seem to contribute to a market drop at the close. The big problem, though, was that Bernanke didn't promise to wear a red suit and come down the chimney imminently with another bagful of gifts. No QE3. No other legerdemain that would amount to money printing. No promise to support current asset values.
Let's face it. The market, and economy, are addicted to government bailouts and subsidies. Everyone wants a federal guarantee for everything. Businesses want the Federal Reserve money printing press running 24/7 before they'll add a single person to the payroll. Investors want to see truckloads of cash moving off the Fed's loading dock before putting a penny in stocks. The big banks want the government's too-big-to-fail subsidy, but not the increased capital requirements and regulatory compliance costs that logically come with the unlimited support of taxpayers. Bernanke wanted to encourage people to invest in risk assets, but in actuality he's accomplished just the opposite. No one truly wants to take a risk any more. There's an easier way to make money--get Washington to guarantee profits.
Bernanke offered talk therapy, predicting that the economy would grow in the second half of 2011. He may be hoping that, if he can't add more money to the financial system to buy a recovery, he can psyche Corporate America into hiring more. But we've been stagnant for too long, and the Fed's been wrong on its predictions too many times.
Without financial methadone from Washington, the withdrawal symptoms could be painful. Scant growth, a good chance of rising unemployment, and falling stock prices. If the Fed adds more stimulus, the spectral presence of rising prices would shadow its every move.
Across the pond, the Euro sovereign debt crisis will either end badly, or worse. Wealthy northern Europe will absorb profligate Euro bloc member debt (possibly with a few token pennies thrown in the pot by creditors) and greater political power will be centralized in Brussels, or the Euro will go down in history as a very costly example of wishful thinking. Whatever the case, there won't be any stimulus to the U.S. economy from Europe. Economies in Asia are also slowing. We're on our own. What will happen?
We've already seen this video. Last summer, the same problems were tossing the economy and stock market around like rag dolls in a tornado--fading federal stimulus, sovereign debt crisis in Europe and everyone on Wall Street looking for a federal promise of profits. Ben Bernanke stepped up to the plate at the Federal Reserve's annual August conference in Jackson Hole, promised QE2, and hit what looked for a while like a home run. It's curving toward the foul pole now, but we don't yet have an official ruling from the umpire. If this summer follows the same path of economic stagnation and malaise in the stock markets, expect the Fed to step up to the table, bet its chips on a hard 8, and roll the dice one more time.
Wednesday, April 27, 2011
Washington Today: End Game in Afghanistan, No End Game in Financial Markets
The war in Afghanistan will wind down for NATO troops. That's clear from today's news. Leon Panetta will take over the Defense Department from Robert Gates. Gen. David Petraeus will get Panetta's job running the CIA. Adm. Mike Mullen, Chairman of the Joint Chiefs of Staff, isn't eligible to be renominated. The chain of command that presided over last year's surge in Afghanistan is being dismantled. That's one of the easiest ways in Washington to change policy. Top officials don't have to change their minds; they just change jobs.
By drawing down forces in Afghanistan, President Obama would keep a campaign promise, and satisfy the wishes of the majority of Americans who recent polls indicate want the U.S. out of the war. Besides, there's more than one way to skin this cat. Today's Wall Street Journal reports on P. 1 that the Pakistani government has urged the Afghan government to join in an alliance with Pakistan and China. The Pakistanis, who may be worse enemies of America than the Afghans, are now more aggressively undermining America than ever before. America's relations with India are improving, and we may be better off easing out of Afghanistan and Pakistan, and exercising influence in South Asia by strengthening ties with New Dehli.
Meanwhile, back at the Fed, Chairman Bernanke did a fairly decent imitation of Alan Greenspan at the Fed's first ever press conference. Bernanke said . . . well, try to figure out what he said. The reaction of most listeners was to parse, then parse some more, and then parse some more. Greenspan was famous for lengthy vocalizations that meant little except, "I'm keeping my options open." Looks like Bernanke prepared for today by watching old game films from the Greenspan era.
The Fed itself released a statement earlier today, following its April meeting, in which it said it would stay the course. So the sum total of this month's Fed meeting and today's press conference is we know pretty much what we knew before. The stock market took it all positively, assuming that the Fed will keep the monetary printing presses rolling 24/7. Maybe. But Bernanke did keep all options open. His remarks that could mean QE3 is coming could also mean that the Fed will drain liquidity, depending on circumstances.
And that's the problem with today's Fed. Even though Ben Bernanke has said he wants to provide greater transparency, the tendency of the markets to pop or swoon over a lifted eyebrow or a hint of a frown has forced him to be measured, and then cautious, and today, simply ambiguous. He ends up telling us very little, which lets the markets interpret his remarks as they wish and force the Fed to follow their lead. Today's positive market reaction highlights the financial system's dependence on subsidies from the Fed, and increases the cost to the Fed of changing its policies. A fall in the stock market is virtually guaranteed whenever the Fed changes policies, and that puts enormous political pressure on the Fed to keep printing money indefinitely. By purporting to provide transparency, but not actually doing so, the Fed is losing control over monetary policy. All this is fine if no amount of money printing leads to significant inflation. If only we lived in Wonderland, where one can believe as many as six impossible things before breakfast.
By drawing down forces in Afghanistan, President Obama would keep a campaign promise, and satisfy the wishes of the majority of Americans who recent polls indicate want the U.S. out of the war. Besides, there's more than one way to skin this cat. Today's Wall Street Journal reports on P. 1 that the Pakistani government has urged the Afghan government to join in an alliance with Pakistan and China. The Pakistanis, who may be worse enemies of America than the Afghans, are now more aggressively undermining America than ever before. America's relations with India are improving, and we may be better off easing out of Afghanistan and Pakistan, and exercising influence in South Asia by strengthening ties with New Dehli.
Meanwhile, back at the Fed, Chairman Bernanke did a fairly decent imitation of Alan Greenspan at the Fed's first ever press conference. Bernanke said . . . well, try to figure out what he said. The reaction of most listeners was to parse, then parse some more, and then parse some more. Greenspan was famous for lengthy vocalizations that meant little except, "I'm keeping my options open." Looks like Bernanke prepared for today by watching old game films from the Greenspan era.
The Fed itself released a statement earlier today, following its April meeting, in which it said it would stay the course. So the sum total of this month's Fed meeting and today's press conference is we know pretty much what we knew before. The stock market took it all positively, assuming that the Fed will keep the monetary printing presses rolling 24/7. Maybe. But Bernanke did keep all options open. His remarks that could mean QE3 is coming could also mean that the Fed will drain liquidity, depending on circumstances.
And that's the problem with today's Fed. Even though Ben Bernanke has said he wants to provide greater transparency, the tendency of the markets to pop or swoon over a lifted eyebrow or a hint of a frown has forced him to be measured, and then cautious, and today, simply ambiguous. He ends up telling us very little, which lets the markets interpret his remarks as they wish and force the Fed to follow their lead. Today's positive market reaction highlights the financial system's dependence on subsidies from the Fed, and increases the cost to the Fed of changing its policies. A fall in the stock market is virtually guaranteed whenever the Fed changes policies, and that puts enormous political pressure on the Fed to keep printing money indefinitely. By purporting to provide transparency, but not actually doing so, the Fed is losing control over monetary policy. All this is fine if no amount of money printing leads to significant inflation. If only we lived in Wonderland, where one can believe as many as six impossible things before breakfast.
Monday, April 25, 2011
A Question for the Chairman: Is the Fed Doing Its Part to Reduce the Federal Deficit?
This week, Chairman Ben Bernanke of the Federal Reserve holds the first ever press conference by a Fed Chairman. The wisdom of opening himself up to volleys of dumb, loaded, and unfair questions isn't crystal clear. Since, however, he's voluntarily decided to position the seat of his pants in the middle of a firing range, here's a question that should be posed to him.
It's Econ 101 that the lower the price of something, the more of it people will consume. Isn't the Fed making it easy for the federal government to run massive deficits by keeping interest rates ultra low?
The stated purpose of low interest rates is to stimulate the economy. But they also stimulate government borrowing. Look at Japan. Its public debt is something like 200% of its GDP (America's is around 70%). But interest rates in Japan are so low that the government's annual bill for borrowing all this moola isn't terribly painful. Most Japanese government debt is held by Japanese citizens, who seem perfectly willing to refinance the government every time its debt falls due, asking for scarcely any interest income at all. From an economic standpoint, it makes sense for the Japanese government to keep borrowing. Since it can roll over maturing debt at will for ultra low rates, it never really needs to control its deficits and can keep borrowing more at minimal interest expense. The U.S. Treasury, too, can easily roll over its debt at historically low prices. So its need to reduce deficits isn't pressing.
The Fed's low interest rate policy is inflating commodities and equities, but its impact beyond that is unclear. Big banks aren't increasing the net amounts of their loan portfolios and small businesses still limp along with working capital from their owners' credit cards. Real estate remains moribund, with more of the same expected for the future. Raising interest rates will make financial markets speculators unhappy. But let's remember that central bank manipulation of asset prices doesn't produce lasting prosperity, but indeed the opposite (for further reading, see 2007-08 financial crisis).
For all the political hoopla over deficits, reality is that money talks and bullsh . . . uh, political dialogue walks. What's forced Greece, Ireland, Portugal and other Euro bloc nations to rein in their spending? Not frowning bureaucrats in Brussels, but rising interest rates demanded by their creditors. Chairman Bernanke recently scolded Congress and the administration for not doing enough to reduce the deficit. Well, remember, Mr. Chairman, money talks and bu . . . well, you know. If you want the government to reduce the deficit, make it pay for borrowing.
It's Econ 101 that the lower the price of something, the more of it people will consume. Isn't the Fed making it easy for the federal government to run massive deficits by keeping interest rates ultra low?
The stated purpose of low interest rates is to stimulate the economy. But they also stimulate government borrowing. Look at Japan. Its public debt is something like 200% of its GDP (America's is around 70%). But interest rates in Japan are so low that the government's annual bill for borrowing all this moola isn't terribly painful. Most Japanese government debt is held by Japanese citizens, who seem perfectly willing to refinance the government every time its debt falls due, asking for scarcely any interest income at all. From an economic standpoint, it makes sense for the Japanese government to keep borrowing. Since it can roll over maturing debt at will for ultra low rates, it never really needs to control its deficits and can keep borrowing more at minimal interest expense. The U.S. Treasury, too, can easily roll over its debt at historically low prices. So its need to reduce deficits isn't pressing.
The Fed's low interest rate policy is inflating commodities and equities, but its impact beyond that is unclear. Big banks aren't increasing the net amounts of their loan portfolios and small businesses still limp along with working capital from their owners' credit cards. Real estate remains moribund, with more of the same expected for the future. Raising interest rates will make financial markets speculators unhappy. But let's remember that central bank manipulation of asset prices doesn't produce lasting prosperity, but indeed the opposite (for further reading, see 2007-08 financial crisis).
For all the political hoopla over deficits, reality is that money talks and bullsh . . . uh, political dialogue walks. What's forced Greece, Ireland, Portugal and other Euro bloc nations to rein in their spending? Not frowning bureaucrats in Brussels, but rising interest rates demanded by their creditors. Chairman Bernanke recently scolded Congress and the administration for not doing enough to reduce the deficit. Well, remember, Mr. Chairman, money talks and bu . . . well, you know. If you want the government to reduce the deficit, make it pay for borrowing.
Tuesday, January 26, 2010
Ben Bernanke and Moral Hazard
At the end of last week, when it looked like Ben Bernanke might not be confirmed for re-appointment as Chairman of the Fed, the stock market was in a tizzy, with the Dow dropping over 200 points on Friday alone. Now, after repeated insistent pronouncements by high level administration and Congressional figures that Bernanke will be approved for a second term, the markets have stabilized and even moved slightly upwards. If you're invested in stocks, that's good. But only for now. In the long run, you, we and all have a problem.
It's no secret the stock markets are complex. With the Internet's informational horn of plenty and thousands of pages of SEC filings per year per company, the data flow is overwhelming. But the crucial information of what a company is truly about and where it's going is very difficult to discern. Add to this the fact that there are thousands of public companies, and anyone who tries to rationally analyze the totality of the markets is destined for discombobulation. Some investors seek out talismanic signs--those would be the now tarnished credit rating agencies' little letter and number grades. Others follow gurus--whichever analyst du jour has the best discernible track record from whatever point of view one considers meaningful. But, more than anything, today's markets rely on big medicine--the big medicine of big government.
Not long ago, the most esteemed medicine man was Alan Greenspan. In an age of asset volatility, beginning with the 1987 stock market crash, Greenspan seemed to have magical powers. He could calm roiling waters. While the Japanese stock and real estate markets boomed and busted, leaving Japan in seemingly perpetual stagnation, Greenspan wielded the monetary wand first to expunge any signs of inflation, and then transport American assets--equities and real estate--to Lake Wobegon, where they all performed above average. Nary a cloud was to be seen in ever brighter blue skies. Seldom was heard a discouraging word. The buffalo roamed. The deer and the antelope played. Chairman Greenspan was practically deified and the markets rose ever higher while he presided over the Fed.
But Chairman Greenspan's big medicine offended the gods of supply and demand. He, a professional economist, had the hubris to think that he could magically stop prices from falling, and the economy from contracting. The gods simmered, then fumed, and then raged. Finally, they cast fearsome bolts of lightning that set the financial world ablaze and burned down numerous houses of cards. The nation was tossed out of Lake Webegon. Justice, untempered by mercy, was administered by the laws of supply and demand.
Alan Greenspan's luck continued to hold. By the time the ship hit the iceberg, he had departed the Fed and taken up a new role as eminence grise to the financially powerful. In his place was a new Chairman, Ben Bernanke, whose medicine was untested.
It's conceivable that the stock market crash of 2007-08 was severe as it was because the Fed was then chaired by a rookie. Because Bernanke wasn't predictable at that time, asset prices couldn't be easily established, and demand fell away.
We know what happened next. The Fed opened up all of its doors, even the emergency exits in the cafeteria, and invited every imaginable financial institution to come in for loans. It organized the first ever money printers' SWAT team to work 'round the clock rescuing beleaguered financial firms. Short term interest rates magically disappeared, and they've been gone for so long many teenagers and children don't believe they ever really existed.
But the stock market revived, and the real estate market may soon be moved from the ICU. Ben Bernanke was complimented, then toasted, and most recently, deified as Man of the Year. The markets now believe in his magic. As long as Bernanke serves as their totem, they will know that no bullet can kill them. Appetite for risk has made a comeback. The bulls strut in the range.
The financial markets' reliance on Great Men is a bad sign. Trading and investing have become bets on the direction of government policy. It's easier to rely on the perceived avuncular omniscience of a senior federal official than deal with the markets in all their mindnumbing complexity. Enormous political pressure is placed on the Chairman of the Fed to pump out soothing liquidity forever. Enormous political pressure is placed on the administration and Congress to keep the seemingly gifted Medicine Man in the Fed Chairmanship forever.
As long as the Big Medicine Man stays in office, no risk will be deemed too great, no speculation foolish. All assets will be good buys, because if supply ever threatens to exceed demand, Uncle Ben will pump out more liquidity to absorb the evil excess.
It was this way with Uncle Alan that we got the Great Bursting Bubble of 2007-08. Now, with the financial markets clinging to Ben Bernanke like lint, the cycle appears poised to renew itself. The financial markets have become increasingly addicted to government policy--and in particular, government handouts. This isn't a story that will have a happy ending in the long run. Lasting prosperity won't come from Big Medicine Men. It will come from the individual efforts of people producing things that other people want to buy, and from the financial markets financing the efforts of these productive people. But the near term profits and bonuses of Wall Street are harder to harvest from the pedestrian activities of the production process. Massive cash flows provided by the Fed are much more lucrative. Plus ca change, plus c'est la meme chose. And that's too bad.
It's no secret the stock markets are complex. With the Internet's informational horn of plenty and thousands of pages of SEC filings per year per company, the data flow is overwhelming. But the crucial information of what a company is truly about and where it's going is very difficult to discern. Add to this the fact that there are thousands of public companies, and anyone who tries to rationally analyze the totality of the markets is destined for discombobulation. Some investors seek out talismanic signs--those would be the now tarnished credit rating agencies' little letter and number grades. Others follow gurus--whichever analyst du jour has the best discernible track record from whatever point of view one considers meaningful. But, more than anything, today's markets rely on big medicine--the big medicine of big government.
Not long ago, the most esteemed medicine man was Alan Greenspan. In an age of asset volatility, beginning with the 1987 stock market crash, Greenspan seemed to have magical powers. He could calm roiling waters. While the Japanese stock and real estate markets boomed and busted, leaving Japan in seemingly perpetual stagnation, Greenspan wielded the monetary wand first to expunge any signs of inflation, and then transport American assets--equities and real estate--to Lake Wobegon, where they all performed above average. Nary a cloud was to be seen in ever brighter blue skies. Seldom was heard a discouraging word. The buffalo roamed. The deer and the antelope played. Chairman Greenspan was practically deified and the markets rose ever higher while he presided over the Fed.
But Chairman Greenspan's big medicine offended the gods of supply and demand. He, a professional economist, had the hubris to think that he could magically stop prices from falling, and the economy from contracting. The gods simmered, then fumed, and then raged. Finally, they cast fearsome bolts of lightning that set the financial world ablaze and burned down numerous houses of cards. The nation was tossed out of Lake Webegon. Justice, untempered by mercy, was administered by the laws of supply and demand.
Alan Greenspan's luck continued to hold. By the time the ship hit the iceberg, he had departed the Fed and taken up a new role as eminence grise to the financially powerful. In his place was a new Chairman, Ben Bernanke, whose medicine was untested.
It's conceivable that the stock market crash of 2007-08 was severe as it was because the Fed was then chaired by a rookie. Because Bernanke wasn't predictable at that time, asset prices couldn't be easily established, and demand fell away.
We know what happened next. The Fed opened up all of its doors, even the emergency exits in the cafeteria, and invited every imaginable financial institution to come in for loans. It organized the first ever money printers' SWAT team to work 'round the clock rescuing beleaguered financial firms. Short term interest rates magically disappeared, and they've been gone for so long many teenagers and children don't believe they ever really existed.
But the stock market revived, and the real estate market may soon be moved from the ICU. Ben Bernanke was complimented, then toasted, and most recently, deified as Man of the Year. The markets now believe in his magic. As long as Bernanke serves as their totem, they will know that no bullet can kill them. Appetite for risk has made a comeback. The bulls strut in the range.
The financial markets' reliance on Great Men is a bad sign. Trading and investing have become bets on the direction of government policy. It's easier to rely on the perceived avuncular omniscience of a senior federal official than deal with the markets in all their mindnumbing complexity. Enormous political pressure is placed on the Chairman of the Fed to pump out soothing liquidity forever. Enormous political pressure is placed on the administration and Congress to keep the seemingly gifted Medicine Man in the Fed Chairmanship forever.
As long as the Big Medicine Man stays in office, no risk will be deemed too great, no speculation foolish. All assets will be good buys, because if supply ever threatens to exceed demand, Uncle Ben will pump out more liquidity to absorb the evil excess.
It was this way with Uncle Alan that we got the Great Bursting Bubble of 2007-08. Now, with the financial markets clinging to Ben Bernanke like lint, the cycle appears poised to renew itself. The financial markets have become increasingly addicted to government policy--and in particular, government handouts. This isn't a story that will have a happy ending in the long run. Lasting prosperity won't come from Big Medicine Men. It will come from the individual efforts of people producing things that other people want to buy, and from the financial markets financing the efforts of these productive people. But the near term profits and bonuses of Wall Street are harder to harvest from the pedestrian activities of the production process. Massive cash flows provided by the Fed are much more lucrative. Plus ca change, plus c'est la meme chose. And that's too bad.
Tuesday, July 28, 2009
Reappoint Bernanke, But Don't Deify Him
As America, the homeland of immigrants, grew in diversity, its culture came to be secular and commercial. While the Pilgrims, Puritans, Quakers and others landed on the shores of Britain's North American colonies with the hope of attaining grace through freedom of worship, America came to be the land of opportunity, where the pursuit of happiness evolved (or devolved, as the case may be) into making your fortune. Wherever you or your ancestors might be from, the one thing you have in common with all other Americans is a national culture of commerce.
A nationwide economy, especially in a country 3,000 miles wide (and with two other states much farther away), requires a national referee to ensure fair dealing between people thousands of miles apart. Thus, as the economy grew from Jefferson's ideal of yeoman farmers to fulfill Hamilton's much larger vision, the federal government took on the roles of national referee, guardian of the financial system, and promoter of economic growth and full employment.
This has been ever more the case during the economic crisis of the last two years. The federal government took de facto control of the financial system, and became the majority owner of America's largest car company. Front and center in all this governmental activity has been the Federal Reserve, the central bank and also much more. Today, the Federal Reserve is not merely the regulator and lender of last resort for the banking system. It's the ultimate source of credit for much of the economy, providing trillions of dollars of credit facilities that keep the financial system--and thus the economy--above the septic field.
President Obama has to decide soon whether or not to reappoint Ben Bernanke as the Chairman of the Fed, or chose a successor. He should reappoint Bernanke.
There are reasons to question a reappointment of Bernanke. The man has clearly demonstrated that he has feet of clay. He was slow to recognize the severity of the subprime and related crises, and has left unresolved the still highly troubling problem of trillions of dollars of toxic assets held by the major banks. He and his erstwhile compadre, former Treasury Secretary Henry Paulson, bailed out Bear Stearns, Fannie Mae and Freddie Mac; let Lehman collapse; and then gave AIG a blank check bailout that paid its creditors 100 cents on the dollar even though they were consenting adults who voluntarily took the risk of AIG's creditworthiness. Bernanke's and Paulson's decisions to bail out, or not, were seemingly driven by reasons known only to them. That instilled a fear of the unknown in the financial markets that left credit frozen and the economy on the brink of Depression.
But, to Bernanke's credit, he demonstrated the ability to move up the learning curve, a quality greatly needed but not commonly found in senior federal officials. He came to understand that there are vast pools of raw sewage in the financial system and that dramatic action was necessary to keep them from polluting the national economy. He was highly innovative, and the economy seems to have skirted the edge of the septic field.
As has been well-publicized, the Fed's rescue efforts contain the seeds of inflation and asset bubbles. Bernanke and other Fed governors have insisted they can withdraw the accommodative measures instituted in the last 18 months in a timely enough manner to avoid these consequences. Maybe so, maybe not. But could anyone else do better?
Bernanke seems to understand that his butt was nigh deep-fried sixteen times over during the past two years. Having been so thoroughly acquainted with the potential for disastrous and tremendously embarrassing failure, Bernanke is probably running somewhat scared. That's a good trait to have in the most powerful government official next to the President. Bernanke's predecessor seems to have been overly confident of his ability to discern new paradigms and we're still paying the price for that certitude.
Bernanke is reputed to be as a much a listener as a talker. That's a rare attribute in Washington, but valuable. The current economic problems are far from over, and could easily get weirder before they get better. A Fed Chairman who listens, learns and innovates has a good chance of coping.
At the same time, the Fed's powers should not be expanded. Bernanke wants the Fed to address consumer protection issues in the financial markets. The Fed already had its chance and failed. It simply has too many priorities on its plate. Consumer protection would conflict with other Fed responsibilities. If the banks are tottering and need greater profits to beef up their capital, would the Fed institute and enforce potentially expensive consumer protections? Yet, consumer protection is needed. A newly formed, independent consumer protection agency is in order.
By the same token, the Fed shouldn't be the overseer of systemic risk. As we discussed in http://blogger.uncleleosden.com/2009/07/financial-regulatory-reform-we-should.html, controlling systemic risk could conflict with Fed desires to maintain the financial strength of the banking industry. When banks are undercapitalized, the Fed might be tempted to let them take greater risk in the hope of making greater profits and enhancing their ability to raise capital. But that could let the horse out of the barn in terms of systemic risk, and as we know today all too well, risk that's been unleashed cannot easily be corralled. Our pick for the czar of systemic risk: the FDIC. An insurer won't let the insureds run amok.
Thus, reappoint Bernanke. But don't deify him by adding to the Fed's powers. It's the grandest of doyennes in our national culture of commerce and tremendously powerful already. Increasing its powers would complicate its job and exacerbate existing concerns about its lack of accountability. Economic well-being is the archstone of our national culture, and we shouldn't make it dependent on any single regulatory agency.
A nationwide economy, especially in a country 3,000 miles wide (and with two other states much farther away), requires a national referee to ensure fair dealing between people thousands of miles apart. Thus, as the economy grew from Jefferson's ideal of yeoman farmers to fulfill Hamilton's much larger vision, the federal government took on the roles of national referee, guardian of the financial system, and promoter of economic growth and full employment.
This has been ever more the case during the economic crisis of the last two years. The federal government took de facto control of the financial system, and became the majority owner of America's largest car company. Front and center in all this governmental activity has been the Federal Reserve, the central bank and also much more. Today, the Federal Reserve is not merely the regulator and lender of last resort for the banking system. It's the ultimate source of credit for much of the economy, providing trillions of dollars of credit facilities that keep the financial system--and thus the economy--above the septic field.
President Obama has to decide soon whether or not to reappoint Ben Bernanke as the Chairman of the Fed, or chose a successor. He should reappoint Bernanke.
There are reasons to question a reappointment of Bernanke. The man has clearly demonstrated that he has feet of clay. He was slow to recognize the severity of the subprime and related crises, and has left unresolved the still highly troubling problem of trillions of dollars of toxic assets held by the major banks. He and his erstwhile compadre, former Treasury Secretary Henry Paulson, bailed out Bear Stearns, Fannie Mae and Freddie Mac; let Lehman collapse; and then gave AIG a blank check bailout that paid its creditors 100 cents on the dollar even though they were consenting adults who voluntarily took the risk of AIG's creditworthiness. Bernanke's and Paulson's decisions to bail out, or not, were seemingly driven by reasons known only to them. That instilled a fear of the unknown in the financial markets that left credit frozen and the economy on the brink of Depression.
But, to Bernanke's credit, he demonstrated the ability to move up the learning curve, a quality greatly needed but not commonly found in senior federal officials. He came to understand that there are vast pools of raw sewage in the financial system and that dramatic action was necessary to keep them from polluting the national economy. He was highly innovative, and the economy seems to have skirted the edge of the septic field.
As has been well-publicized, the Fed's rescue efforts contain the seeds of inflation and asset bubbles. Bernanke and other Fed governors have insisted they can withdraw the accommodative measures instituted in the last 18 months in a timely enough manner to avoid these consequences. Maybe so, maybe not. But could anyone else do better?
Bernanke seems to understand that his butt was nigh deep-fried sixteen times over during the past two years. Having been so thoroughly acquainted with the potential for disastrous and tremendously embarrassing failure, Bernanke is probably running somewhat scared. That's a good trait to have in the most powerful government official next to the President. Bernanke's predecessor seems to have been overly confident of his ability to discern new paradigms and we're still paying the price for that certitude.
Bernanke is reputed to be as a much a listener as a talker. That's a rare attribute in Washington, but valuable. The current economic problems are far from over, and could easily get weirder before they get better. A Fed Chairman who listens, learns and innovates has a good chance of coping.
At the same time, the Fed's powers should not be expanded. Bernanke wants the Fed to address consumer protection issues in the financial markets. The Fed already had its chance and failed. It simply has too many priorities on its plate. Consumer protection would conflict with other Fed responsibilities. If the banks are tottering and need greater profits to beef up their capital, would the Fed institute and enforce potentially expensive consumer protections? Yet, consumer protection is needed. A newly formed, independent consumer protection agency is in order.
By the same token, the Fed shouldn't be the overseer of systemic risk. As we discussed in http://blogger.uncleleosden.com/2009/07/financial-regulatory-reform-we-should.html, controlling systemic risk could conflict with Fed desires to maintain the financial strength of the banking industry. When banks are undercapitalized, the Fed might be tempted to let them take greater risk in the hope of making greater profits and enhancing their ability to raise capital. But that could let the horse out of the barn in terms of systemic risk, and as we know today all too well, risk that's been unleashed cannot easily be corralled. Our pick for the czar of systemic risk: the FDIC. An insurer won't let the insureds run amok.
Thus, reappoint Bernanke. But don't deify him by adding to the Fed's powers. It's the grandest of doyennes in our national culture of commerce and tremendously powerful already. Increasing its powers would complicate its job and exacerbate existing concerns about its lack of accountability. Economic well-being is the archstone of our national culture, and we shouldn't make it dependent on any single regulatory agency.
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