Archive for category Monetary Policy
“Stimulus or Sedative?” Thomas Sowell Never Disappoints
Posted by Tom in Business, Centrally Managed Economy, Democrats, Economics, Financial Crisis, Government Regulation, Monetary Policy on March 9, 2010
Sowell opens his succinct RCP post with an Abe Lincoln story: President Lincoln asked an audience how many legs a dog has, if you call the tail a leg? Some shouted “Five” but Lincoln corrected them saying that the answer was four. “The fact that you call a tail a leg does not make it a leg!”
The professor uses that tale to drive home the truth about the “stimulus” and the “jobs bill.” The idea behind stimulus, for example, is to get investors to invest, lenders to lend, and employers to employ. Prime the pump, put a little bit of water in to get the well flowing. That little bit of water, the government money, was never meant to restore the economy by itself, but to get the private business sector going. What has happened?
- After the Bush-started stimulus in 2008–business spending fell by 28%.
- Durable goods spending fell by 22%.
- Four months after the TARP billions–large TARP banks made 23% fewer loans.
- The velocity of money fell faster than at any time in the last half century.
- The WSJ reports the “sharpest decline in lending since 1942.”
Why would banks lend when, “from the White House to Capitol Hill, politicians are coming up with all sorts of bright ideas for borrowers not to have to pay back what they borrowed…” Why would investors invest when a substantial number of the consumers are unemployed? Why would employers employ when faced with higher taxes and more Obamacare mandates? In short, the outlook is uncertain and certainly more big government than private sector oriented.
Sowell points out that none of this is new: during the Great Depression of the 1930s, money velocity, lending, investing and employment were all lower than they were in the 1920s. The anti-buisness rhetoric and anti-business policies did not inspire any more confidence then than they do now. “In an atmosphere where nobody knows what the federal government is going to come up with next, people tend to hang on to their money until they have some idea of what the rules of the game are going to be.”
Economists have estimated that Roosevelt’s New Deal prolonged the depression by several years, how long will Barack Hussein Obama, Reid and Pelosi prolong our current difficulties?
Tom Motherway
the Spending Limitations Amendment would eventually put us on a sustainable path
Posted by Tom in Centrally Managed Economy, Congress, Constitution, Deficit, Financial Crisis, Financial Policy, Monetary Policy, National Debt, Nationalized Health Care, Statism on March 6, 2010
Even without any more stimulus, bailouts, Obamacare, or cap and trade the US is on a course to bankruptcy. Consider:
- In the past five years federal spending has increased 42% to nearly 25% of the economy, the highest level since World War II.
- The deficit has exploded from $318 Billion in 2005 to $1.4 Trillion, a 400+% increase, equal to the entire accumulation of debt from George Washington to Bill Clinton.
As James Antle points out in his American Spectator article, Amending the Spending, “this will be remembered as a golden era of fiscal responsibility compared to what is to come.” Again I emphasize, this is even without Obamacare, added stimulus, bailouts, etc. With demographic certitude, as baby boomers retire, social security, medicare, and medicaid as we know them will be bankrupt. THE PUBLIC DEBT WILL EXCEED 110% OF THE ECONOMY IN 2026 AND CLIMB PAST 200% BY 2040! Again, this is without Obamacare, added stimulus, bailouts, etc.!
Three congressmen, Mike Pence (R-Ind.), Jeb Hensarling (R-Texas) and John Campbell (R-Calif.) have proposed a constitutional amendment to cap federal spending at 20% of the U.S. economy. The limit would be waived only when an official declaration of war is in effect or by two-thirds majorities of both houses of Congress. 20% is the historic average share of the economy consumed by the federal government.
The backers admit that Republicans are just as spendthrift as Democrats. They are not naive about getting it passed, 5000 amendments have been offered and only 27 enacted! But the mood of the country seems to be shifting to a serious concern for the current fiscal insanity.
If they’re correct, and the amendment has some legs, the country can get off the current unsustainable course and onto a path that’s fiscally sustainable.
Tom Motherway
America’s Lost Decade(s)-Complements of Obama, Bernanke and Geitner
Posted by Tom in Deficit, Democrats, Economics, Fed, Financial Crisis, Financial Policy, Monetary Policy, Real Estate, Uncategorized on January 25, 2010
Japan’s “lost decade” was caused by hiding bad assets, inflating values, and failing to recognize losses. “Hide the problems.” “Kick the can down the street.” Bank capital was suspect because bank assets were suspect. This societal attempt not to “lose face” resulted in a stagnant decade and higher interest rates for Japanese borrowers.
Fast-forward to the U.S. today. Fannie and Freddie, the efficient government instigators of the subprime residential debt bubble, are government toxic waste dumps. Tim Geithner in a little publicized Christmas Eve surprise, removed the $400 Billion in federal bailout limits from Fannie and Freddie. Currently the government, that’s your tax dollars, are behind everything these toxic twins do, without limit!
Why worry? What do they do? One thing is HAMP, the Home Affordable Modification Program. This is the $75 Billion program to keep people in the over-leveraged, over-priced homes that they can’t afford. It supports the inflated values of mortgage assets on the books of the banks so they won’t be required to write down the value of these assets with the corresponding hit to capital. As previously reported, including Christmas Eve Time Bomb, the program is a dangerous tilt at windmills! It only postpones the inevitable day of reckoning.
What happens to the Fannie-Freddie mortgages once made? Well, the majority go into the secondary market in packages against which bonds are issued, mortgage backed securities, MBS. Well, you argue, the market should fairly price these instruments. Unfortunately the Fed is the market, at least the great majority of the market, 75-80%. Where does it get the $1.45 Trillion to do this? Well, it prints the money. Yes, the Fed has doubled the monetary base.
Why then don’t we now have runaway inflation? Most of that excess liquidity is sitting on the banks’s balance sheets as bank reserves. The banks have not started lending it into the commercial market. There is little increase in the velocity of money, little economic activity. When the economic recovery gathers steam, inflation will raise its ugly head–on steroids!
To control that inflation the Fed would normally sell assets sitting on its balance sheet, typically government bonds. Problem is that now a lot of the securities sitting on the Fed’s books are the Fannie-Freddie toxic waste. Who’s going to buy that crap? And, at what price?
In an intriguing NRO post today, Fed Hedge, Stephen Spruiell points out that whoever the next Fed chairman is he will fail. He will have no where to turn when the stuff hits the fan. We will face runaway inflation with no exit, no remedy. Defaults, foreclosures, double-digigt interest rates. Borrowing will stop, business will atrophy.
So it really doesn’t matter who the next Fed chairman is. This gives populist bent Senators cover to oppose Bernanke’s confirmation. When the inevitable explosion occurs, they will say “told you so!”
Tom Motherway
Dollar Reaches Breaking Point
Posted by Tom in Foreign Policy, Foreign Trade, Monetary Policy on October 12, 2009
Who will fund the record breaking Obama deficits? The dollar is falling as it should with anticipated Obamaflation. Of course Obama and the Democratic Congress are not helping by taking the strong protectionist tack that their union owners demand. This from Bloomberg:
Policy makers boosted foreign currency holdings by $413 billion last quarter, the most since at least 2003, to $7.3 trillion, according to data compiled by Bloomberg. Nations reporting currency breakdowns put 63 percent of the new cash into euros and yen in April, May and June, the latest Barclays Capital data show. That’s the highest percentage in any quarter with more than an $80 billion increase.
World leaders are acting on threats to dump the dollar while the Obama administration shows a willingness to tolerate a weaker currency in an effort to boost exports and the economy as long as it doesn’t drive away the nation’s creditors. The diversification signals that the currency won’t rebound anytime soon after losing 10.3 percent on a trade-weighted basis the past six months, the biggest drop since 1991.“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,” said Steven Englander, a former Federal Reserve researcher who is now the chief U.S. currency strategist at Barclays in New York. “It looks like they are really backing away from the dollar.”
via Dollar Reaches Breaking Point as Banks Shift Reserves Update3 – Bloomberg.com.
Obama’s post American world will be dramatically weaker and much poorer.
Tom Motherway
Cargill on Crisis–September Meeting Notes
Posted by Tom in Centrally Managed Economy, Monetary Policy, Stimulus/Bailout on September 16, 2009
Our thanks to Tom Cargill, Ph.D. for his excellent presentation at last evening’s Reno Hayek Dinner. His background is impressive indeed: Following his degree at Davis he conducted research and published a number of books and articles in economics with emphasis on financial and central banking issues. He has consulted with governmental agencies in the US, Japan and Korea and presented lectures in China, Hungry, Australia and Indonesia.
And he did bring that background to bear in last night’s discussion on our current financial crisis. This classic bubble build and bust began in 2001 and its effects are now and will continue to be upon us. While significant, it is not as bad as the Great Depression or Japan’s decade of deflation although both provide valuable lessons today which bailout oriented policy makers seem to ignore. With cheap liquidity flooding the market for too long a time and a government policy mandating loans to deadbeat borrowers, real estate prices outstripped fundamentals. With government assistance and off balance sheet securitizations the US exported the bubble to overseas investors so the explosion resounded beyond our shores. With the implied guarantee of our two GSEs the investments were viewed as risk free.
The explosion took effect and unlike past explosions the central banks acted quickly and concertedly with “a hair of the dog” remedy, easy money. Governments joined in with Keynesian fiscal “stimulus,” which really doesn’t have the advertised multiplier effect; that real effect is in fact negative. Governments also added “bailouts” as weapons in the war against its crisis. These were added without regard to moral hazard and we now have the vagary of “systemic risk” and companies that are “too big to fail!”
So the “government or market” causation question for our current financial problems, probably deserves the answer, both. But were it not for the government policies of Government Sponsored Entities, easy money, and home ownership by people unable to handle that ownership, the crisis would never have occurred. Crystal balling outcomes is indeed difficult but it seems to be a better bet that we will have inflation instead of deflation and that it will be politically difficult for the central banks to tighten monetary policy and fiscal authorities to withdraw stimulus. The major deficits and unprecedented debt will be an effective drag on our future economy and new taxes, especially the VAT will most likely be needed to approach some sanity.
The proof of a good meeting is its interest and duration; last evening, no one wanted to leave and we ran a half hour over schedule! Our thanks to Professor Cargill for the excellent meeting.
Tom Motherway, tom@renohayek.com
Fed’s Assets Doubled in 6 Months and Will Do So Again
Posted by Tom in Monetary Policy on April 9, 2009
In the last quarter of 2008 the Fed’s balance sheet footed at about $1 Billion. It’s now over $2 Billion and according to the CBO has the potential to hit $5 Billion. How’d they do that you ask? Click here to see a step by step graphic tracking the key events and amounts of junk on that balance sheet, which Jerry O’Driscoll was kind enough to send us. Note the difference between the relatively clean high quality assets last year and the “colorful” expanded assets this year. Who will buy this stuff when the it’s time to contract money supply and raise rates?
The Fed Is Now Scared (Cato @ Liberty)
Posted by Tom in Monetary Policy on March 27, 2009
Monetary management by the Fed must be able to handle contractions and expansions–both slopes of the business cycle. In our current down cycle the Fed is pumping money into the economy and as Don pointed out in our discussion there is little monetary velocity–little activity. As the recent gains in the stock market perhaps portend, there will eventually be an up cycle. And as we all discussed with the ballooning spending on the fiscal side, the BHO non-stimulus plan, there will be dramatic inflation with increasing monetary velocity. Debt service alone from the BHO hock-the-children plan assures that there will be no cuts in spending, no help from the fiscal side. But the Fed must attempt to control inflation by raising rates and reducing money supply. Traditionally it has sold assets to reduce money supply and increase rates. As Jerry O’Driscoll points out in his Cato post,
The Fed Is Now Scared
Bloomberg News (March 25, 2009) reported a speech by San Francisco Fed president Janet Yellen in which she called for authority for the central bank to issue its own debt. The request must have most people perplexed, especially since her rationale was delivered in Fed-speak. “Issuing such debt would reduce the volume of reserves in the financial system and push up the funds rate without shrinking the total size of our balance sheet,” Yellen said.
Actually, Yellen, who is also an economist, is addressing a very serious issue. It is one that critics of current Fed policy have been raising for some time.
The Fed is loading up its balance sheet with illiquid assets, including many dubious assets taken in as collateral for loans of money and Treasury securities to financial institutions. In the process, the Fed has an ever diminishing supply of highly liquid (and safe) Treasury securities on its own balance sheet.
Critics like economic historian Anna J. Schwartz and former Fed attorney Walker F. Todd have pointed out that the Fed will have a technical problem if it wants to start sopping up all the liquidity it has created. In a 2008 paper in International Finance, Schwartz and Todd wrote that “it is fair to ask what the Fed intends to do if it decided that it would tighten monetary policy by raising interest rates.” Without a sufficient supply of highly liquid assets to sell in the markets, the Fed would need to dispose of its illiquid assets at losses. That would possibly drive up interest rates more than desired.
Yellen’s call for the power to issue Fed debt signals a number of things. First, the Fed, contrary to recent happy talk from other officials, is worried about inflation. Second, its critics are correct that the Fed has painted itself into a corner by taking illiquid assets onto its balance sheet. Third, the Fed wants to hold those dubious assets to maturity (hence Yellen’s point about not “shrinking the total size of our balance sheet”).
Yellen’s trial balloon drew a “no comment” from the Fed’s Washington headquarters. The issue will not go away.
One logical consequence of this loss of the traditional mechanism for controlling monetary aggregates would seem to be an exacerbation of inflation at a time when it is already high or trending higher. Not a pretty picture.
Tom Motherway