A year ago, in my remarks to this conference, I reviewed the response of the global policy community to the financial crisis.1
Yeah, a financial crisis you created by willfully ignoring everything that was going on around you for the last two decades, including massive fraud in housing, massive collusive dealing in the financial system, off-balance sheet exposures that exceeded GDP in a number of firms you allegedly regulated and complex schemes intended to cover all of this up – facts that you were well-aware of.
Never mind the fact that the entire premise on which your thesis has rested has been the ever-expanding level of credit in the economy at a rate exceeding GDP growth. You’re not alone in this of course; such a record extends back to the inception of the Fed Z1, but that doesn’t change the fact that your theories and practice have been bereft of mathematical reality.
This list of concerns makes clear that a return to strong and stable economic growth will require appropriate and effective responses from economic policymakers across a wide spectrum, as well as from leaders in the private sector.
Let’s see, as we going to find anything like “lock up the crooks and claw back their expensive toys in the Hamptons” among that list? Of course not. Nor will we see “contract leverage and systemic debt to a sustainable level”. Yet both are required.
At best, though, fiscal impetus and the inventory cycle can drive recovery only temporarily. For a sustained expansion to take hold, growth in private final demand–notably, consumer spending and business fixed investment–must ultimately take the lead. On the whole, in the United States, that critical handoff appears to be under way.
No it isn’t. The consumer hasn’t de-levered and neither has anyone else. Not to a sufficient degree anyway. Oh sure, consumer credit has been contracting now for many months, and continues to – getting continually bent over the table with 29% interest rates will do that to you – if you don’t go bankrupt first.
And don’t start with that “increase in savings” bullcrap – you’re well-aware, as am I, that the government defines “savings” as “income less consumption”, which means that debt paydown or default is defined as “savings.” Like hell – that which is saved has to remain yours once saved – if you pay off debt you’ve saved nothing.
Corporate “rebounds” have all been fueled by cost-of-labor decreases. To put it in terms everyone can understand, that’s what happens when your boss gets in your face and says “work harder, get paid less, or get fired – pick!” Average Americans understand this, but you either don’t or refuse to speak the truth about it.
Household finances and attitudes also bear heavily on the housing market, which has generally remained depressed. In particular, home sales dropped sharply following the recent expiration of the homebuyers’ tax credit. Going forward, improved affordability–the result of lower house prices and record-low mortgage rates–should boost the demand for housing. However, the overhang of foreclosed-upon and vacant housing and the difficulties of many households in obtaining mortgage financing are likely to continue to weigh on the pace of residential investment for some time yet.
There is no such thing as “residential investment.” Housing is a consumer durable good and is in fact consumed!
Never mind that governments add to that “consumption” with confiscatory tax systems on real estate. What’s the real rate of return on a $500,000 house that has a $14,000 a year tax bill, as is the case in many of our major cities and their suburbs? If the house goes up in price at the rate of your claimed inflation (2%) then the entirety of the so-called “increase in value” is absorbed by the property tax bill and more, and we haven’t begun to sock back a capital fund for things like a new water heater, roof and furnace – all of which are in fact consumed with time.
Consequently, investment in equipment and software will almost certainly increase more slowly over the remainder of this year, though it should continue to advance at a solid pace.
Intel doesn’t think so.
In contrast, outside of a few areas such as drilling and mining, business investment in structures has continued to contract, although the rate of contraction appears to be slowing.
You don’t get out much do you? There are more strip malls than we’ll need for the next 20 years. Indeed, there is more commercial property in the general than we will need for the next 20 years. This was also fueled by fraud – particularly among your buddies in the banking system that put everything they could get their hands on into some sort of dodgy security like a CDO, then self-dealt themselves to riches, while leaving the rest of us to ruin.
Once again government is “helping” by making tax uncertainty the order of the day, which means that business is having and increasingly hard time figuring out what the liability side of the balance sheet will look like a couple of years hence. And that’s a problem, because while everyone seems to lie about the assets, especially banks, liabilities are always good to the penny and have to be covered.
Bank-dependent smaller firms, by contrast, have faced significantly greater problems obtaining credit, according to surveys and anecdotes. The Federal Reserve, together with other regulators, has been engaged in significant efforts to improve the credit environment for small businesses.
Most small business loans have been in fact collateralized by the owner’s home. That owner’s home is now underwater, and the owner likely has blown the (falsely believed) equity expansion on Hummer, vacation condo (also seriously underwater) or boat. He therefore has no collateral to put up for a loan, and the bank is entirely correct in saying “No”, given that 9 out of 10 businesses fail within the first five years.
There is no solution to this problem with “lending”, other than “don’t borrow.” And that, in fact, is the right answer – run a business that doesn’t require lending – that is, leverage – to be viable. This means that only productive enterprises get started, instead of ponzi-based things like building $400,000 craptastic McMansions at grossly-inflated prices.
Firms are reluctant to add permanent employees, citing slow growth of sales and elevated economic and regulatory uncertainty.
Why would I hire people into falling demand, a confiscatory government environment and the ever-present threat of your buddies at Humongous Bank Inc. shoving a stallion up my backside? I’ll pass, and logical businessmen and women nationally are doing exactly that.
Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place. Monetary policy remains very accommodative, and financial conditions have become more supportive of growth, in part because a concerted effort by policymakers in Europe has reduced fears related to sovereign debts and the banking system there
You’re smoking crack dude. 12% of GDP in deficits here and you call this “accommodative”? I call it “idiotic” and “that which can’t go on forever won’t.” We’re arguing when (it goes boom), not if.
Maintaining price stability is also a central concern of policy. Recently, inflation has declined to a level that is slightly below that which FOMC participants view as most conducive to a healthy economy in the long run.
Inflation should be zero. That way I can choose to save and invest without having your cronies try to force me into dodgy deals. But of course that’s what you do on the FOMC, right – try to coerce people into getting involved in dodgy investments which are guaranteed to eventually blow up, as are all Ponzi Schemes. You managed to pull it off twice in ten years – congratulations. I hope you don’t mind if the public decides to erect the middle finger in your direction, having learned by hard experience what listening to you will do their financial (and emotional!) stability.
In support of the stock view, the cessation of the Federal Reserve’s purchases of agency securities at the end of the first quarter of this year seems to have had only negligible effects on longer-term rates and spreads.
Looks to me like when you quit jacking around with your nutty programs rates on the long end declined – that is, when you were jacking around rates were generally rising!
But I thought “Quantitative Easing” was supposed to suppress rates? At least this is what you sold to Congress and the American People. How “suppressed” were they Ben? NOT! Never mind that this is just government debt – how about credit cards? Were those rates “suppressed” by your little game? Oh I know, the little guy doesn’t matter, right?
A first option for providing additional monetary accommodation, if necessary, is to expand the Federal Reserve’s holdings of longer-term securities. As I noted earlier, the evidence suggests that the Fed’s earlier program of purchases was effective in bringing down term premiums and lowering the costs of borrowing in a number of private credit markets.
It was? Well spreads, yes. But let me ask this: Were mortgage rates higher or lower while you performed “QE” than they are now? Oh, they were higher, right?
Oh sure, banks were able to issue debt into the market at very low rates. But why? Was it really “QE” or was it really the government backstop – some of it explicit – that was attached to that debt? Ditto for “Build America Bonds”.
As for private credit, well, that’s a different matter. Show me the reduction in actual interest rates while you were tampering with the market in places that mattered to average Americans. You can’t – because in fact rates went the wrong way!
A lot of that had to do with what I argue was your intended purpose behind “QE” – to provide a “risk-free” arb opportunity for certain “special people”, while the rest of America twisted in the wind. Funny how the banks all seemed to know which coupons you would buy in advance, and how certain asset managers had the prescience to know what you buy before you came in and lifted every offer, all the way up. Nice for them, but of absolutely no benefit to the average American.
However, uncertainty about the quantitative effect of securities purchases increases the difficulty of calibrating and communicating policy responses.
How about the truth: The effect was exactly the opposite of what you claimed it would be!
Another concern associated with additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed’s ability to execute a smooth exit from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might lead to an undesired increase in inflation expectations.
A: It’s not unjustified.
B: You know damn well this Ponzi can’t go on forever, and proof of that is found in your refusal to identify the conditions under which you will exit – and how.
A second policy option for the FOMC would be to ease financial conditions through its communication, for example, by modifying its post-meeting statement.
Lying has worked so well up until now in producing lasting prosperity. You should do more of it.
A third option for further monetary policy easing is to lower the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System.
Right – 25 basis points is so much that it’s a huge incentive. “I have a squirt gun and I’m not afraid to get you wet!” Pull the other one Bernanke.
A rather different type of policy option, which has been proposed by a number of economists, would have the Committee increase its medium-term inflation goals above levels consistent with price stability. I see no support for this option on the FOMC.
That’s probably because pitchforks and torches are a universal language, and nobody on the FOMC (except perhaps you) is really all that interested in finding out if there really is a breaking point in American Society beyond which The Wizard of Oz is revealed to be a tiny little man with an even-smaller johnson that has been jacking the town around for years, at which point the citizens of Oz simply decide to eat him.
Oh wait – they were “more civilized” in the novel. Yeah, well, that was a children’s story. This is the real world, and the people do have a limit of tolerance for abuse. When they’re unable to find redress through the law and are homeless, jobless and starving, they have nothing left to lose. That’s not something I or anyone else who’s sane wants to see.
First, the FOMC will strongly resist deviations from price stability in the downward direction. Falling into deflation is not a significant risk for the United States at this time, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation.
Deflation on a moderate scale is only bad if you’re in debt. Never mind that we’ve got it and have had it for more than 20 years in certain areas. Who among the citizens is upset with deflation in technology, for instance?
Anyone remember the price of a color television 30 years ago? How about a computer in 1981? A calculator? A cell phone – oh wait, there was no such thing. All of these things and more have undergone massive and continual deflation since their introduction. We love it as consumers, because, well, we consume these things. When our computer wears out we buy a new one that is both faster and cheaper. Same with our cellphone. Same with our color TV.
Exactly how is this bad? It’s not – unless you went massively into debt to buy the thing, at which point you got serious problems, as the debt has to be paid off for a product that is worth a tiny fraction of what you paid for it!
Finally, we need to distinguish between genuine deflation and attempted support of a price level that was achieved by fraudulent economic and monetary policy – that is, it was through fraudulent inducement that the original INFLATION of those prices occurred.
Deflation through greater productivity per unit of labor cost is a good, not bad thing. It means you can buy more capability with less work. This is a net societal positive.
The latter is an adjustment that is necessary to restore balance. The question there is not whether we should have “deflation”, it is whether those who caused the inflation of the price level through these fraudulent manipulations in the market should be held to account for their activity and imprisoned while the economy is allowed to contract back to a sustainable level of price on a macro basis, such that playing ponzi finance is no longer necessary to do basic economic things like buy a home or automobile.
My answer to that question is “yes”, but I’m just one of 330 million.