The Odd Collection Of Holes


So today we have an odd assortment of holes.

Jackson Hole, for one, where an asshole emitted the following (in part):

When significant financial stresses first emerged, in August 2007, the FOMC responded quickly, first through liquidity actions–cutting the discount rate and extending term loans to banks–and then, in September, by lowering the target for the federal funds rate by 50 basis points.1As further indications of economic weakness appeared over subsequent months, the Committee reduced its target for the federal funds rate by a cumulative 325 basis points, leaving the target at 2 percent by the spring of 2008.


Despite the easing of monetary policy, dysfunction in credit markets continued to worsen. As you know, in the latter part of 2008 and early 2009, the Federal Reserve took extraordinary steps to provide liquidity and support credit market functioning, including the establishment of a number of emergency lending facilities and the creation or extension of currency swap agreements with 14 central banks around the world.2In its role as banking regulator, the Federal Reserve also led stress tests of the largest U.S. bank holding companies, setting the stage for the companies to raise capital. These actions–along with a host of interventions by other policymakers in the United States and throughout the world–helped stabilize global financial markets, which in turn served to check the deterioration in the real economy and the emergence of deflationary pressures.

Unfortunately, although it is likely that even worse outcomes had been averted, the damage to the economy was severe.

Oh really?

Doesn’t the claim of whether a “worse outcome” was averted require analysis of not only the counterfactual (which is by definition speculative since we can’t determine what would have occurred) but we must also look at the length of disruption along with the depth, and multiple one by the other?

Clearly we are still in the land of disruption, as the period has not ended and rates have not been normalized.  Indeed, The Fed has promised at least two more years of ultra-low rates.  So we have now six years during which unemployment will (by The Fed’s own claims!) remain elevated and dysfunctional.

This is “a better outcome”?  Than what?  Who remembers 1920/21?  Who has read about it?  Anyone?  Why is that not part of the discussion?

How effective are balance sheet policies? After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve’s large-scale purchases have significantly lowered long-term Treasury yields. For example, studies have found that the $1.7 trillion in purchases of Treasury and agency securities under the first LSAP program reduced the yield on 10-year Treasury securities by between 40 and 110 basis points. The $600 billion in Treasury purchases under the second LSAP program has been credited with lowering 10-year yields by an additional 15 to 45 basis points.12 Three studies considering the cumulative influence of all the Federal Reserve’s asset purchases, including those made under the MEP, found total effects between 80 and 120 basis points on the 10-year Treasury yield.13 These effects are economically meaningful.

They sure are.  The public debt is about $10 trillion.  If this took the yields down by one full point then it removed $100 billion annually from those with capital who lent it to the government.  That is it was a shift from one party to another, not a “benefit”!

The same, by the way, applies to everyone else who borrowed money under these terms.  There is a credit for the debtor, and thus the creditor gets screwed to the exact same degree.

This, of course, assumes there was an actual creditor.  And that’s a further problem; in the private market there generally is but when we’re talking about the government there is not.  There the impact is even more-perverse, in that deficit spending, enabled by these policies, is an indirect tax on the entire economy.

How large is that tax?  That’s easy to compute — take the deficit and determine what percentage of GDP it might be.  At $1.2 trillion it’s about 8%, and has run between 8-12% annually for each of the last four years.  That tax applies to everyone in the economy in that their purchasing power is debased, and worse, it applies prospectively against every cash and cash-like instrument held anywhere, by anyone.

That is, it doesn’t just apply against spent funds it also applies against saved funds that the holder chooses not to spend!

Is this a “small” or “manageable” economic consequence?  A roughly 10% tax on every single entity and earned/saved dollar of production?

Notwithstanding these positive signs, the economic situation is obviously far from satisfactory. The unemployment rate remains more than 2 percentage points above what most FOMC participants see as its longer-run normal value, and other indicators–such as the labor force participation rate and the number of people working part time for economic reasons–confirm that labor force utilization remains at very low levels.

Uh, yeah.  There’s one for this: FAIL.

Second, fiscal policy, at both the federal and state and local levels, has become an important headwind for the pace of economic growth. Notwithstanding some recent improvement in tax revenues, state and local governments still face tight budget situations and continue to cut real spending and employment. Real purchases are also declining at the federal level. Uncertainties about fiscal policy, notably about the resolution of the so-called fiscal cliff and the lifting of the debt ceiling, are probably also restraining activity, although the magnitudes of these effects are hard to judge.30 It is critical that fiscal policymakers put in place a credible plan that sets the federal budget on a sustainable trajectory in the medium and longer runs. However, policymakers should take care to avoid a sharp near-term fiscal contraction that could endanger the recovery.

So let me see…. first we think we’ll impose a 10% surtax on every piece of economic activity in the country for four years, and worse we will impose it onsaved capital, and then you bleat about fiscal headwinds and tight budgets?

What the hell did you think was going to happen when you stole 10% of everyone’s income four years running by enabling all this deficit spending?

Third, stresses in credit and financial markets continue to restrain the economy. Earlier in the recovery, limited credit availability was an important factor holding back growth, and tight borrowing conditions for some potential homebuyers and small businesses remain a problem today.


There has been no contraction in systemic credit.  Indeed I challenge you to find the contraction in any of the sub-units of that chart.  The one place you’ll seematerial contraction is inter-financial entity credit which is all funny-money used to back speculative bets in this or that — and it was almost-exactly offset to the dollar with deficit spending, that is, there was no reduction in leverage but merely a shift in where it lay.

Until systemic leverage contracts back to something reasonable, roughly half what it is now, there is resolution to this problem.  The longer the shifting continues the worse the risk that the next dislocation happens there.  And in this case “there” would be the government, which is a catastrophic failure.

Early in my tenure as a member of the Board of Governors, I gave a speech that considered options for monetary policy when the short-term policy interest rate is close to its effective lower bound.31 I was reacting to common assertions at the time that monetary policymakers would be “out of ammunition” as the federal funds rate came closer to zero. I argued that, to the contrary, policy could still be effective near the lower bound. Now, with several years of experience with nontraditional policies both in the United States and in other advanced economies, we know more about how such policies work. It seems clear, based on this experience, that such policies can be effective, and that, in their absence, the 2007-09 recession would have been deeper and the current recovery would have been slower than has actually occurred.

You’re full of crap Ben.  Yes, the contraction would have been deeper.  But 1920/21 proves that the recovery would have been quicker and more-robust.

As we assess the benefits and costs of alternative policy approaches, though, we must not lose sight of the daunting economic challenges that confront our nation. The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.

Offshoring is, in part, driven by extremely low rates, high leverage and thus high expectations for prices and yields in equity markets.  That in turn tends to drive labor to where it is easily-exploited in various forms, including effective slavery and environmental destruction.

The blow-back from that is the evisceration of the nation’s employment base, particularly for those who are further down the ladder of skill — manufacturing and similar labor.

While The Fed is not entirely responsible for this, they’re a contributor to it.

We must therefore finish up our list of “holes” with one final one — the citizens of our country, who have been subjected to abuse of their cornholes by this very same Ben Bernanke — and The Fed in general.

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