Deadman's picture

    The Fed's ultimate hubris...

    So the powers that be on the Federal Reserve Board have decided to engage in round two of their little quantitative easing experiment, basically agreeing to purchase $600 billion in government debt over the next 8 months in order to keep interest rates artificially low and hopefully juice the economy in the process. 

    That $75 billion a month isn't that much in the grand scheme of things, and the markets are certainly acting as if all is copacetic, but I still find the hubris of the Fed incredibly alarming - though not incredibly surprising. 

    Fed Chairman Ben Bernanke of course considers himself an astute historian of The Great Depression, and he remains firmly and forever convinced that the primary cause of that debacle - or at least of its depth and duration - was the Deflation Boogeyman. He is determined to avoid repeating that experience at any and all costs. 

    (Is there anything scarier than a historian/academician who is so convinced in the righteousness of his beliefs and cause?)

    Unfortunately, the costs this time may end up being a permanent debasement of our currency and an economy so out of whack it will take generations to recover. Meanwhile, people like me who have put way too much of their nest eggs into dollar-based savings accounts just get screwed. 

    I don't want to get into a debate about the necessity of the Fed as an entity at all (does the idea of eleven men and women setting market prices really sound wise?), or the silliness of their wildly conflicting dual mandate (low, stable inflation and high employment) that they are charged to work under, but this latest move is pure madness.

    Bernanke says that the Fed's first round of quantitative easing a couple of years ago did its job - helping stabilize a free-falling economy while keeping inflation at low levels. Never mind that QE1 led to one of the weakest post-recession recoveries in history. Never mind that many measures of incipient inflation have been soaring (price of TIPS bonds, sugar, oil, gold, corn, etc. etc. anyone??). Never mind that many of the assets the Fed purchased were trash mortgage securities not worth the paper they were written on and that the Fed never engaged in shrinking its balance sheet as it planned on doing once the crisis had passed (When all is said and done after QE2, the Fed's balance sheet may equal a mind-boggling 20% of GDP according to some estimates.)

    Look, I'm not a trained economist, so I don't know whether the economy has the excess capacity to absorb another round of quantitative easing as Bernanke suggests it does. What I do know is this:

    1) The first round of QE did little to stimulate the economy, suggesting that the root of our problems wasn't a lack of too little money sloshing around (the contraction in available credit was a normal and appropriate response to the destructive debt orgy that preceded it)

    2) The Fed is quickly running out of bullets to fire to juice the economy

    3) Continuous quantitative easing hasn't worked in Japan

    4) Other countries will respond to our attempt to debase our currency and it won't be pretty

    5) In his quest to defeat the Delfation Boogeyman, Bernanke is ignoring many key signals of incipient inflation (The soaring prices of gold and government bond just cannot continue. One of these markets will prove to be spectacularly wrong). 

    Bernanke even says in the Washington Post article linked to above that QE2 has already begun to work because interest rates have fallen and the stock market has risen since the Fed signaled its plans to the market. Are you kidding me? Bernanke is so obsessed with stock prices, it actually seems like a rising stock market has become a third part of the Fed's new mandate. But it's no shock that the stock market will perform well in a high inflation environment - anything priced in dollars will go up on a relative basis. 

    And in yet another stunning display of hubris, Bernanke also says that the Fed is fully prepared to reverse QE2 should conditions warrant. I hope he's right but I have a hard time believing the Fed will have control over the situation if inflation becomes the proverbial snowball rolling down the hill as I suspect might happen. (Try reversing QE when the Chinese government is trying to dump hundreds of billions of dollars of our debt at the same time) 

    Look, I understand why politicians never get religion when it comes to entitlement reform and deficit reduction. In good times or bad, they are always trolling for votes, and passing out free money is the quickest path to re-election. 

    But the whole point of the Fed was that the wise and thoughtful men and women who populate this independent entity would know better. The problem is when you put a small group of people - and one man in particular - in such an enormous position of power, they just end up thinking they know better. And God help us all if they don't. 


    I don't have as much time to respond to this as I would like, but I have to say that there isn't much in the way of analysis here, Muerte.  A lot of what you said here is post hoc ergo propter hoc stuff.  And pretty much every trained economist this side of U of C (and even quite of a few of them) all point to the direct evidence that the economy is performing WAY below capacity.  That represents a tremendous waste.  Why aren't you concerned about that?

    Let me hit your five points very quickly:

    1.) This is too simplistic an analysis of inflation/deflation.  The problem isn't strictly too little money.  It's too little demand, but the money comes in because the people who have it won't spend it.  Look at all the capital sitting around right now.

    2.) True, but they haven't even hinted at their biggest weapon: Committing to a higher inflation target.

    3.) This isn't strictly true in the way you state, but it's easier to point out that it hasn't really damaged their economy in the way you seem to fear either.

    4.) Of course they will respond.  Will it be pretty?  What will be pretty is the effect it will have on our trade deficits.

    5.) This is easy: The gold market is not a serious economic indicator.  If either the bond market or a single commodity market has to be wrong, guess which one it will be?  Remember all of the hardcore shilling for gold that goes on.  INFLATION SCARY, BUY GOLD!  Glenn Beck, etc.

    Bernanke is perhaps to focused on stock prices, but the Fed has a mandate to fight unemployment.  That's the big issue right now.  To the extent that QE2 will make a dent in that, which you rightly note is ambiguous, it's the right move, but it isn't scary because it's going to ruin our currency.  If anything, it's scary because it runs the risk of falling under the category of "too little, too late."  FWIW, Mark Thoma's take: "This is not, by any means, a bold plan."

    1) You may be right, which gets to your point why aren't i concerned about the excess capacity in the economy. I guess I'm just not convinced that it's there. I hear bernanke's argument - get the economy (and the markets) juiced a bit, people start feeling more confident and then things start humming and that excess capacity starts being used, and we'll worry about any ramifications later. I even think it makes a little sense. I just think it's full of hubris. 

    2) a higher inflation target? really???? i guess that would be the ultimate hubris - to not only suggest that you can target inflation (i didnt know we had an explicit inflation target??) but that it should be higher than it used to be. I'm sure that will end well.

    4) Trade deficits are fairly low on the totem pole of my concerns, and wouldn't even be impacted if currency debasements are universally applied - that's the whole problem with beggar thy neighbor policies. My bigger fear is what will then happen geopolitically.

    5) you may be right. I've argued that the bubble is in government debt. But so far, I've been wrong. Of course, it's not just gold that is hinting at inflation - almost every commodity under the sun is trading at decade-high prices - save for oil, which had its own speculative run a couple of years back. 

    I suppose my main point is that the Fed shouldn't be targeting unemployment - let the politicians handle that one. I want my Fed to do one thing - preserve the stability of our currency. I know this has me to the right of dagblog's core audience - and in line with some of the Tea Party thinking

    I'm not a gold standard guy, but I think the Fed ought to be more careful about the power it wields - it's one thing to tinker around with interest rates a bit. I don't love the idea, but it at least can cause somewhat limited damage. It's something else to deploy a powerful and rarely-used market controlling weapon like quantitative easing when the country appears on the precipice of a crisis. And it's yet quite another thing to deploy that same weapon when you just don't like the pace of an economic recovery. 

    I said I didn't want to get into the debate, but ultimately i guess I do question the sagacity of the current Fed apparatus. All I know is that the past decade, the men and women in charge of it have made some very bad decisions. 

    1.) It's not hubris - it's analysis.  Seriously, when you have idle capital and laborers, how are you not performing under capacity?

    2.) Yes, Virginia, the Fed has an inflation target - usually 2%.  And the primary thing the Fed does is expand or contract the money supply.  The Fed, contrary to popular belief, does not actually set interest rates.  They buy or sell bonds that will have a certain return over a certain period of time, but the relationship to managing the money supply and resultant short-term interest rates is so tight that everyone just says the Fed sets the rate.  How's that for hubris? ;)

    4?) Letting our currency devalue - in terms of exchange rates - is not a beggar thy neighbor policy.  And whether or not the trade deficit is a major concern for you, it's a major concern for out of work Americans.

    5.) Yes, you've been wrong.  US Government debt as a share of GDP is higher than we might like, but not by historical standards.  Look at Japan - they have a debt to GDP ratio of something like 245%.  Markets don't care because they have a relatively productive economy that can service the debt.

    The Fed isn't there to do what you want.  It has a mandate to keep unemployment low.  That's part of the reason it was created.  They also target a relatively low inflation rate to keep the dollar stability guys like yourself happy.  I hate to say it, Muerte, but another thing here that puts you in line with Tea Party thinking is that you don't seem to actually know what the Fed does or why - FOMC operations to target interest rates and inflation to keep the economy performing near capacity.

    I certainly won't defend all of the Fed's decisions over the past decade, but I think you've gotta understand why and how it's operating before you decide to re-write the mandate.

    condescend much, DF? 

    1) I suppose we have theoretical excess capacity - (although as long we're accusing each other of oversimplifying, you can't possibly be arguing that you always have excess capacity unless you have 0% unemployment and zero savings????)

    but my point is that capital was so poorly allocated over the past decade (um, say, the housing market ... or the CDO market which supported the housing market) that I'm not sure our economy does have large amounts of immediately usable excess capacity. And I think throwing more money at the economy isn't the solution to our problem - indeed, it delays the solution (by, um say, preventing foreclosures and thus a reset of the housing market or by keeping bad assets on the balance sheets of crippled banks). 

    That's why I was only in favor of the fiscal stimulus policies that were either designed to address some potential emerging social imbalance (e.g. unemployment extension) or that was designed to try and find new areas where capital could be better put to use (e.g. infrastructure improvement or green energy initiatives). Would I rather participants operating in the free market - as opposed to some government bureaucrat - find those areas for investment? of course, but in a time of crisis, the free market is too paralyzed to do anything - thus the need for government intervention. 

    boy, i wish the answer to fixing economies with overcapacity was to just throw more money at them. Of course, then it'd be hard to explain the Zimbabwes of the world. 

    2) thanks for not answering my question - the Fed does NOT have an explicit inflation target, unlike their explicit interest rate target. And yes, I understand the mechanism through which they control interest rates. (EDIT: As kgb says below, it's a matter of semantics). 

    4) currency devaluation is of course a beggar thy neighbor policy. 

    5) You're right Japan has had the ability to finance a much higher debt, as expressed by a percentage of GDP, than we are currently at,  But I can't say we want to use Japan as the shining example to which we aspire, given that their economy has been mired in basically a 20-year doldrum (with no end in sight!). 

    My intention wasn't to condescend.  It sounded to me like you were saying that they don't target inflation at all, which is not true.  I can see now that you're just saying that they don't have an "explicit" (ie mandated) target.  Well, that's kind of rich considering your dismissal of the reality of FOMC operations as mere "semantics."  That's exactly what I would call hanging your hat so squarely on the word "explicit" here.  But, again, I misinterpreted what you were actually saying and did not mean to condescend, so I apologize for that.

    1.) Are you seriously saying that you do not see the loss that occurs when you have idle labor?  That's not theoretical at all.  There are people who could be working (ie producing goods and services) who are not doing that.  Worse still, they are being paid not to work.  Given the other things you've said here, it seems rather, well, semantic to call this unused capacity merely theoretical.

    While I'm not sure I can agree with you about what you say about capital allocation (it's too vague, but sounds kind of Austrian to me), I do agree with you about the way that fiscal stimulus should have been implemented.  Having that said, there's no way we're seeing any more of that at this point.

    Dude - Zimbabwe?  Come on.  What in the blue blazes does Zimbabwe have to do with any of this?  Are there any ways you can name in which Zimbabwe is comparable to the U.S.?

    2.) I addressed above, but I'll add that even though the target isn't part of the Fed's charter, it is public.  People know what it is and they set their expectations accordingly.  Perhaps not to the degree that they would if it was mandated, but the whole point of delving into the truth of FOMC operations is to show that there is a damned tight relationship - in the short run - between the money supply and interest rates.  The reason I went to pains (I'm such a pedantic jerk that I summed it up in one sentence) to describe those operations is to illustrate that there is no hubris (a word you have dropped half a dozen times now) in using these operations to affect the interest rate.  In fact, this relationship is so strong that people just say that the Fed sets the rate.  To build on that, if you understand the relationship between interest rates and inflation, then you can understand how the Fed can affect that as well.  It's not hubris at all and it's actually the policy of a number of countries.

    4.) Currency manipulation is a beggar thy neighbor policy.  The dollar floats, which is to say that the exchange rate is determined by markets.  I thought you liked that part.  Can you explain exactly how letting the dollar devalue - rather than attempting to maintain a "strong dollar" policy - is "beggar they neighbor"?

    5.) I'm not saying we aspire to be Japan.  I used it as an example to show that people who are acting like our debt is insanely high are just wrong.  It's not a high for the U.S. historically and it's not a high for other other modern OECD nations.  And the markets - again, I thought you believed in the wisdom of the markets here - don't see a problem with current U.S. debt or inflation.

    That's really all that needs to be said here.  Lots of people - including you - made very similar noises two years ago.  And last year.  Didn't happen.  When exactly should I be expecting a concussion from a falling chunk of sky?

    1) of course there's economic loss when there's idle labor. but it's also generally accepted that there is a level of unemployment which is certainly unavoidable and generally acceptable (and perhaps even preferable if you don;t want your economy to overheat). But the question is how do we best and most efficiently deploy that idle labor. You can't just flick a magic wand and make it happen ... or in the context of our current debate, just throw more money into the system, if you've spent the last decade misallocating your capital.

    The reason I bring up Zimbabwe is quite simply just to bring up an extreme situation of how just throwing money into an economy filled with idle labor and excess capacity doesn't automatically bring about prosperity. I meant no comparisons.

    2) Yeah, I guess I consider the whole premise of the Fed - that putting aside policy lag, faulty analysis, personal failings and a whole host of other potential pitfalls, that a group of eleven men (and let's be real, just one, really) can fine tune interest rates to the point where they keep the economy not too cold so that we have full employment (not 100% mind you), and not too hot so that we have stable prices - a bit hubristic, but the point of the article and what i thought I made crystal clear in my comment reply was that they were now going far beyond what any other Fed has done in the past and doing so when i do not think we are in crisis mode any longer. 

    4) We are not in crisis mode. Interest rates are at zero. What we are doing now is currency manipulation. Our policy is not just not advocating a strong dollar - it is advocating a weak dollar. And that is a beggar thy neighbor policy - i'm actually not making a judgment about whether such a policy is wise or not given our current trade deficit (I obviously agree that China has never not engaged in currency devaluation), I'm just saying when the world's leading economy does it, it usually leads to nasty repercussions. 

    5) Agreed. I know I feel like Chicken Little. But it couldn't just be that the markets have so far pinned their sights on far more juicier targets, like Dubai, or Greece and the rest of the PIIGS?? People were calling dot-coms overvalued for years before the bubble finally burst. At some point, wrong becomes just plain wrong, because in the long run, it ends badly for all of us. But I'm still not convinced what the market has done the past eighteen months constitutes the final word on this matter.

    Man, I've missed the old Deadman-DF finance debates from the early dag days. I wish that I had time to scrap it up too.

    PS Happy birthday, Deadman.

    Then you figure they would be doing something about unemployment - no?

    Sure, there is a complex interplay - a sort of dance - involved in going from setting a target to achieving the target in the market, but you are playing a game of semantics to give yourself the illusion of superior knowledge on a point of true irrelevancy. They put interest rates wherever they want them and the market responds within a fraction of a percent - the mechanism they use to accomplish this is what Bernake is doing at the moment. WTF are you babbling about?

    And, as a counterpoint. They've been slashing rates in response to "under performance" for quite some time now ... news flash: it hasn't been working. If the market doesn't invest the money in things that cause the wider economy to grow and instead use it for pure speculative gambling on non-productive financial products the wider economy will continue to under perform.

    The problem isn't that the economy is under performing because these institutions don't have enough capital. The economy is under performing because the people running these institutions are using this money for something other than investing in the parts of the economy that are currently under performing and paying themselves a HUGE cut off the top. Putting more capital into their hands isn't going to change that. It seems pretty difficult to argue that the tool they are employing is actually in line with their mandate once you take into account the current reality in the institutions who are benefiting from these moves.

    It's bullshit. Much like your argument here.


    Not sure what's with your attitude here, but I don't see how it's called for.  Having said that...

    You might expect that the Fed would act on unemployment, but so far they haven't.  I happen to think that the reason for this is basically that the Fed is a council of bankers and bankers hate inflation more than they hate deflation, which is typically what we see coupled with unemployment.  Deflation is good for creditors and bad for debtors (ie working people).

    I'm not trying to put some kind of academic gloss to appear superior in knowledge.  My point, which perhaps I should have been clearer about, is what I explained above to Deadman - he keeps throwing around the word hubris.  That is, after all, the thesis of this post.  The point of addressing the reality of the fact that the Fed does not set interest rates by fiat (and this is not simply a semantic point - there are places, like Venezuela, where things like this are tried) is to remind Deadman of how tight the short-run relationship between the money supply and interests rate are.  It's so tight that people just take it for granted that the Fed sets the rate.  So, it's not hubris by any conceivable definition for the Fed to think that they can affect interest rates - the vast majority of people just take it as a fact.  Furthermore, interest rates have an inverse relationship with inflation, though the relationship here isn't quite as tight (and the big context here is that zero bound conditions, which we are facing now, are exceptional).

    So the Fed has tremendous power - essentially immutable - to manipulate rates.  They also have the power, though not as strong, to target inflation rates.  This isn't hubris.  It's fact.  That's WTF I was babbling about.

    Let me be clear: I'm not saying I think QE2 is a great idea.  I'm skeptical of it, but as far as the "ineffective versus dangerous" debate goes, I'm pretty much in the "ineffective" camp.  To me, DM sounds like he has a foot in both camps, but I don't see how what they're doing is inherently risky or represents some incredible amount of hubris, which is the thesis of this post.

    I disagree about the problem with the economy.  The problem with the economy is that it's 70% consumption and consumers are broke, in debt and/or out of work.  The theory behind further expanding the Fed's balance sheet via QE2 is that if you push toward inflation, you reduce unemployment.

    Again, not sure what the reason for the hostile tone is.  I wasn't making an argument, I was critiquing the argument in the OP.

    People are out of work ... not in the abstract, but for real. People are out of money. People I know. People you likely know. People I love.

    And we are discussing if the current actions taken ostensibly to address these conditions are dangerous or merely ineffective. That is what has me so fucking pissed. Semantics over if the action is actually setting the rate or if it's a policy move to coerce the interest rate to go where they want it takes an a discussion about an already disgusting set of choices and changes it to an in-the-weeds game of semantics that are largely irrelevant to what's being done (although, you are right you could have made it a bit more clear the correlation you were trying to draw to inflation).

    From where I sit if the actions are either ineffective or dangerous, taking the action in the face of so much pain is hubris of an unparalleled magnitude taken by people flush with money who don't give a flying fuck how many lives are destroyed as long as their accounts are full and some random abstract set of numbers sit where they like them - in a system that is so broken that every single number they are using has been reduced to meaningless bullshit that primarily serves to hide the great swindle they have pulled on America. An unparalleled zero-bound condition in your parlance.

    While the Fed really is able to move interest rates wherever they want them with a high degree of confidence, and inflation to a lesser degree (and I'd put stock prices in this category as well ... a whole different sickening ball of wax). Unless they do something along the lines of what Destor recommends they are completely powerless to ensure that the middlemen who benefit will ever take those benefits and use them to make jobs. QE2 looks like full-on bullshit because at it's heart it relies on the discredited voodo theory of trickle-down economics as far as any real humans are concerned.

    To those without money ... the idea the solution lies in preventing prices from settling to match their current economic state is a pretty tough sell; it just looks like the corporations are trying to make sure more of their food stamp money goes into the pockets of the same assholes who are the cause of them being on food stamps in the first place - literally taking food right out of their children's mouths. I'm sure there is a nuanced explanation for why this is not the case - and maybe if the policy makers hadn't just cut everyone's benefits because "prices were lower than expected" ... just before prices spiked again ... that argument might even gain some traction. But something has to give. Real people can't afford to live, and inflation will just increase their pain.

    So the hostile tone is at the situation. At the games of semantics. At the whole mess. Not really at you in specific. Although your implication that "ineffective" in today's economic reality would not warrant excoriating criticism or represent a stunning hubris does sort of make you look to be in the camp of "I've got mine .... what is everyone freaking out about?". I'm likely misconstruing the "hubris" of the action as far as DM is concerned ... but that's where I went with it.

    For a lot of people this isn't at all abstract and they don't have time for ineffective, let alone something dangerous that might make it even more difficult to crawl out of the hole. The winter is coming. People are going to start dying. It's not your fault ... you just ended up being where I expressed my exasperation at the "scholarly" approach to a national emergency.


    You are aware that you are basically making one of the main Tea Party arguments that really resounded with a lot of Independents who decided to vote Republican this time?

    Especially without offering any suggestions of what you'd rather see the Fed do except stop their meddling because it may not be the right thing and they are a mysterious small elite group, and it could hurt your savings.

    Also, when you say

    he remains firmly and forever convinced that the primary cause of that debacle - or at least of its depth and duration - was the Deflation Boogeyman. He is determined to avoid repeating that experience at any and all costs.


    people like me who have put way too much of their nest eggs into dollar-based savings accounts just get screwed.

    it reminds me of the case during the Great Depression, that if one had a steady job and a little nest egg, they were in the clover, because the cost of living, luxuries, and labor were all incredibly cheap--deflation and high unemployment for others was just hunky dory for those lucky people.

    Thankfully for creditors, the Fed is a quasi-private council of bankers.  Creditors despise inflation, but love deflation because the former makes them poorer and the latter makes them richer, vice versa for debtors.  There are very good reasons for the way that the ideologies here run along class lines.

    Yes, I do realize my general line of thinking on this matter is in line with a core crux of the Tea Party ideology. That's OK - as someone who mistrusts ideologies, I never lose sleep when my thinking crosses over into other ideological realms, even ones that seem to be mostly insane.

    As i said in my response to DF, meddling by the Fed is one thing. It's to be expected - it's part of their mandate, and in times of crisis (not sure what we're in still qualifies), perhaps more meddling is to be expected. What's also to be expected is that the decision making of a small group of men and women, no matter how smart they may be, will be wrong a lot of the time, something the track record of the Fed fully supports. And yeah, generally speaking, I guess I do trust the collective wisdom of the markets more, and I just would hope that the Fed would be judicious in their attempts to manipulate, I mean guide, the economy. 

    You are also right, part of my frustration is that by and large I have done the 'right things' - working hard, putting money away when I can, avoiding buying spectacularly overvalued houses or otherwise going into large amounts of debt (except perhaps to finance my education) only to see that behavior punished (on a relative basis anyway) time and time again over the past couple of years. 


    You have lived through one of the most spectacularly-inflation free eras in modern memory. Also, even including the present recession, you've lived through a period of (on average) strong economic growth. And since you often remind us that you predicted this crisis months if not years in advance, I'm sure you avoided most of the damage from that anyway. So I'm struggling to find the tears to mourn your punishment. :)


    The Fed can meddle all they want. But they need to stop taking money out of our bank account and putting it in to the pockets of the ultra wealthy every time their own actions create conditions where they would take a loss sans taxpayer money. That *is* a suggestion. You may disagree with it, but you certainly don't make the case. You simply toss up a hated demographic, tenuiously tie them to the topic and present that as if it constitutes a legitimate rebuttal.


    You simply toss up a hated demographic, tenuiously tie them to the topic and present that as if it constitutes a legitimate rebuttal.

    That part wasn't meant as a rebuttal in the least. It was genuinely meant as an "are you aware of this?" But I do believe the link is far from tenuous--I think it's an important core issue regarding the tea party and also the results of the election! It's not tenuous at all! This is a big issue for them and was for a lot of the voters.

    And as far as the "without making a suggestion" part, I meant that as an analytical point as well, but an important one, I believe--that fiscal libertarians don't want suggestions, they don't want anyone meddling or trying to fix whatever ails, they want "the market" to take care of it. So I was pointing out that without offering an alternative to the Fed trying to fix things, his complaint might come off as agreeing with a libertarian view.

    As far as the other part of my comment, there, yes, I offering a rebuttal of a sort--about how there are always winners and losers in any economic scenario, and that usually even the most well meaning person will find it hard not to be on the side of those who are in the same situation as himself. His essay really did read to me as: I'll take the risk of deflation, you all figure out some other way to raise employment.

    Agreeing with the libertarian view shouldn't be a problem if the libertarian view is correct on a certain point. Leaving aside the heavy pollination of the teabaggers with neocon, in the articles you link the actions being discussed generally consist of doing away with the fed completely and/or subjecting them to annual audits (which I agree with 100% BTW). You don't think that's a bit of false-conflation to what DM actually said? I don't perceive him saying anything like that. Maybe I misread his post, but it just seems like a lazy game of guilt-by-association to me.

    While I actually share your criticism of libertarian philosophy in so much as it tends to be heavy on what they don't want but rather superficial on policy they'd like in it's place ... I think you have done that legitimate criticism a total disservice in the way you have construed this issue.

    And for the record, when one happens to be in the same situation as 98% of the population, being on the side of those in the same situation as yourself seems to be a pretty solid place to sit. If they don't figure out some other way to raise employment, employment isn't going to get raised ... I don't see how this is going to change shit in terms of unemployment. Capital doesn't appear to be the problem. These people are posting record profits, they just aren't investing in the real economy and it appears that they are highly incentivized not to do so. That isn't a function of interest rates.


    Robert Reich has a column today that basically agrees with DM:

    But without an expansionary fiscal policy, the Fed’s goals are pipe dreams.

    Lower rates won’t spur businesses to expand capacity and jobs because there aren’t enough consumers to buy additional goods and services.

    Low interest rates just create bubbles, the Fed's main mission is to save banks, and low interest rates and inflation do that, yet inflation in a stagnant economy does not create jobs or recovery, it is just a way for traders on Wall Street to make more money.  It is hard to see how trashing the dollar and increasing inflation is going to help 'main street' where 600 people apply for one job opening. Keep in mind that the cheap US dollar can be converted in other currency, the Aussie dollar now pays 4.5% to our 1%, printing dollars that get sent to Australia or Singapore will not help the US economy, but it will help big traders making those deals on Wall Street.

    Reich continues:

    Without an expansive fiscal policy that puts more money into the pockets of consumers and gets them out from under their huge debt load, the Fed’s billions will just fuel another stock-market bubble...Wall Street is making more bets in the stock market with money it can borrow at almost zero percent interest.

    Remember when the average person could invest in a CD and get an annual yield of 8.9% with, like, zero risk? Sure, you had to pay a bit more when buying a house. But not THAT much more, and well, that really isn't an issue for most Americans anymore. Just thinking. These people don't have our best interest in mind at all. (heh ... I made a pun :-).

    I remember when CD's first became popular during the high inflation of the Carter years. It was the first chance for normal average people to actually participate in playing a market with their savings, And they loved it, it definitely felt like a mania- all the retired people went crazy getting CD's and moving them around as often as possible to get a fraction more of a point here or there, where before they talked about the grandkids while playing cards, now they talked about where the best CD rate was. The silver boom caused by the Hunt Brothers was concurrent--that was also a mania, everyone was melting down any silver they had and digging for old coins they inherited to melt down. I was working in a regional auction house where we had to use a silver scale to estimate antique silver, it was nearly always worth more at melt price than the antique value. I also remember everyone who didn't have enough savings for a CD figuring that they shouldn't save at all in dollars, that they would be better buying a year's worth of shampoo or toothpaste than putting money in a checking or passbook account.

    Looking back, I really do think it was the start of "capitalism for the little guy," which many currently think didn't turn out too well. Those who are too young to remember the pre-CD days, though,  the days when an average individual was not involved in the stock market because they couldn't possibly be involved, You didn't have any kind of "financial instruments" available to average people, just passbook savings--the fomer were for rich people.  For those too young to know, it might behoove to ask an aged relative what that was like. How limited one's options were as far as using savings to advance your state in life, especially without access to much credit of any kind (credit cards were also relatively new.) There was owning a home if you could come up with a 20% down payment, and then there was starting a business without much help from any bank, that was about it. Yeah, many had strong unions that made sure they got a fair wage and benefits, but as far as moving up any turther than that, there weren't any other options except real estate.

    Artie, isn't this a great country. I can remember when those first credit cards showed up in my mailbox, all with $1K credit lines. Four of us cashed in 10 cards and bought a house and 10 acres in Vermont.

    And now, I can blog my ass off here as a liberal and hater of Wall Street, then bring up a screen and switch my IRA into a China mutual fund or commodity fund. Man, this is great.

    As for inflation, will my Stickley bookcases and Saito prints ever be worth anything? How about my first printing Emily Dickinson?

    Weren't you the risk taker--I'd a nevah done such a thing back then! Little did I know that the state usury laws we had back then were better than we'd ever see again.

    re: Stickley bookcases

    hipster kidz these daze don't seem to like wood-but I figure that whole mid-century modern thing shouldn't last much longer as those hipsters are no longer hip and have kidz themselves who are growing fast and will surely consider their parents tastes yucky.....

    edit to add: as for the book, you can easily keep track on the value yourself these days:

    I'll try not to yammer on here as I've said this before but I believe the Fed is being far too timid.  Remember, the Fed has enormous flexibility to act.  It can buy anything the governors decide it can buy.  It can distribute money wherever the governors think it would do the most good.  In this case, it's decided on a pretty vanilla approach -- lubricate the government bond market to make it easy for the Treasury to borrow cheaply.  The Treasury will then borrow and put the borrowed funds to work.  The Fed, meanwhile, can ease the Treasury's burden by crediting interest payments back to the government.  Free money!

    But it's not going to solve our problems which are structural.  We have too little demand because most Americans don't have high enough incomes to support their consumption.  The Fed could fix that by simply giving people money in a progressive manner with the largest checks going to the poorest people, all the way up through, say people who make $250,000 a year.  Basically we need a great consumer debt do over for all working Americans.  If you let Americans out from under the thumbs of student loan lenders, mortgage lenders and credit card lenders you'll see dynamism return to the economy.

    I for one was hoping to see some of your yammering on this thread.Smile

    I dont want to be rude as your comment is certainly thought-provoking - but i don't even know where to begin here - you do realize you're basically advocating a socialist, command-and-control system here, right?? you really think 11 unelected men and women should be in total charge of our economy and how our money gets spent? (and for what it's worth, I think the Fed has already stretched its flexibility to the very max in how its dealt with this crisis, going way beyond that which any previous Board has done and which I think was intended when the agency was created.)

    Free money?? do you really believe that is possible, or more accurately, that it wouldn't come with serious consequences??

    A consumer debt do-over?? what, are we a third-world country?? that wouldn't unleash dynamism - it would totally cripple our economy. the moral hazard alone such a strategy would unleash would be outrageous - why would a creditor ever lend money to a consumer again (and why would I as a rational consumer every pay back a loan??). 

    I agree that income disparities have grown too great over the past 20 years, but to think we can or should rebalance that by delivering one-time checks so that people can consume more sounds totally outrageous. 

    i guess I need to search dagblog archives to read some of your other thoughts because by itself, this sounds like the height of lunacy. 

    Well, it is possible that I'm a lunatic.  I'm going to try to find some time today to blog about why I'm not (or why I think I'm on more solid ground than you think, even though I'm also on the fringe.)

    Thanks for bringing some financial literacy back to dagblog D - as the above comment illustrates, without you the level is pretty much zero.

    That said I pretty much agree with your original detractor's conclusion (even if their tone leaves something to be desired) to the extent the I think QE2 won't have much effect for good or ill. Normally I think monetary policy is an effective tool, but in this case I don't think the normal macroeconomic X's and O's apply. To recap, generally you'd expect lower interest rates to increase growth because:

    1. Consumers would see a wealth increase as they rollover high-cost debt (e.g. refinancing), and they would increase their spending as a result
    2. Businesses would increase investment due to the lower cost of capital
    3. Exports would increase as our currency depreciated and our goods became cheaper overseas

    Unfortunately, in this environment, I don't think we'll observe these canonical responses. Zero interest rates haven't convinced businesses to get off their piles of cash, because they have no confidence that consumer spending will rebound. So rule out #2, unless #1 obtains. But given the unemployment picture, I just don't think anyone feels like their income is secure enough to justify spending any wealth increase they might see from lower rates. So no #1, no #2. The rest of the world (ex-BRIC) is in the same situation, so don't hold your breath for export growth, especially when our goods won't get cheaper in China.

    I'm normally not a big fan of fiscal policy, because it is easy to screw up and really can do some damage by creating structural deficits (see the Bush tax cuts, another example of wealth increases that, should they be continued, will go straight to savings). That said, the only way out of this mess will be to create credible recovery in employment, and if we're going to pull any policy levers, that might be the only one left that's attached to anything.

    The thing that sucks the most about what is happening with the fed is that the little guys are getting screwed again. If you have money to risk (and all the big guys and even a bunch of the mid-size guys do) a great deal of wealth is being made in this market. This is good news for pension funds, and will help the states meet their obligations.

    People who got scared and took their money out of the stock market and either bought bonds or just put their money in a "safe" bank either have, or will be soon, eating into their capital.

    As for inflation, it may be the only way to work our way out of all this enormous debt...

    For people who still have a lot of equity in their homes, still have jobs and excellent credit, home mortgage rates are at historically low rates (right around 4%) and now is a good time to refinance, if you have the time and temperment to deal with the mortgage nazis. The pendulum has swung, and the mortgage companies now want more documentation than ever that you are a good credit risk, and some are even requiring that you have 25% equity, instead of the normal 20%. My daughter is about to wrap her refinance up and will be saving just shy of $600 per month...a huge pay raise by any standard.

    So, there are bright spots to be seen, but what they are doing certainly favors those who need the help the least. It may be necessary, I don't know, but I sure hope they know what they are doing. I'm getting really tired of seeing the little guys actually suffering for the sins of the wealthy, while the wealthy profit from the chaos.

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