Tag Archives: Bernanke

Goodbye, Ben Shalom

ben-bernankeRegular readers know that Jeremiah was for QE before he was against it.  This is actually the consensus view of professional economists – Raghuram Rajan, for instance, since we were just talking about him.  Chairman Bernanke will be remembered for QE #1, which averted a certain disaster.  Subsequent rounds of QE were more risky and less effective.  Before stepping down, Bernanke also began the process of tapering off QE.

It now seems obvious that central banks should have done what they did … restored liquidity to a world financial system that would otherwise have been insolvent

The strong dollar people hated QE from the beginning.  Their fears were confirmed by inflated returns in the stock market.  At the other end of the spectrum, Paul Krugman is still beating the drum for more.  You can’t please everyone.  Bernanke also had a hand in shoring up the euro.

It is often the mundane achievements that turn out to be the most durable.  Chairman Bernanke took huge steps in making the Fed more transparent, with regular statements, published minutes, and quantitative targets.

But no amount of transparency can offset the cultism which now surrounds the Fed.  On Monday, the stock market was idle, as the world waited for the new Chairman’s testimony.  Bernanke retires with a good record, on balance, but there is work to be done.

Chairman Yellen must disabuse Congress, and the world, of their superstitions about the Fed.  Monetary easing is a poor remedy for unemployment, not to mention inequality.  Jeremiah would like to see the new Chairman remind Congress of its own responsibilities, and maybe even question the “dual mandate.”

Update:  Well, that was just embarrassing.  Congress begged the new Chairman for help with unemployment, inflation, mortgage lending, inequality, and the weather.  The price of gold went straight up.


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No Minimum Wage for Robots

The Economist is here, calling for a rise in America’s national minimum wage.  This is pretty heroic for a newspaper aimed at economists.  The fact that minimum wage laws create unemployment is well established in theory and practice.  They also drive inflation, and not in that friendly Keynesian way.

The Economist’s argument is, since labor markets are not perfectly elastic, employers may be holding wages below their equilibrium.  They simultaneously argue that, where labor markets are flexible, a minimum wage might not hurt employment too badly.  All of the research is from Europe.


Unions are the obvious free market solution.  If wages are indeed suppressed, then unions will be able to organize the workers.  If not, then we must admit this is the equilibrium wage – and turn policy attention toward our failed educational system.


Another point to consider is that labor competes with capital, and there is no minimum wage for capital.  Ordinarily, companies confront a nonzero hurdle rate for investment.  Ironically, as the Fed pursues ZIRP and QE in hopes of stimulating employment, they also make it cheaper for firms to replace workers with automation.


Jeremiah has written sympathetically about humans working for the minimum wage.  If we really want to help these people, we must make the fiscal adjustments to provide them with direct cash assistance – not foist an unfunded mandate onto employers.  Such measures should be undertaken by the states, according to the situation in each state, not a distant and unaccountable central government.

See also:  On Public Spending

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End the IRS

By now, you know that the IRS has been targeting certain groups for harassment.  You know that the IRS can read your email, and you have seen IRS chief Steve Miller testify to Congress that this is all just fine by him.  In fairness to Mr. Miller, he did allow the IRS was guilty of “poor service.”

IRS Howitzer

This is like having the government aim an eight inch howitzer at your yoga studio.  The question is not, why don’t they like yoga?  The question is, why does the government have a weapon like this in the first place?

If you run a small business – that is, if you are one of the rare people actually providing jobs in this wretched economy – you know what the IRS can do to you.  The IRS can put you out of business instantly, take everything you own, and throw you in jail.

Contrary to your constitutional protections, you are presumed guilty unless proved innocent.  Meanwhile, they impound your house and freeze your bank account.  Good luck defending yourself in court.  You don’t even have clean clothes to wear.  Oh, and the IRS has their own special court.

Many of the non-economic reasons people expatriate are due to tax enforcement policies and a culture of fear encouraged by the IRS.

It’s like a little piece of Nazi Germany went through the time machine and came out in America.  Phil Hodgen, who runs a law practice for Americans looking to flee the country, specifically mentions the “jackboot approach to enforcement” by the IRS.  Phil’s blog is one horror story after another.

So, we have well meaning Paulites and Occupy kids calling for an end to the Federal Reserve, while a much larger menace stalks the country.  Yes, Uncle Sam needs the money, but – we are pretty sure taxes can be collected without the Gestapo.

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America’s Payday Loan

Bill Gross has a new article out, on financial repression.  His writing is a little goofy, but the math is good and he tries to keep it non-partisan.  Here’s a quote:

“Misguided monetary and fiscal policy might lead to disruptive markets at some point.  The approaching fiscal cliff might be the first of a series of disruptions.”

Okay, that’s alarmist, but we wanted to introduce the topic of “misguided monetary and fiscal policy.”  Jeremiah has written sympathetically about Chairman Bernanke’s monetary stimulus, up to a point.  The Fed has lately created $2 to 3 trillion – depending on how you count it – in a failed effort to stimulate the economy.

On the fiscal side, President Obama has kicked in $1 trillion of ARRA money, and he has run deficits of roughly $1 trillion per year for four years.  Together, Obama and Bernanke have injected almost $8 trillion of stimulus.  It’s hard to believe the Keynesian argument that just $1 trillion more would tip the balance.

Keynes believed that when ordinary people are too busy queuing up in the soup line to go spend money they don’t have, the government should do it for them.

Keynes believed that when ordinary people are too busy queuing up in the soup line to go spend money they don’t have, the government should do it for them.  Like his bearded disciple, Keynes was right – up to a point.  Deficit spending is a valid short-term measure, like a payday loan – but there has to be a payday on the horizon.

Financial repression means punishing people for saving money – and it works!  Printing trillions of dollars is, as Bill Gross will tell you, a hidden tax on savings accounts.  That’s why he’s whining about his paltry interest rate.

So, why should we worry about some rich guy’s savings account?  Because it’s not really a savings account he’s talking about.  Bill Gross manages a big pension fund – the biggest, in fact.  If you have a pension – from GM, California, anywhere – the odds are good that Bill has your money.  That means you eat cat food in your golden years because GM funded your pension assuming 4.0% and Bill only got 0.1%

Lucky for you, PIMCO – that’s the fund – can still get a decent return by investing your money in Brazil or Vietnam.  No kidding, Vietnam.  As the Economist puts it:

“Savers have the freedom of the globe and there are plenty of countries where real interest rates are positive and growth prospects are more attractive.”

Financial repression in America will result in some combination of old people starving, money going overseas, jobs following the money, and China cutting off our credit – or we might just have “disruptions,” as Bill says.

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Trillion Dollar Avalanche

Shown below is a simple diagram of monetary stimulus.  Easy money is supposed to reduce unemployment, through the agency of the Phillips curve and assorted other processes that aren’t working.  Jeremiah has his own idea what’s blocking that second link, but for now let’s talk about the first one.

In the latest Fed action, Chairman Bernanke vows to “print money” until employment improves.  If you read the fine print, the Fed has a 2% inflation target.  This link is also blocked.  Over the past four years, the Fed has created an unprecedented $2 trillion of new money.  Now, they plan to add a steady drip of $40 billion per month, until inflation starts to rise.

This plan assumes that inflation will start to rise, gradually, and then the Fed will stop easing and check inflation by raising the interest rate.  Let’s hope they’re right, because this plan sounds an awful lot like pouring sand onto a sandpile.

The sandpile dynamic intrigues mathematicians because, while the sand is poured at a steady rate, the slopes of the pile will shear off and collapse abruptly.  Likewise, when the $2 trillion finally begins to circulate, it could all go at once – creating a dramatic spike in inflation or, to put it another way, a plunge in the dollar’s value.  The total money supply, M2, is roughly $10 trillion.

This is a very tricky situation for the Fed.  Everyone has been predicting that QE would cause rampant inflation, and yet we haven’t even gotten the 2%.  When it does go, it’s likely to be sudden.  On the other hand, recessions have been caused by central banks hitting the brakes too soon.

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Ben, Ben, Ben …

Well, we are mystified.  We certainly did not expect a third round of quantitative easing, and open-ended QE at that, now it has proven ineffective at reducing unemployment.  Jeremiah, along with everyone else – including Chairman Bernanke, we thought – agrees that QE is out of gas.  So, what happened?

The conspiracy view is that, by spurring the economy, Bernanke hopes to re-elect President Obama.  This theory only works if QE actually does something, beyond hiking the price of gasoline.  A weaker version of this theory is that Bernanke at least wants to be seen helping Obama, since he was admonished by Senator Schumer (D-NY) to “do all you can, etc.”  Other theories include:

  • When you have only a hammer, every problem looks like a nail.  If the Fed is determined to fix our economy using monetary policy, while fiscal policy is rudderless, then they have only one tool in the toolbox.
  • The Fed knows something we don’t, like a renewed risk of deflation.
  • All the central bankers are doing it.  The Economist has a pithy chart showing that the inefficacy of QE has also been proved in Europe and in England.  By going along with his pals, Bernanke keeps the currency values roughly in line.

This last theory is our favorite – certainly nothing to do with domestic unemployment or the election.  It means that financial repression is now uniform throughout the world – a transfer of real wealth from savers to debtors, including sovereign debtors.  The Euro, Pound, and Dollar – with links to the Swissie, Yen and Yuan – are all in it together.  Maybe that is a reasoned approach to worldwide deleveraging, after all.

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Economics 101

Jeremiah loves to find debates where the traditional right and left are both wrong, and economics is a good place to look.  The right has “hard money” pundits like Larry Kudlow, who bash Chairman Bernanke for devaluing our cherished greenback.  We have never had a strong economy without a strong dollar, he says, confusing cause with correlation.

The paths were straight, the bridges were strong … everything bore an impress of tidiness and good management.

On the left, we have people begging the Fed for easy money to shore up the stock market (?) and create jobs.  They seem to believe that inflating asset prices will stimulate the economy.

Here again, a rising market would be an effect – not a cause – of a strong real economy.  This may be hard to grasp because the market is a leading indicator.  It can rally months ahead of a pickup in earnings, but the economy is still the driver.

The other thing wrong with this argument is that, while the Fed has a mandate to try and control unemployment, it does not have a mandate to pump up the stock market.

The dollar and the stock market will both go up when the economy recovers.  Devaluing the dollar, as Bernanke has already done, can give a boost to exports and investment – but the boost is temporary.

So, if monetary policy is out, what can the government do to stimulate the economy?  Well, the idea of “stimulus” is flawed.  Economic growth depends on savings and investment, exports, a skilled and mobile labor force, and balanced budgets.  All the government can do is keep its own house in order, and not impose undue burdens on business.

There is no magic, only – as Tolstoy put it – good management.

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