Tag Archives: Fed

New Fed Bashing Hero

AudreyHepburnJeremy Grantham gave an insightful interview to Fortune magazine, which they have subtitled “Fed bashers have a new hero.” Business Week picked up the story, calling Grantham a “noted gloomster.” This is what passes for analysis in journalism today. Everything is ad hominem and partisan. If you have actually read Grantham’s published research, you know that he is rigorous, objective, and precise. When he says that stocks are overvalued, this is based on solid analysis of corporate earnings – documented elsewhere by his colleague James Montier. Temperamentally, Grantham is bullish on America, but he is not in business to make overpriced investments.

“The only ones who have really benefited from QE are hedge fund managers.” – Jeremy Grantham

A related headline is, “Grantham calls Yellen ignorant.” What he actually said was, “either she is ignorant of the markets, or else she is cynical about manipulating them.” Congress had asked the Fed Chair if markets were overvalued, which is not her area of expertise. The Fed studiously avoids pricing stocks, gold, or Bitcoin. They look instead at employment, yields, and consumer prices. Financial analysts, obviously, feel the Fed should also study the markets.

The New York Times presents this roundup of Fed bashers. The Times is married to Paul Krugman’s idea that printing money somehow helps the common man – dogma long past its sell-by date. Opinions are more varied than the tabloids let on, and the consensus is much as Jeremiah has presented. The Fed was right to step in with the first round of quantitative easing, but now it has gone too far. Easy money has created a variety of perverse incentives and moral hazards.

Speaking of moral hazards, look at the list of Fed critics – Gundlach, Grantham, Einhorn, Hunt, Chanos, Spitznagel, and Druckenmiller. The Times says they’re all wet – and a minority.  So, what does the rest of Wall Street have to say? Not a damned thing. They’re taking the money.

See also: Inflation at Tiffany’s

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The Chosen People

SowellA couple of the Senators who questioned Fed Chair Yellen today mentioned her “historic” appointment.  This is simpleminded identity politics.  The Fed has been run by the tribe for thirty years.  You know which tribe we mean – Keynesians!  So, this one is female.  Big deal.  How about putting Thomas Sowell in there?  Now, that would be historic.

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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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The Placebo Effect

RajanHere is India’s central banker, Raghuram Rajan, warning that tapering by the Fed is causing problems for the world’s smaller economies.  This is the same Rajan who warned that QE was going to have adverse side effects.  Such a gloomy fellow!  He complains when the Fed prints $4 trillion, and he complains when they taper off.

Everyone, including the Fed, understands that this money did not fund the kind of investments that create jobs.  It merely inflated stock markets at home and abroad.  Abroad, the flood of “hot money” distorted currencies from the Swiss franc to the Turkish lira. Now the tide has turned, it has created a panic in emerging markets.

This turns out not to have been globally coordinated financial repression.  The big dogs – the Fed, ECB, and IMF – make policy, not the Bank of India.  When the big economies run into trouble, we just print more money.  When it’s the emerging markets, we tell them to suck it up.

Emerging market policymakers were faced with orthodox economic advice that suggested many years of austerity and unemployment as well as widespread bank closures … to cleanse the economy

The IMF is run by Europe and based in Washington – and the only serious challenge to the dollar is the euro.  Together, we have a lock on monetary policy.  It’s a good deal for America, while it lasts, but you have to wonder – which group took the cure, and which got the placebo?

See also:  Bank of England official criticises go-it-alone approach

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Inflation at Tiffany’s

AudreyHepburnTiffany’s is having a good year.  Bloomberg attributes the upscale jeweler’s success to a rising stock market and house prices.  If you’re a Fed watcher,  you know that the “wealth effect” is official policy.

Tiffany’s is also raising prices.  That’s the inflation the Fed has been looking for.  It is starting with the rich, logically enough.  This really is trickle-down economics.  Unlike the supply side boom we saw in the 1980s, the Fed’s beneficiaries are not creating any new wealth.  They just happen to be nearer the monetary spigot.

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.

Now we have populists of all kinds – including the pope – calling for change and denouncing capitalism.  The tragic symptoms are obvious, but is capitalism really the cause?

Lenin (and Keynes) knew that the quickest way to destroy capitalism was to debauch the currency.  It automatically makes the rich richer, and it screws everyone else “in a manner which not one man in a million is able to diagnose.”  Not even the pope.

Update:  We wanted to tweak the pope over his misinformed attack on capitalism, but Matt Welch has done a better job.  Writing in Reason, Welch notes that the political left, which normally dislikes the church because of its stance on abortion, gay rights, and evolution, suddenly loves the pope when he comes out against capitalism.

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Government Is Not the Solution

Last week, we reported on the epiphany of Larry Summers.  In his speech to the IMF, Mr. Summers reluctantly admits our economy has structural problems that stimulus can’t fix.  This was a watershed moment in economic policy.  If you didn’t know from the content, you would certainly know it from the reaction.

Understandably, people want to pillory Summers because much of this failed policy was his idea.  You have to give the guy credit, though, for recognizing a mistake and admitting it publicly.  Less flexible thinkers have been caught off guard.  Paul Krugman is here, rearranging his position so that he continues – retroactively – to have been right all along.

Apparently our structural problems, demographic challenge, and persistent trade deficit are news to Dr. Krugman.  He is still not changing his policy, though.  It just means we’ll need fiscal and monetary stimulus for much longer than expected.

Jeffrey Sachs was more satisfying.  He repeats his call for a new framework to stimulate private investment in new industries – not “the old standard-bearers of housing, cars, and consumer goods.”  This sounds a lot like the restructuring Robert Dugger recommended for Japan.  Coincidentally, the Economist has an update on that.  Japan’s economy is stifled by red tape and bureaucracy.  We are truly following their footsteps, just as Dugger predicted.

There is an investment shortfall because the financial, regulatory, and policy barriers to high-return investments have not been addressed.

Sachs has the most practical solution we have heard, although we are a little wary of public-private investment schemes.  Jeremiah would like to try private-private solutions first.  Japan’s MITI worked well until it didn’t, and central planning in America – except for DARPA ­–has a pretty poor record.

Summers may have been the first to say it out loud, but we find this (emphasis added) in the FOMC minutes from October:

Participants also considered scenarios under which it might, at some stage, be appropriate to begin to wind down the program before an unambiguous improvement in the outlook …

So, the establishment is preparing for an early end to the stimulus – no digging ditches and filling them up, no alien invasion.  We will have to knock down those policy barriers or, as the entrepreneurs say, “get government off my back.”

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America’s Structural Trap

GMJeremiah has been raving that all monetary easing since QE1 has been overkill.  Outside of the establishment economists in Washington, this is the majority view.  Everyone from fund managers to Occupy says the Fed is not helping – the former, even as they rake in profits.  Now, we have unearthed a paper that gives a name to the problem.

But first, here is Larry Summers speaking at the IMF economic forum.  If you can’t open the FT link, watch the speech on YouTube.  Summers has the nerve to say out loud what the others now claim to have been thinking all along.

Four years ago, the financial panic had been arrested … but, in those four years, the share of adults who are working has not increased at all.  GDP has fallen further behind [its] potential …

This may be why Summers was dropped from the short list for Fed Chairman.  He says there should have been a rebound after the crisis.  Summers goes on to suggest that our equilibrium interest rate may be negative, and he draws a parallel with secular stagnation in Japan.  The implication is that we only have full employment during a bubble, and – we may have been in this structural trap since the 1990s.

About ten years ago, Robert Dugger studied the situation in Japan.  Recently, people have taken new interest in his work.  We found this on Minyanville, and the original paper is here.  The charm of Dugger’s paper is that, reasoning from Japan’s experience, he was able to predict exactly how such a situation would unfold in America.  The details are uncanny.  You would think he had just written it last week.

In a structural trap. extremely loose monetary policy perpetuates deflation and low GDP growth, because unproductive but politically important firms are allowed to survive and capital reallocation is prevented.

A structural trap looks like a liquidity trap, except that the Fed can’t generate a credible expectation of inflation – because everybody knows the real economy is flat on its back.  What it takes to revive the economy is that you have to let old line companies go bust, so that workers – mostly young workers – can get new jobs in new industries.

TrapThat’s a lot of pain, but it would be over by now.  The alternative is that we languish in this weak recovery, possibly forever.  Larry Summers actually said forever.  Japan is going on twenty years.

Dugger recognized that no politician has the nerve for this, and that’s where an independent central bank comes in.  Remember Chairman Volcker tightening the screws in the 1980s?

Now that he is not facing another election, President Obama can afford to be bold.  He should appoint a monetary hawk as Chairman, and pursue a policy of structural reform.  That may be a stretch for the man who bailed out GM, but we can hope.

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