Bernanke: Same Old Play Book 14 comments
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I seem to recall, way back when Bernanke was appointed the head of the Fed, a promise to speak clearly. I well recall the "good old days", when economists, analysts, and various financial pundits would agonize over every word Greenspan uttered...nay...even probably agonized over every punctuation mark in written transcripts of his utterances, in an effort to discern exactly what he meant, and his intentions, as well as his famous (infamous?) remark about if the listener understands him, he's not being obscure enough.
Maybe it's me, but either Ben isn't speaking clearly enough, or else old habits die hard, and the various scribes of Mammon torture and tease every Fed statement in their efforts to discern what the future may hold.
One thing I will grant Ben is that he's holding the Fed governors on much looser leashes, allowing them to comment on a fairly regular basis, unlike back when Alan was calling the plays. I'd say that listening to what their thoughts might be would likely be more fruitful, in terms of predicting which way the Fed might be leaning.
But of greater import, is the continuation of "easy money" policy. Even ol' Alan has finally 'fessed up (albeit reluctantly) that he might have been a tad too lenient with the country's purse. I'm not completely certain that "this time is different", in terms of the degree of distress in the economy. After all, the LTCM debacle arguably posed a comparable amount of systemic risk, in terms of large financial firms collapsing like a house of cards on a windy day.
Government intervention, while preventing the collapse, ended up coming back to bite us in the butt. It looks like Ben is so wrapped up in studying the Great Depression that he might well be ignoring more recent examples of events and remedies, which might be equally illuminating.
I find myself wondering if, in the near term...like within the next few months... a .25% rate hike wouldn't a timely "shot across the bow", as far as showing everybody that the Fed has no intention allowing wholesale reflation of asset bubbles to occur. And I'd guess it would do more to support the dollar than a month of Sundays worth of Timmy's jawboning about a "strong dollar".
I realize that it would, at least initially, knock the props out from under the market, the price of gold, and the price of oil, but I don't think that .25% would do anything to actually delay the arrival of any REAL recovery of our economy.
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This article has 14 comments:
Monetary policy is not a suitable tool for fixing what's wrong with the financial system.
In medical terms, we don't need an infusion of narcotics, we need laser surgery on cancerous areas: CDS and commodities manipulation come to mind, or liposuction on various areas of bloated leverage.
This is especially true when they have said that "the interest rates would be low for an extended period"...So Dollar carry trade would go on...lower interest rates will surely not do anything productive,...Only that it will make money more easily avaliable for speculation...
On Nov 08 07:57 AM Faisal Humayun wrote:
> I am very sure that the Fed would not increase rates anytime soon
> as they have said...They have done that in the past by keeping rates
> artifically low even after the recession was over (after the Nasdaq
> bubble)..I see no reason why they will be different this time...
>
>
> This is especially true when they have said that "the interest rates
> would be low for an extended period"...So Dollar carry trade would
> go on...lower interest rates will surely not do anything productive,...Only
> that it will make money more easily avaliable for speculation...
I don't see that there is any real difference between ..1, .25, .5 anyways. No business is going to invest/not invest based on that.....no small business person is going to change their plans...no aspiring business person is going to put their plans on hold.
It might also offer some encouragement to the savers in our society that have been so unfairly penalized to allow for the bailout of those that are responsible for our mess.
My point exactly. There are times perceptions are as, if not more, important, than reality, and this may well be one of those times.
Tom,
All true, and perhaps even .25, while largely symbolic, might give pause to those with all of that leverage.
On Nov 08 10:32 AM davidbdc wrote:
> I agree that moving the rate up .25 would be a good signal. It could
> be coupled with an assurance that rates would remain below 1% for
> an extended period of time.
>
> I don't see that there is any real difference between ..1, .25, .5
> anyways. No business is going to invest/not invest based on that.....no
> small business person is going to change their plans...no aspiring
> business person is going to put their plans on hold.
>
> It might also offer some encouragement to the savers in our society
> that have been so unfairly penalized to allow for the bailout of
> those that are responsible for our mess.
It would unsettle the markets, but there has to be some sort of exit strategy and taking baby steps now might hopefully reduce the possibility of more drastic steps later.
On Nov 08 09:37 AM Dave Wrixon wrote:
> Only if you are Goldman Sachs. Have you tried requesting a loan for
> speculative purposes?
The great paradox, of course, is that a public policy of long term accommodating monetary policy (including maintenance of very low interest rates) coupled with high and growing US Federal budgetary deficits were two of the ongoing factors during the 2002-2008 period that established the groundwork for the cresting of the investment banking crisis in October of 2008 (and the financial, financial credit and general economic collapse this treatened) but that the continuation and enlargement of these very factors (i.e. the stimulus policy) were, arguably, key to stabilizing the economy once this crisis crested and meltdown became a clear and present threat.
The great challenge now is to decide when to move beyond efforts to stabilize the economy, what reforms and policy changes should mark this move beyond stabilization and the sequence and timing for these reforms and policy changes to be implemented. Given the paradox described above and the natural prudence of many of us observing the massive extent of the stimulus efforts to date, the desire you and several commentators for an early concrete signal from the Fed that monetary policy will begin without delay to tighten is reasonable and to be expected.
Arguably, prudence of a different sort needs to be exercised now however. Even at the risk that some inflation will occur, it is vital that the stabilization of the economy and the beginnings of real recovery be solidly based before significant elements of the stimulus policy are reversed; having paid the large price for stimulus it would be tragic to lose its benefits through premature changes to that policy now. Further, there continue to be many more clear evidences of problems with unemployment, underemployment and the housing market than concrete evidence that inflation is presently occurring. Let's therefore not jump the gun.
In short, the change in the US Fed policy you advocate should be implemented as an early sign that the stimulus policy is ending and a new phase leading to a sound recover has begun. Arguably that change needs to be delayed a quarter or more longer than you suggest however for the reasons suggested above.
Exactly what I'm thinking. It seems the ECB is already "priming" the markets with Trichet's latest comments about tightening up a bit.
On Nov 08 11:09 AM JeffDB wrote:
> I personally think it would be a good move and would still be consistent
> with their promise of interest rates that are "exceptionally low"
> for "an extended period."
>
> It would unsettle the markets, but there has to be some sort of exit
> strategy and taking baby steps now might hopefully reduce the possibility
> of more drastic steps later.
Unfortunately, you're correct in pointing out the differences between the US and Japan's experience with zirp.
On Nov 08 10:55 PM Moon Kil Woong wrote:
> I see no difference between Greenspan and Bernanke aside from the
> fact that Bernanke seems even more economically accommodating towards
> fast, free, easy money. To that, I'd say we will be at zirp until
> our economic hell freezes over similarly to Japan but without the
> thrifty population, positive trade surplus, and social safety net
> Japan had going into their lost decades.
Luckily for the politicians, a good number of our debt holders can't vote.
They are philosophically bereft because they see one side of the world only. They want the economy to expand for ever. They want prices to go up for ever. No rest for the wicked apparently. What destroyed the Roman Empire? Not wars, although wars are often just an effect of the 'inflate forever' philosophy. Inflation is what destroyed Rome. Rome also forgot that deflation was part of the total equation.
We need a philosopher running the Fed -- IF, in fact, we need a Fed at all. I'm not so sure we need a Fed. A philosopher understands there is a time for everything. A time to inflate (a time to lower interest rates) and a time to deflate (a time to raise interest rates). It's not so difficult: watch nature. There is a time to fill up with activity, expansion, wealth (day) and a time to rest, to empty out (night). There is a time for higher prices, and a time for lower prices.
But those in power with vested interests (asset price inflation) will not act with nature but will only act in support of their own interests. That's what INFLATE INFLATE INFLATE is all about: fear that their own assets will lose value if they don't always court the Devil of inflation. The one-sided mind believes in the value of a one-sided world. Hence, a damaged, faulty philosophy.