Weighing The Week Ahead: Counting Too Much On Central Bankers? [View article]
Jeff, thanks for the reply. You are correct to note that political science is loaded with different types of models, but as the discipline has relied more on applied stats and put a premium on methodology we have drifted away from trying to examine big questions, especially current events. You are also right that if even if we worked on current issues, policy makers would almost definitely not listen; it is a bit disheartening. Finally, as to my note about policy alternatives, evaluating the options in Europe is tougher but I discussed some of the options before the Fed in this post: http://bit.ly/OdUq8e
Weighing The Week Ahead: Counting Too Much On Central Bankers? [View article]
Jeff, this is a superb summary, thank you. It is lacking one thing though, a precise list of the possible policy alternatives that Bernanke and Draghi could announce this week. We have all been too focused on a couple policies (in particular, QE or no QE) and I think the Fed and the ECB are looking a variety of different ways to intervene right now and those actions could create very different market reactions that are worth considering ahead of time.
In response to your final point, I happen to be a political science graduate student with an macroeconomics background. We definitely have a better grip than some of the quants on the dynamics European bickering and could provide valuable insight into how that might impact markets. However, I have to throw in the caveat that predictive modeling is typically not the focus of political science work...a surprising few of us like to look at the world in real time.
Apologies about the typo, I meant the 1920s (particularly 1923), so thank you for pointing that out. The Roman case is interesting because it also confronts a larger problem having to do with the political problems endemic to empire building. As infrastructure costs become too great and political systems age into corruption (even republics and democracies, as the Roman example highlights) the politically easiest means of financial reprieve is currency debasement. This can take a couple years or a couple centuries and it does create serious problems.
All of that said, while QE is intended to provide liquidity and I genuinely believe that the Fed would be willing to tolerate higher than normal inflation at the moment if it meant substantial headway on job creation, that isn't what we are seeing. Weaknesses in other economies have meant that despite actions that should reduce the value of the dollar, the dollar remains relatively strong and inflation remains below the Fed's target. The irony of all of this is that a weaker dollar would not necessarily be a bad thing for the U.S. equities markets as I explained in a Bloomberg article earlier this year that is reposted here: http://bit.ly/Q2xOIi
I understand your disdain for inflationary policies, but unlike modern Zimbabwe or Germany in the 1930s, we are not experiencing rapid inflation in the U.S. In fact, despite QE inflation is below the Fed's target and job growth is too slow. So, by saying that QE is money creation and that is the last hope of failed empires, you are pointing to a series instances that look nothing like the present day U.S. If anything, we need more stimulative policy in our economy today.
I understand the colloquial definition of "printing money" but it is a pet peeve of mine that it is overused and poorly understood. As for your question about M3, I suspect it would cause M3 to rise moderately which would contribute to inflationary pressure but not in a significant way. I honestly doubt that it would be sufficient to drag inflation above the Fed's 2% target and since monetary policymakers typically focus on M2, not M3, I suspect this is of little concern to them in the decision process.
The answer to your question about MBS is actually rather technical, but the simplest explanation is to say that the Fed would be incentivizing lending much the same way Fanny and Freddie used to. This is essentially why the program needs to be done jointly with Treasury. For a more complete explanation, see my post on Fed Playbook at: http://bit.ly/PWJjkz
Thank you for clarifying the intended purpose of QE. It is very much an unconventional monetary policy approach, but we have become accustomed to it and people understand it. This understanding is precisely why it is mostly what we are hearing about in the news and will likely hear about until the announcement on Wednesday afternoon.
I should also throw out one caveat that may not have been as clear as I would like in the article. You point out that QE has not worked as well as intended because banks have failed to lend as much as expected. This could still be a problem with the options I provided. The Fed is seeking ways to incentivize the banks to lend more readily, but that doesn't mean borrowers will be more qualified to receive loans.
Finally, it is a pet peeve of mine that people refer to anything the Fed does as "printing money." This is completely misleading. The Fed grows their balance sheet, that's it. The Treasury is in charge of the U.S. Mint and the printing presses. Moreover, inflation is currently BELOW the target of 2%, so we should be more concerned about weak demand than rising prices.
While I agree that the U.S. government is operating remarkably inefficiently and is far too beholden to special interests (I have published extensively on this topic), I do not see where I have placed blame on anyone else in this article or these comments. It seems to me that you are expressing some political vitriol that has nothing to do with the topic of this article and might be best placed in a different forum.
Thank you for your comment, but I am uncertain what socialists have to do with your point and you seem to have the numbers a bit off too. The European Commission projects that in 2012 the Eurozone will experience a 0.3% contraction in economic growth. Admittedly growth is expected to pick up in the second half of the year, but after a dismal spring, the Eurozone is still set to contract this year.
As for Chinese economic growth, projections vary, but consensus is that in 2012 their GDP will grow somewhere between 7.6 and 8.1 percent. That is the lowest since at least 1999 and as recently as 2010 we were seeing over 10 percent growth with pre-crisis 2007 growth over 14%. India’s growth is projected to be between 5.6 and 6.5 percent down from over 9.5 percent as recently as 2010 and 9.8 percent in 2007. Finally, Brazil is projected to grow between 1.5 and 2.1 percent this year, down from over 7.5 percent as recently as 2010 and over 6 percent in 2007.
Perhaps more importantly, nobody is blaming others for poor U.S. economic performance. I am simply pointing out that the media focus on QE3 or no QE3 is a misleading and potentially dangerous. Investors need to be aware that the Fed is considering other options and may choose to utilize those options to buoy a very weak recovery.
While this is a very nice pro and con argument for QE3 (despite the somewhat absurd caricature of the political situation), the trouble is that we are all asking the wrong question. The issue is not whether or not the Fed will engage in QE, it is a matter of whether or not they will engage in stimulus at all. The Fed has other options besides QE and they have clearly been exploring those. Bernanke has openly talked about his interest in the British "Funding for Lending" program and several other members of the FOMC have indicated they are exploring other policy alternatives. So, why are we asking QE3 or no QE3 when we should be asking what other tools does the Fed have at its disposal?
Weighing The Week Ahead: Counting Too Much On Central Bankers? [View article]
I would be curious to know what you think.
Weighing The Week Ahead: Counting Too Much On Central Bankers? [View article]
In response to your final point, I happen to be a political science graduate student with an macroeconomics background. We definitely have a better grip than some of the quants on the dynamics European bickering and could provide valuable insight into how that might impact markets. However, I have to throw in the caveat that predictive modeling is typically not the focus of political science work...a surprising few of us like to look at the world in real time.
The Fed May Act, But Not With QE3 [View article]
All of that said, while QE is intended to provide liquidity and I genuinely believe that the Fed would be willing to tolerate higher than normal inflation at the moment if it meant substantial headway on job creation, that isn't what we are seeing. Weaknesses in other economies have meant that despite actions that should reduce the value of the dollar, the dollar remains relatively strong and inflation remains below the Fed's target. The irony of all of this is that a weaker dollar would not necessarily be a bad thing for the U.S. equities markets as I explained in a Bloomberg article earlier this year that is reposted here: http://bit.ly/Q2xOIi
The Fed May Act, But Not With QE3 [View article]
The Fed May Act, But Not With QE3 [View article]
The Fed May Act, But Not With QE3 [View article]
http://bit.ly/PWJjkz
The Fed May Act, But Not With QE3 [View article]
I should also throw out one caveat that may not have been as clear as I would like in the article. You point out that QE has not worked as well as intended because banks have failed to lend as much as expected. This could still be a problem with the options I provided. The Fed is seeking ways to incentivize the banks to lend more readily, but that doesn't mean borrowers will be more qualified to receive loans.
Finally, it is a pet peeve of mine that people refer to anything the Fed does as "printing money." This is completely misleading. The Fed grows their balance sheet, that's it. The Treasury is in charge of the U.S. Mint and the printing presses. Moreover, inflation is currently BELOW the target of 2%, so we should be more concerned about weak demand than rising prices.
The Fed May Act, But Not With QE3 [View article]
The Fed May Act, But Not With QE3 [View article]
As for Chinese economic growth, projections vary, but consensus is that in 2012 their GDP will grow somewhere between 7.6 and 8.1 percent. That is the lowest since at least 1999 and as recently as 2010 we were seeing over 10 percent growth with pre-crisis 2007 growth over 14%. India’s growth is projected to be between 5.6 and 6.5 percent down from over 9.5 percent as recently as 2010 and 9.8 percent in 2007. Finally, Brazil is projected to grow between 1.5 and 2.1 percent this year, down from over 7.5 percent as recently as 2010 and over 6 percent in 2007.
Perhaps more importantly, nobody is blaming others for poor U.S. economic performance. I am simply pointing out that the media focus on QE3 or no QE3 is a misleading and potentially dangerous. Investors need to be aware that the Fed is considering other options and may choose to utilize those options to buoy a very weak recovery.
Will QE3 Be Announced In August? [View article]