dagblog - Comments for "The Fed's ultimate hubris..."

People are out of work ...

kgb999 — Fri, 05 Nov 2010 20:59:42 +0000

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.

Man, I've missed the old

Michael Wolraich — Fri, 05 Nov 2010 16:29:49 +0000

In reply to 1) of course there's economic

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.

The thing that sucks the most

stillidealistic — Fri, 05 Nov 2010 15:06:18 +0000

In reply to The Fed's ultimate hubris...

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.

Thanks for bringing some

Steve — Fri, 05 Nov 2010 13:07:25 +0000

In reply to I dont want to be rude as

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:

Consumers would see a wealth increase as they rollover high-cost debt (e.g. refinancing), and they would increase their spending as a result
Businesses would increase investment due to the lower cost of capital
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.

Well, it is possible that I'm

Michael Maiello — Fri, 05 Nov 2010 12:48:12 +0000

In reply to I dont want to be rude as

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.)

D,You have lived through one

Steve — Fri, 05 Nov 2010 11:10:13 +0000

In reply to Yes, I do realize my general

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. :)

-Rowl

1) of course there's economic

Deadman — Fri, 05 Nov 2010 03:53:23 +0000

In reply to My intention wasn't to

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.

Not sure what's with your

DF — Fri, 05 Nov 2010 02:47:08 +0000

In reply to Then you figure they would be

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.

My intention wasn't to

DF — Fri, 05 Nov 2010 02:31:30 +0000

In reply to condescend much, DF? 1) I

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?

I dont want to be rude as

Deadman — Fri, 05 Nov 2010 02:29:40 +0000

In reply to I'll try not to yammer on

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.