Posted on 01/26/2009 7:09:49 PM PST by sickoflibs
The Federal Reserve is struggling to explain its plans for pulling the U.S. economy out of recession as it resorts to unorthodox policy tools while official interest rates are set near zero.
Since a rate-setting meeting in December, several U.S. central bank officials have tried to lay out what the Fed can do now that it has run out of conventional ammunition to support economic growth.
Usually, the Fed can focus its policy message around its interest rate target, but with federal funds already close to zero that capability has disappeared with no clearly discernible substitute on the horizon.
"It is very difficult to communicate the nature and effects of unconventional balance sheet actions," Glenn Rudebusch, associate director of research at the San Francisco Federal Reserve Bank said in a report earlier this month.
Rudebusch suggested the Fed needs to explain what it hopes to achieve with its various new programs to ease conditions in specific credit markets.
The Fed's next chance will come on Wednesday, when its policy-making Federal Open Market Committee issues a statement following two days of deliberations. It will be the FOMC's first meeting since it cut the overnight federal funds rate to a range of zero to 0.25 percent in mid-December.
Some Fed watchers expect a commitment to buying long-term Treasuries, word on an expansion of the efforts to buy securities in other asset classes, or even setting of an explicit inflation target as as a way to tackle worries about deflation.
Still, the reactive nature of many of the Fed's moves since 2007, with programs seemingly created on the fly as fresh crises erupted, has made crafting a clear policy message more difficult, and also devalued the currency of the FOMC statement.
"The Fed has been making up plays at the line of scrimmage, rather than taking them from a playbook," said Brian Fabbri, economist at BNP Paribas in New York. "Thus the relevance and drama of the FOMC meetings—where the markets would anticipate and react to each change in the Fed's target rate—has been reduced."
Helicopter Days
The Fed is now providing huge amounts of liquidity and credit to various segments of the private sector, massively expanding the size of its balance sheet in what Chairman Ben Bernanke terms "credit easing" policy.
It has attempted to distance itself from Japanese-style "quantitative easing," when the Bank of Japan in the early 1990s set an explicit numerical target for reserves, and expanded reserves accordingly.
"The Japanese experience suggests that simply expanding bank reserves—even by a very large amount—had little effect on bank lending or on the economy more broadly," Janet Yellen, San Francisco Fed President and an FOMC voter this year, said on Jan 15.
Still, the Fed risks a communications gap because its "alphabet soup" of programs can not be be distilled into a simple message on its policy bias—easier, tighter, or no change—or easily measured for signs of success.
Chicago Fed President Charles Evans has defined the Fed's current actions as a proxy for doing the impossible, or setting the fed funds rate at a negative level.
"The trick, no doubt, would be to print exactly the right amount of money to fix today's economic problems without generating another disaster via hyper-inflation," said Rory Robertson, interest rate strategist at Macquarie Bank in Sydney.
But fine-tuning policy around a theoretical negative funds rate is tough, as then-Fed governor Bernanke acknowledged in a now-famous 2002 speech on deflation.
"Alternative policy tools ... may raise practical problems of implementation and of calibration of their likely economic effects," Bernanke said.
Bets in the derivatives markets suggest the Fed could start lifting interest rates as soon as September. Many forecasters look for a much longer spell of near-zero rates, given their gloomy economic outlook.
Jan Hatzius, economist at Goldman Sachs, said that by the end of 2010 conventional monetary policy drivers such as the Taylor Rule, which suggests appropriate adjustments to interest rates based on factors such as inflation and the jobless rate, would imply a fed funds rate of negative 6 percent.
"Our forecast of a 9.5 percent unemployment rate by late 2010 implies the largest amount of slack of the postwar period," Hatzius said. "Fed (and Treasury) officials will need to expand their efforts to stimulate demand dramatically further."
Excellent!
where does the Fed get the dollars? (a) the Chinese or
Wrong. The Treasury gets money from the Chinese and other buyers of Treasury securities. The Fed does not.
or(b) “print” them by asking the Treasury for some.
The Fed does not ask the Treasury for dollars. The Fed does not print dollars by asking the Treasury. They can print more with no input or permission from the Treasury.
Either way, it bails out the naughty and has no stimulus effect!
It does add new money to the system. New money is a stimulus.
You don't really have a degree in economics, do you?
RE :”What benefit in this name calling? Be articulate yourself. Get published. Be on TV. Spread the message. At least he’s out there!”
What are you replying to? The previous comment? “name calling”?
Troll? Go stuff yourself newbie. I’ve been reading Schiff, SHedlock and dozens of others closely for years. But the facts are clearly laid out in Mish’s piece yesterday, IF you take the time to read it. Schiff is more right than wrong, but he was totally wrong in his “decoupling” theory, and his Euro Pacific customers who put money with Schiff got HOSED last year. That’s a fact.
Try actually reading Mish’s exposition at the link, then get back to me.
In case you don’t know about hyperlinks, here it is for you.
http://globaleconomicanalysis.blogspot.com/
Mish Shedlock, Sunday, January 25, 2009
Peter Schiff Was Wrong
There are numerous YouTube videos, articles, and references to Peter Schiff being “right” rapidly circulating the globe. While Schiff was indeed correct about the US imploding, most of the praise heaped on Schiff is simply unwarranted, and I can prove it.
First, let’s start with a look at the claim being made. Peter Schiff concludes many of his articles, books, etc. with the following statement.
“Mr. Schiff is one of the few non-biased investment advisors (not committed solely to the short side of the market) to have correctly called the current bear market before it began and to have positioned his clients accordingly.”
I would like to see some proof of that statement. Specifically I would like to see the average returns posted by EuroPacific clients for 2008.
I have talked with many who claim they have invested with Schiff and are down anywhere from 40% to 70% in 2008. There are many other such claims on the internet. They are entirely believable for the simple reason Schiff’s investment thesis was flat out wrong.
I have an actual portfolio statement from one of Schiff’s clients at the end to discuss, for now let’s discuss the main points of Schiff’s thesis.
Schiff’s Overall Thesis
US Equity Markets Will Crash.
US Dollar Will Go To Zero (Hyperinflation).
Decoupling (The rest of the world would be immune to a US slowdown.
Buy foreign equities and commodities and hold them with no exit strategy.
Schiff was correct about point number 1 above. The US equity markets crashed. That was a very good call. Unfortunately, his investment thesis centered on shorting the dollar in a hyperinflation bet, and buying foreign equities rather than shorting US equities.
Furthermore, Schiff made no allowances for being wrong and had no exit strategy whatsoever.
What happened in 2008 was that foreign equities sold off much harder than US equities, and a strengthening US dollar compounded the situation.
In other words, Schiff failed where it matters most: Peter Schiff did not protect his client’s assets.
(Read the rest and examine the charts at the link.)
What will they buy them with, TP? More thin-air money, to saddle our children with more debt?
The writing is on the wall, for those who can read.
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved."
-~~Ludwig Von Mises
Yes. That's what the Fed does, they create money out of thin air and buy stuff with it. You're just figuring that out now? LOL!
to saddle our children with more debt?
How does a Federal Reserve purchase saddle our children with debt? Walk through the steps for everyone. Thanks.
“You notice that? That is Schiff’s claim that it is and creates inflationary bubbles by printing money/super low savings interest rates to stimulate the economy. Even at the peak of the bubble savings account rates were 2-3% but ING could get 5%. Now it is zero, of course people are saving right now so you don’t need high interest rates”
Thank you, I am getting a much better picture now.
I opened an ING account last year. They have higher interest because they have no offices.
I am with you trying to figure it out. We know democrats are outright lying about economics, they want inflation and redistribution . Problem is republicans lied too(or are clueless), “Great economy, tax cuts with huge spending increases boosts economy, more money in peoples pocket stimulus moves economy” We never heard Republicans mention bad loans until the crash and finger pointing. The bubble was their success. But maybe the debt/monetary based inflationary bubbles are not good as they tell us (they feel good unless you cant afford something.) . Maybe we need to save and produce too.
RE :”but ING could get 5%”
Yes but inflation was higher, the asset bubble gets blown up as everyone jumps in not wanting to be left out, but it’s musical chairs with one chair at the end. My brother in law bought rentals in a vacation area near the peak, he had no idea and got killed( I knew by late 2005 housing was over) . That sort of cycle, same as 1920s is not healthy.
Absolutely but I have heard Nothing along those lines.It would take business encouragement (Lower Corporation tax rates) cheap energy (Drill our own) and cut Capitol gains tax to nothing which is dreaming but never the less it will get things moving.
Yes but inflation was higher, the asset bubble gets blown up as everyone jumps in not wanting to be left out, but it’s musical chairs with one chair at the end. My brother in law bought rentals in a vacation area near the peak, he had no idea and got killed( I knew by late 2005 housing was over) . That sort of cycle, same as 1920s is not healthy."
True like a dog chasing its tail The problem is we were not productive as a producer of goods and generating positive cash flow for our country We were using the same monetary resources over end over until it ran out NOW what?
No. I majored in Ballet! Tell me how the Fed prints money without treasury input?
Frankly, all of these folks have screwed up the economy beyond belief.
We built houses at prices no one could afford on borrowed money. Now many houses are empty. Where did the money go? Labor, illegals building houses, real estate agents, mortage and stock brokers,....all the jobs in the boom economy, but they spent the money and borrowed more. So we have empty houses and debt, so lets borrow more. I guess dems figure their federal project boom cant bust, but the bond market funding it can,then what? No one in press asking that but republicans have picked up on my idea to ask about it.
Why do you trust Misch? How do you know he isn't as full of smoke as Schiff? Most important, what do YOU think? Don't just read everyone else.
I, as a newbie since 2000 A.D., think Schiff is more credible than Misch because he sees the danger in huge deficits, astounding increases in M1 and M2 and all of the other Ms and, I believe, he is correct in predicting financial and economic disaster.
But, of course, I didn't lose any money in this market so I'm not as passionate about the problem as many. I have taken the necessary steps to protect my assets and I'm waiting to see what happens. Schiff is a smart guy and his past performance is no assurance of future performance. He's obviously learned from his mistakes.
Schiff is a smart guy. Misch is a smart guy. Let's see who's right.
That is a hell of an overburden the Dems made here! and just throwing money at it is not going to do anything but create inflation.I hope our People stand firm or this is going to be a wild ride with a horrific ending.
The problem is that the Fed is pushing on a rope right now. The problem is that banks aren't lending, but this is not because interest rates are too high or that there is a Fed-imposed limit on lending. It's because the banks are scared.
The problem with the Fed's money regulatory mechanisms is that they all assume that banks will always lend as much as they are allowed at competitive rates. So what happens if they don't? The Fed can extend ever-increasing enticements to lend, but until the banks stop being scared, they won't respond. So then what happens when the banks snap out of it? The Fed's enticements suddenly start working and banks will overextend themselves and we will be in for another world of hurt. Also the increased money supply that the Fed pumped into the economy to offset the decrease in lending gets augmented by the new lending into a huge jump in inflation
I've been trying to think of a way for the Fed to "pull the rope" rather than push. One horrible but straightforward idea is to fine banks who fall below a certain lending percentage. It's kind of like a reverse reserve requirement. Another even worse idea is for the Fed to compete directly with banks in lending when private lending dries up. Another similarly bad idea is for the Fed to tell the banks that it will pay back a certain percentage of bad loans, taking the bank's risk away.
Whatever is done, I still expect the scenario to play out that deflation runs its course in a year or so, and then snaps back into a short period of very fast inflation before settling down.
But it's not from thin air! Really!
Why don't you tell us how well that process is working out, and what the next steps will be?
And let Schiff post the return he got for his clients in 2008, in invensting in Asia, emerging markets etc.
I like a lot about Schiff, and he’s more right than wrong, but I’m growing sick about his cult of personality, and his apostles who pretend he’s the 2nd coming and infallible.
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