THIS is the oBAMA ECONOMY...

[Rshermr]

There is no "economic recovery" folks, that is flat out, a LIE. We are in DEEP, DEEP, SHIT... and it's all coming to a close soon. We will experience catastrophic economic devastation of biblical proportion, and it will happen on obama's watch...

Is it possible for you in one thousand words or less to state an actual economic argument to back up your post? Your source doesn't attempt it, so I guess you will have to give us a clue.

I have some major problems with folks who waste my time with sources as partial as cns "news". If some one can not provide a substantial source that is at least perceived as impartial then they are simply not worth the effort. Says I, who has tried. But really, you generally find that whomever makes the argument is incapable of expressing their point, much less debate it.

 

[Kimura]

Just to add a few points: The FED controls interest rates all along the term structure, even all they way out if they so choose. They'll generally permit some fluctuations between they IOR rate and discount rate. It boils down to policy objectives.

Just for clarity, the mechanism for the Fed to influence long-term rates is through expectations of future short-term rates, hopefully through "forward guidance". But if the markets are convinced that the Fed will revert to central bank form at the first whiff of recovery, I don't see much the Fed can do to lower long-term rates. Am I missing something?

Idk...what I wouldn't give to be a fly on the wall at FOMC meetings.

On the one hand, the 'markets' have become weary about the supply side consequences of tapering, being gravely concerned that less FED purchases will result in increased rates, and specifically increased mortgage rates, even if the FED funds rate remains cemented at current levels.

What we are witnessing is a 'market' decision to raise longer term rates based on supply fears and not on any fears related to excess demand increasing rates so to speak.

And to add insult to injury is the belief that should the FED one day decide the situation is acceptable and the economy no longer requires negative real rates, that would mean that the FED is going to move the FED funds rate to around 2-4% to reach some type of equilibrium with inflation if that makes sense.

I think we stay at near 0 until a decision for equilibrium moves rates to 2-4%. This means a 1-2% shift or tweaking in FED parlance.

This still comes back to the reality that the term structure of rates, specifically in a floating exchange, is definitely a policy decision at the end of the day. It's best left to being in the political realm vs the 'market', because on a floating exchange, the 'market' making a decision is nothing more than prognosticating some type of reactionary bias to those setting the rates so to speak. The bias from today's rates being decided by the 'market' is nothing more than what 'markets' will perceive as FED policy in the future.

Personally, I don't see any type of benefit in paying the price for the volatility we are witnessing to obtain that kind of information. We need to deep six that type of volatility that comes with 'markets' determining long term rates by letting the FED tie up the entire ******* term structure of risk free rates with a bid for the whole treasury curve at their target rate, in tandem with open ended lending.

 

[oldfart]

This still comes back to the reality that the term structure of rates, specifically in a floating exchange, is definitely a policy decision at the end of the day. It's best left to being in the political realm vs the 'market', because on a floating exchange, the 'market' making a decision is nothing more than prognosticating some type of reactionary bias to those setting the rates so to speak. The bias from today's rates being decided by the 'market' is nothing more than what 'markets' will perceive as FED policy in the future.

Personally, I don't see any type of benefit in paying the price for the volatility we are witnessing to obtain that kind of information. We need to deep six that type of volatility that comes with 'markets' determining long term rates by letting the FED tie up the entire ******* term structure of risk free rates with a bid for the whole treasury curve at their target rate, in tandem with open ended lending.

Thanks for the clarification. No one can accuse you of being timid in monetary policy! I haven't thought of the implications of the Fed buying the entire Treasury spectrum, so here goes.

Suppose the Fed sets a target for the long bond of a 1% real rate and a 2% inflation rate and stands ready to buy bonds until the prices rises (nominal rate falls) to a 3% yield. This isn't too far out so it would be believable. Since the Fed is buying, there is no problem in finding sellers. It would be hard to do the reverse of this policy as there is no guarantee that the Fed could enforce a target price while finding willing buyers. So the Fed can peg a yield on long-term Treasuries as long as it is lower than the current market yield.

I'm not sure you need open ended lending to support this. Fed purchases will inject liquidity all by itself, so why would sellers need to borrow in addition? You could end up with a pretty funky looking yield curve, with real rates at below zero on the short end and 1% or less on the long end and probably essentially flat (at zero?) for a long range in the middle.

One effect would be to reduce the burden of the public debt. If the Fed holds a larger portion of the long term Treasury debt, receives the interest and refunds the profit to the Treasury, the rate matters less and less. Another would be to put bond investors in a box. Eventually somebody will have to figure out where to park money more profitably than in government bonds. This is sort of the super-Keynesian solution which Keynes himself played with a lot. If the long term cost of funds can be driven very low, lots of investments start to look pretty good.

Of course financial markets would go apeshit, but that's just an added value. Somebody will start complaining that easy money will give rise to bubbles and future crashes. The only way to avoid this that I see is to institute a permanent depression. Financial markets have displayed an innate level of bad judgment and instability that I don't see where the cost of funds deters too-big-to-fail players from being irresponsible. They knew very well that their behavior in the early 00's collectively would result in a crash and still they couldn't stop themselves. If anybody believes that they would be any more irresponsible with cheaper money, they underestimate the capacity for self-delusion of the moneyed class. What is needed is real regulation enforcing real consequences on firms, not restrictions on money.

I don't think its a cure all, but it would be worth a try combined with some other policies to get us out of the muddle. Besides, I cross my fingers when I say this, I have a hard time imagining how anything could be worse than the Bob Rubin--Larry Summers vision of government protected predatory monopoly pseudo-capitalism.

 

[Freemason9]

The problem QE creates is one of excess liquidity. Tapering exposes three areas of concern: the impact on the stock market (we see what happens to the market when tapering is simply mentioned), a rise in interest rates (and the negative effect that would have on the housing market), and emerging economies (our economy is impacted by international trade). Trying to reign in the money supply without a growing economy is fraught with danger. Here is the problem with QE - it cannot be continued indefinitely.

I see no symptoms at all of excess liquidity. Such a state would certainly result in some degree of inflation, and we have gone nose-to-nose with deflation over the last few years. Personally, I would LOVE to see a little "excess liquidity." Our economy needs it badly, and we actually need to abandon our anti-inflation fiscal policy and adopt a full-employment policy.

 

[Toro]

Just to add a few points: The FED controls interest rates all along the term structure, even all they way out if they so choose. They'll generally permit some fluctuations between they IOR rate and discount rate. It boils down to policy objectives.

Just for clarity, the mechanism for the Fed to influence long-term rates is through expectations of future short-term rates, hopefully through "forward guidance". But if the markets are convinced that the Fed will revert to central bank form at the first whiff of recovery, I don't see much the Fed can do to lower long-term rates. Am I missing something?

Idk...what I wouldn't give to be a fly on the wall at FOMC meetings.

On the one hand, the 'markets' have become weary about the supply side consequences of tapering, being gravely concerned that less FED purchases will result in increased rates, and specifically increased mortgage rates, even if the FED funds rate remains cemented at current levels.

What we are witnessing is a 'market' decision to raise longer term rates based on supply fears and not on any fears related to excess demand increasing rates so to speak.

And to add insult to injury is the belief that should the FED one day decide the situation is acceptable and the economy no longer requires negative real rates, that would mean that the FED is going to move the FED funds rate to around 2-4% to reach some type of equilibrium with inflation if that makes sense.

I think we stay at near 0 until a decision for equilibrium moves rates to 2-4%. This means a 1-2% shift or tweaking in FED parlance.

This still comes back to the reality that the term structure of rates, specifically in a floating exchange, is definitely a policy decision at the end of the day. It's best left to being in the political realm vs the 'market', because on a floating exchange, the 'market' making a decision is nothing more than prognosticating some type of reactionary bias to those setting the rates so to speak. The bias from today's rates being decided by the 'market' is nothing more than what 'markets' will perceive as FED policy in the future.

Personally, I don't see any type of benefit in paying the price for the volatility we are witnessing to obtain that kind of information. We need to deep six that type of volatility that comes with 'markets' determining long term rates by letting the FED tie up the entire ******* term structure of risk free rates with a bid for the whole treasury curve at their target rate, in tandem with open ended lending.

I think that creates risk taking as it drives investors out on the risk curve and creates all sorts of distortions and excesses. BB-rated bonds <5% is retarded.

 

[Toro]

This still comes back to the reality that the term structure of rates, specifically in a floating exchange, is definitely a policy decision at the end of the day. It's best left to being in the political realm vs the 'market', because on a floating exchange, the 'market' making a decision is nothing more than prognosticating some type of reactionary bias to those setting the rates so to speak. The bias from today's rates being decided by the 'market' is nothing more than what 'markets' will perceive as FED policy in the future.

Personally, I don't see any type of benefit in paying the price for the volatility we are witnessing to obtain that kind of information. We need to deep six that type of volatility that comes with 'markets' determining long term rates by letting the FED tie up the entire ******* term structure of risk free rates with a bid for the whole treasury curve at their target rate, in tandem with open ended lending.

Thanks for the clarification. No one can accuse you of being timid in monetary policy! I haven't thought of the implications of the Fed buying the entire Treasury spectrum, so here goes.

Suppose the Fed sets a target for the long bond of a 1% real rate and a 2% inflation rate and stands ready to buy bonds until the prices rises (nominal rate falls) to a 3% yield. This isn't too far out so it would be believable. Since the Fed is buying, there is no problem in finding sellers. It would be hard to do the reverse of this policy as there is no guarantee that the Fed could enforce a target price while finding willing buyers. So the Fed can peg a yield on long-term Treasuries as long as it is lower than the current market yield.

I'm not sure you need open ended lending to support this. Fed purchases will inject liquidity all by itself, so why would sellers need to borrow in addition? You could end up with a pretty funky looking yield curve, with real rates at below zero on the short end and 1% or less on the long end and probably essentially flat (at zero?) for a long range in the middle.

One effect would be to reduce the burden of the public debt. If the Fed holds a larger portion of the long term Treasury debt, receives the interest and refunds the profit to the Treasury, the rate matters less and less. Another would be to put bond investors in a box. Eventually somebody will have to figure out where to park money more profitably than in government bonds. This is sort of the super-Keynesian solution which Keynes himself played with a lot. If the long term cost of funds can be driven very low, lots of investments start to look pretty good.

Of course financial markets would go apeshit, but that's just an added value. Somebody will start complaining that easy money will give rise to bubbles and future crashes. The only way to avoid this that I see is to institute a permanent depression. Financial markets have displayed an innate level of bad judgment and instability that I don't see where the cost of funds deters too-big-to-fail players from being irresponsible. They knew very well that their behavior in the early 00's collectively would result in a crash and still they couldn't stop themselves. If anybody believes that they would be any more irresponsible with cheaper money, they underestimate the capacity for self-delusion of the moneyed class. What is needed is real regulation enforcing real consequences on firms, not restrictions on money.

I don't think its a cure all, but it would be worth a try combined with some other policies to get us out of the muddle. Besides, I cross my fingers when I say this, I have a hard time imagining how anything could be worse than the Bob Rubin--Larry Summers vision of government protected predatory monopoly pseudo-capitalism.

I don't believe that the financial markets thought the financial markets would crash at all. In fact, I thought it was quite the opposite. I'd say at least 9 out of 10 people whom I spoke with saw little danger in the system. There were a few iconoclasts like the guys at SocGen, but for the most part, Wall Street was all in. Heck, I was at the Berkshire AGM in 2007 in Omaha, and Buffett was asked if he thought the financial system was in trouble, and he said no.

I blame the Fed for these crises, first with the tech bubble and next with the housing bubble. They weren't solely to blame, of course, as bubbles have many authors, but their targeting of asset markets certainly has had tremendous adverse effects. I worry about QE distorting markets and this all ending very badly, but admittedly, stocks going up and gold going down for two years in this manner makes me think I could be wrong and The Bernank is right.


Edit - BTW, Kingdom of the Netherlands bond yields hit a 495-year low last autumn.

 

[Kimura]

This still comes back to the reality that the term structure of rates, specifically in a floating exchange, is definitely a policy decision at the end of the day. It's best left to being in the political realm vs the 'market', because on a floating exchange, the 'market' making a decision is nothing more than prognosticating some type of reactionary bias to those setting the rates so to speak. The bias from today's rates being decided by the 'market' is nothing more than what 'markets' will perceive as FED policy in the future.

Personally, I don't see any type of benefit in paying the price for the volatility we are witnessing to obtain that kind of information. We need to deep six that type of volatility that comes with 'markets' determining long term rates by letting the FED tie up the entire ******* term structure of risk free rates with a bid for the whole treasury curve at their target rate, in tandem with open ended lending.

Thanks for the clarification. No one can accuse you of being timid in monetary policy! I haven't thought of the implications of the Fed buying the entire Treasury spectrum, so here goes.

Suppose the Fed sets a target for the long bond of a 1% real rate and a 2% inflation rate and stands ready to buy bonds until the prices rises (nominal rate falls) to a 3% yield. This isn't too far out so it would be believable. Since the Fed is buying, there is no problem in finding sellers. It would be hard to do the reverse of this policy as there is no guarantee that the Fed could enforce a target price while finding willing buyers. So the Fed can peg a yield on long-term Treasuries as long as it is lower than the current market yield.

I'm not sure you need open ended lending to support this. Fed purchases will inject liquidity all by itself, so why would sellers need to borrow in addition? You could end up with a pretty funky looking yield curve, with real rates at below zero on the short end and 1% or less on the long end and probably essentially flat (at zero?) for a long range in the middle.

One effect would be to reduce the burden of the public debt. If the Fed holds a larger portion of the long term Treasury debt, receives the interest and refunds the profit to the Treasury, the rate matters less and less. Another would be to put bond investors in a box. Eventually somebody will have to figure out where to park money more profitably than in government bonds. This is sort of the super-Keynesian solution which Keynes himself played with a lot. If the long term cost of funds can be driven very low, lots of investments start to look pretty good.

Of course financial markets would go apeshit, but that's just an added value. Somebody will start complaining that easy money will give rise to bubbles and future crashes. The only way to avoid this that I see is to institute a permanent depression. Financial markets have displayed an innate level of bad judgment and instability that I don't see where the cost of funds deters too-big-to-fail players from being irresponsible. They knew very well that their behavior in the early 00's collectively would result in a crash and still they couldn't stop themselves. If anybody believes that they would be any more irresponsible with cheaper money, they underestimate the capacity for self-delusion of the moneyed class. What is needed is real regulation enforcing real consequences on firms, not restrictions on money.

I don't think its a cure all, but it would be worth a try combined with some other policies to get us out of the muddle. Besides, I cross my fingers when I say this, I have a hard time imagining how anything could be worse than the Bob Rubin--Larry Summers vision of government protected predatory monopoly pseudo-capitalism.

Well....I do look at things from a more heterodox standpoint. If the FED so desired, they can keep rates at zero indefinitely. It boils down to how they manage their QE. Interest rates are basically held at a constant by the FED as part of its policy goals and exercising its authority.

Deficits drive interest rates down as opposed to up. They relieve pressure on interest rates because of the additional bank reserves being injected into the banking system and not being removed. The FED can counter this by utilizing monetary policy to drain excess reserves or let rates drop to zero. We need to look no further than Japan and their ZIRP.

Currently, our deficit is too small. Our employment numbers are a byproduct of the deficit being too small. Unemployment occurs as a result of net government deficits being too small to meet the demands of the non-government net saving desires.

I don't see financial markets going apeshit. Minsky gave us a pretty cohesive model about why financial markets can go apeshit.

On a side note, like Freemason said, we need a national policy of making full employment a real goal. Unemployment should be our ONLY concern at this juncture in my opinion.

 

[Rshermr]

This still comes back to the reality that the term structure of rates, specifically in a floating exchange, is definitely a policy decision at the end of the day. It's best left to being in the political realm vs the 'market', because on a floating exchange, the 'market' making a decision is nothing more than prognosticating some type of reactionary bias to those setting the rates so to speak. The bias from today's rates being decided by the 'market' is nothing more than what 'markets' will perceive as FED policy in the future.

Personally, I don't see any type of benefit in paying the price for the volatility we are witnessing to obtain that kind of information. We need to deep six that type of volatility that comes with 'markets' determining long term rates by letting the FED tie up the entire ******* term structure of risk free rates with a bid for the whole treasury curve at their target rate, in tandem with open ended lending.

Thanks for the clarification. No one can accuse you of being timid in monetary policy! I haven't thought of the implications of the Fed buying the entire Treasury spectrum, so here goes.

Suppose the Fed sets a target for the long bond of a 1% real rate and a 2% inflation rate and stands ready to buy bonds until the prices rises (nominal rate falls) to a 3% yield. This isn't too far out so it would be believable. Since the Fed is buying, there is no problem in finding sellers. It would be hard to do the reverse of this policy as there is no guarantee that the Fed could enforce a target price while finding willing buyers. So the Fed can peg a yield on long-term Treasuries as long as it is lower than the current market yield.

I'm not sure you need open ended lending to support this. Fed purchases will inject liquidity all by itself, so why would sellers need to borrow in addition? You could end up with a pretty funky looking yield curve, with real rates at below zero on the short end and 1% or less on the long end and probably essentially flat (at zero?) for a long range in the middle.

One effect would be to reduce the burden of the public debt. If the Fed holds a larger portion of the long term Treasury debt, receives the interest and refunds the profit to the Treasury, the rate matters less and less. Another would be to put bond investors in a box. Eventually somebody will have to figure out where to park money more profitably than in government bonds. This is sort of the super-Keynesian solution which Keynes himself played with a lot. If the long term cost of funds can be driven very low, lots of investments start to look pretty good.

Of course financial markets would go apeshit, but that's just an added value. Somebody will start complaining that easy money will give rise to bubbles and future crashes. The only way to avoid this that I see is to institute a permanent depression. Financial markets have displayed an innate level of bad judgment and instability that I don't see where the cost of funds deters too-big-to-fail players from being irresponsible. They knew very well that their behavior in the early 00's collectively would result in a crash and still they couldn't stop themselves. If anybody believes that they would be any more irresponsible with cheaper money, they underestimate the capacity for self-delusion of the moneyed class. What is needed is real regulation enforcing real consequences on firms, not restrictions on money.

I don't think its a cure all, but it would be worth a try combined with some other policies to get us out of the muddle. Besides, I cross my fingers when I say this, I have a hard time imagining how anything could be worse than the Bob Rubin--Larry Summers vision of government protected predatory monopoly pseudo-capitalism.

Well....I do look at things from a more heterodox standpoint. If the FED so desired, they can keep rates at zero indefinitely. It boils down to how they manage their QE. Interest rates are basically held at a constant by the FED as part of its policy goals and exercising its authority.

Deficits drive interest rates down as opposed to up. They relieve pressure on interest rates because of the additional bank reserves being injected into the banking system and not being removed. The FED can counter this by utilizing monetary policy to drain excess reserves or let rates drop to zero. We need to look no further than Japan and their ZIRP policies.

Currently, our deficit is too small. Our employment numbers are a byproduct of the deficit being too small. Unemployment occurs as a result of net government deficits being too small to meet the demands of the non-government net saving desires.

I don't see financial markets going apeshit. Minsky gave us a pretty cohesive model about why financial markets can go apeshit.

On a side note, like Freemason said, we need a national policy of making full employment a real goal. Unemployment should be our ONLY concern at this juncture in my opinion.

I agree with your assessment of unemployment being the only concern now. Unfortunately, politically there is not a lot of concern about the issue, particularly in the house. Seems to me obvious that to those politicians in control of the house, high unemployment = low labor rates. And that goal (low labor rates) seems to me to be a long term political goal.

 

[oldfart]

I don't believe that the financial markets thought the financial markets would crash at all. In fact, I thought it was quite the opposite. I'd say at least 9 out of 10 people whom I spoke with saw little danger in the system. There were a few iconoclasts like the guys at SocGen, but for the most part, Wall Street was all in. Heck, I was at the Berkshire AGM in 2007 in Omaha, and Buffett was asked if he thought the financial system was in trouble, and he said no.

I agree that until the "Minsky moment" the markets behaved as if they thought there was no systemic danger. The timing caught everyone by surprise, but after Bear Stearns it should not have. We now have a pretty good idea of what happened from memoirs of people like Sheila Bair, then head of the FDIC. Different segments were aware of the fraud in their corner, but were not aware that every other segment likewise had dirty little secrets. There was a second Minsky moment when Paulson et al realized that they were the church board of deacons who accidently ran into each other outside the house of ill repute.

The mortgage originators knew that a good part of the loans being originated (liar loans aka "stated income loans", missing documentation, inflated appraisals) were bound to turn sour. But they figured the packaging banks would spread it out so everyone would take a little haircut which they could afford because everybody was making a killing on the fees. A good portion of the appraisal industry played ball with crocked up numbers to hit the target the real estate agents needed, and the rest generally lost most of their business to folks who did. The big banks who packaged the loans into mortgage backed securities figured that most of them were probably good, and besides, if losses wiped out the equity and mezzanine tranches, the insurance would cover everybody important. Besides, there was a lot of insurance premiums and fee income to be made with derivatives, credit swaps, and the like. You could even hedge by betting against the portfolios you were selling to investors! Of course the bond rating firms knew that a portfolio of private non-conforming mortgages had higher risk than FHA conforming mortgages had in the past, but they got paid by the firms packaging the mortgages into bonds for that AAA rating, good as US Treasuries! And they were insured! What could go wrong?

Anyone who paid attention to systemic risk knew a major financial meltdown was in the works. But everybody was making so much money, few bothered to look. Add to that the fact that it is bad form to publically forecast doom and gloom before the Minsky moment (which explains Berkshire's position, after all their biggest holdings have traditionally been insurance companies).

And of course there was the expectation that the full resources of the federal government would bail out the biggest players. The investment in Washington assured the required votes, even if the bailout only passed on the second round.

I blame the Fed for these crises, first with the tech bubble and next with the housing bubble. They weren't solely to blame, of course, as bubbles have many authors, but their targeting of asset markets certainly has had tremendous adverse effects. I worry about QE distorting markets and this all ending very badly, but admittedly, stocks going up and gold going down for two years in this manner makes me think I could be wrong and The Bernank is right.

You look at 1928 and the Fed operation to support the Bank of England, and it's hard to disagree with you. That said, the engine of destruction was and still is the insulation of large firms from adverse results of their own risk taking. We have literally rewarded firms for violating laws and precipitating a worldwide depression on the installment plan. Bubbles may be easier to form with accommodating monetary policy, but I don't see where tight money has prevented bubbles, especially ones predicated upon fraud.

I share your skepticism about the efficacy of Fed policies that micromanage too much. But when Congress has short circuited market discipline and has adopted a ruinous fiscal policy, it's hard to fault the Fed for trying. If only the Fed had the same zeal for its regulatory responsibility as it does for non-traditional monetary policy!