Here’s the asinine policy proposal of the day: Fed Should Commit to Future ‘Booms’ to Make Up for Major Busts.
> The U.S. Federal Reserve should commit to letting economic booms run on enough to fully offset collapses like the 2007 to 2009 Great Recession, former Fed chair Janet Yellen said on Friday, urging the central bank to make “lower-for-longer” its official motto for interest rates following serious downturns.
> Elaborating on how the central bank should think about what to do if rates have to be cut to zero again in the future and can’t go any lower, she said the Fed should promise now that it will keep rates low enough to let a hot economy make up for lost time.
> “By keeping interest rates unusually low after the zero lower bound no longer binds, the lower-for-longer approach promises, in effect, to allow the economy to boom,” Yellen said in remarks delivered at a Brookings Institution conference. “The (Federal Open Market Committee) needs to make a credible statement endorsing such an approach, ideally before the next downturn.”
What We Are Doing Already
The official policy is what we are doing already. May as well make a policy out of it.
The caveat, of course, is the Fed does not realize what it’s already doing.
Ass Backward
There is one more major flaw. It’s ass Backward. We have major busts because the Fed blew major bubbles.
The dotcom bubble arose when Fed Chairman Alan Greenspan held interest rates too low, too long with irrational fears of a Y2K disaster.
The housing bubble was a direct result of Greenspan holding rates too low, too long in the wake of dotcom and 911 disaster.
The everything bubble, which we are in now, was co-authored by Ben Bernanke and Janet Yellen. They held interest rates too low, too long in the wake of the housing bubble crash.
Seemingly Modest Proposal
Rather than blowing bubbles of increasing magnitude over time, why don’t we try sound policies?
Of course, that’s easier said than done. Greenspan did not recognize the dotcom bubble. Bernanke famously denied there was a housing bubble.
End the Fed
Ultimately, the only way to arrive at sound policy is to take the economic reins away from Fed charlatans.
We need to end the Fed and fractional reserve lending as well.
Mike “Mish” Shedlock
Pah. She wants to whipsaw the people into debt slavery faster.
The fed spending trajectory is the new QE, low interest rates are needed to keep the bull running and debts serviced, sounds like that 3% 2021 target isn’t happening after all, but I’m not surprised, when Trump said hey what are you doing to the fed, keep them low, we knew then what was going to happen. I knew we would never see 4% again but now we won’t ever see 3% again either, just my opinion of course.
These bubbles are just incidental to an intentional parabolic increase in debt. Look for more bail-ins. Sometime around 20yrs ago the bankers realized that the demographics are a time bomb and have positioned themselves for a huge wealth transfer via facilitating unsustainable lending/borrowing. There will be no jubilee.
Fixing problems created by unsustainable booms by creating even bigger and longer and more unsustainable booms.
GENIOUS…
Actually NO.
Totally INSANE
The housing bubble was a direct result of the demographics of the baby boom. One of the most important things to remember about interest rates is that you can’t push on a string. If there is no demand, the Fed can’t create it by lowering rates. If there is excess demand, the Fed can dampen it some, but they can’t make it go away by raising rates. Thus, the Fed’s impact is only at the margin. They can make a boom marginally greater, or marginally smaller, but they can’t “blow a bubble”. If it was that easy, Japan would have blown one by now; they’ve been trying to, unsuccessfully, for years.
Boomer demographics contributed just as much to demand for other goods, as it did for houses. Yet computer bubbles somehow failed to materialize…
Also, what does boomer demographics have to do with 20-something, recently border jumped, minimum wage strawberry pickers paying a million dollar for spec houses in the middle of a barren dessert?
Sans Fed and it’s implicit backstop for fractional reserving, you run out of Gold long before something as widespread as nationwide housing gets far into bubble territory. And whatever regional mini bubbles you may get, will self clear, with only explicit participants bearing the cost.
Never forget, there were booms and busts, and bubbles and crashes long before there was a Fed. You can read about economic good times and economic bad times in the Old Testament, for example, so they have existed for over 2000 years.
I have long heard stories about how harsh the depression of 1893 was. My great grandfather lost his grocery store, and had to move 500 miles where he could find a job painting the black paint on pots to feed his family. It boggles my mind that anyone could believe that the if you only get rid of the Fed, you can’t have booms and busts.
I do think that, if you look at history, the case that booms and busts are far, far more moderate with the Fed than without is pretty obvious. Granted, the depression of the 1930s they didn’t deal with very well, but I fault the ignorant tariffs of the time more than the Fed. On the other hand, the “depressions” of the late 1970’s and 2008 were both very mild compared to those of the 30s, the one in 1893, those prior to that.
Your comparison point to computers, is just silly, but I’m sure you know that. Obviously, real estate and stocks are investment assets, while computers are depreciable assets.
I do have reasons I don’t care for the Fed, but blaming them for bubbles is not one of them. As I said, if the Fed could cause bubbles, so could the Bank of Japan, which has been trying, and failing, to do exactly that for a very long time.
Central banks can and do create bubbles at will, the question is what bubble they’re blowing. If the Fed creates money and gives it (at practically no interest) to investment bankers to speculate, that money may never reach the general population, which seems to be what you mean by a bubble.
Here in the US they have created a bubble in assets like stocks and housing (even undesirable houses in my area can cost a million) and in luxury items. Most of this money hasn’t reached flyover country or regular people in a significant way.
Demographics were more tied to bubbles in the past, but that’s going away. The Boomers are the last moneyed US generation, so they are the last ones with the ability to affect a housing boom through genuine demand. From now on, we could either have more kids or import more people from south of the Rio and it won’t matter. Million dollar crack shacks will sell because of investors looking to park money in a real world asset, not because of people looking for a primary residence.
In Japan’s case, the main goal has been to keep the Yen low and they’ve generally succeeded. All they really want is to avoid another Plaza Accord.
One more thing- the destruction of central banks wouldn’t eliminate the boom/bust cycle, which is ironically one of the stated aims of central banks. However it would prevent bubbles from getting as ridiculously large as they are now. The 2008 recession was not “mild”, it would have been the end of the banking system as we know it if not for unprecedented intervention. Only by throwing many trillions of USD at the problem were we able to stave off the inevitable.
Central bank collusion around the world has allowed us the ability to paper over seemingly any problem, at least until the imbalances become so huge that the entire thing crashes down, or too many people get sick of everything and start to revolt. We’re probably going to see both of those events in the coming years.
Tengen, I agree that the 2008 “depression”, in the absence of the Fed, would certainly have resulted in the implosion of the banking system, in which case, the entire economy would have crumbled. My business, for example, would have been wiped out if the banks had crumbled, and had been forced to call all loans. The loans have since been paid off, but could not have been paid instantly in 2008 had they been called. Repeat that at thousands of businesses across the country, and 2008 would have been a typical depression, much like those before the Fed, with banks crumbling, calling loans, closing businesses, and millions of jobs destroyed.
The best anti-Fed argument that I can think of is this: In the absence of the Fed, depressions were more frequent, and much harsher. The result was to purge the excesses out of the market, and to teach individuals and businesses to operate debt free, so that they could survive. Because the Fed cushions depressions, and prevents them from reaching the severity that was always seen in prior centuries, both individuals and businesses feel it is safe to be in debt, and not have a nest egg set aside. The result is a country that spends money they don’t have, and which is enslaved with massive debt, and the debt will someday grow so large that we will have an epic disaster.
You’ll always have booms and busts. They’re basically either moodswings, or external shocks. But absent the Fed backstopping fractional reserving, they are random, non biased events. Hence manageable and largely irrelevant. Just put something aside for slower times, and you’ll ride them out.
There’s nothing wrong, per se, with an economy growing, or contracting, at varying rates. What there is something wrong with, is systematic transfer from some to others. It’s called theft. Always from those further from the Fed, to those closer to them. That’s what leads to indefensible, and ultimately unsustainable outcomes. Not random fluctuations in income and activity, which are in and of themselves economically utterly irrelevant.
Absent a Fed, those who borrow too much, and lend too much, both gain compared to the more cautious, during boomtimes. But then, will be forced to bear the entire brunt of their folly in the inevitable ensuing downturn. With no ability to pass some of the losses off on third parties. Since there is no ability for lenders to lend out, out of thin air, money they don”t have, but that are still somehow backed by The Full Faith and Credit of the US.
Lenders can still, and did pre 1893, lend out notes redeemable in specie. At that lender. And people can, and did, spend those as if they are/were money good. But those who don’t/didn’t trust that particular lender, or who just happens to be cautions, can just refuse to accept them. Hence will avoid any exposure to a bust of that lender. Rendering said bust irrelevant for him.
So, you’ll end up with bank runs, bankers swinging from lamp posts, ruined savers and all manners of other effects intrinsic to free people with differing risk appetites and time preferences attempting to optimize in an uncertain world, hence taking risks. Which is all fine and dandy. With increased risk, comes increased EXPECTED return. But also, greater variance in outcomes, such that the added risk and expected payoff, does increase the chance you’ll starve to death. Which is also fine. Keeping gamblers from starving to death, is not a commandment. Nor some a priori goal of “the economy.”
But “Don’t Steal” is a commandment. And stealing is what the Fed is there to facilitate. It’s all the Fed is there to facilitate: To steal from those who are cautious, prudent, accepting of lower expected returns and/or increasingly those who are just further from the Fed; in order to hand the loot to reckless gamblers, who now get to gamble with other people’s money, as well as to those who are closer to the Fed. Without the latter having to fully compensate the former for the risk, in the form of offering interest rates high enough to entice the cautious to partake in a gamble.
You could end the Fed tomorrow and it would not solve anything, as long as we have career politicians that don’t have to live by the laws they pass, spend money they don’t have, and increase taxes & fees to mask their malfeasance.
You also ignore global capital flows that are the driver behind markets. As we have seen, CB’s cannot make people borrow. The Fed will try to stop another stock bubble by raising rates, but it will only compound the problem, and when confidence collapses they won’t be able to attract money no matter how high they raise rates (as Turkey is currently demonstrating). Confidence is the key, and it will decline quickly when the truth is fully revealed.
Without a Fed, politicians cannot spend money they don’t have. Like anyone else, they’d have to get on their knees and dig, if they want more Gold than they already have. Doing something productive, for a change.
“The housing bubble was a direct result of Greenspan holding rates too low, too long in the wake of dotcom and 911 disaster.”
The housing bubble was also intentional. A new bubble purposefully replacing another. It wasn’t an accident that Bush’s Ownership Society came about. It was part of creating the bubble, along with Greenspan taking lending standards to ZERO.
Barnake and Ms Yellen are also complicit!
The institution of the Fed, or even more broadly, the ability of some privileged actor to create purchasing power in a way others are barred from, is the problem.
Socialism didn’t fail everywhere because Lenin, Stalin, Mao, Chavez and the rest were “complicit” in something “baad.” It failed because socialism is a failure. Ditto central banking. There can never be a “good” socialist leader. Nor a “good” central banker. No matter how many times The Man on TV says 2+2=5, 2+2 will never equal 5.
The one function of the fed that I believe should be retained is their ability to provide liquidity in times of financial stress. This was their original mandate and should still be their only mandate. It makes sense to me, despite all the calls for the abolishment of the fed. Providing liquidity in exchange for quality assets in times of a liquidity freeze up during mass panics should prevent the economy thats circling the drain from being completely flushed.
There is no difference between “liquidity” and “solvency.” You either can pay, or you can not. If not, liquidate your assets in bankruptcy.
There is nothing wrong with bankruptcy. No asset gets destroyed. A bankrupt farm doesn’t suddenly run out of topsoil. A bankrupt oil company doesn’t make oil in the ground disappear. A bankrupt car maker’s machines don’t seize up, nor does its workforce forget how cars are designed nor built. It’s all still there. Just as good as ever.
All bankruptcy does, is transfer control of the asset. From those who just proved themselves incompetent stewards, to someone who, at a minimum, hasn’t yet proven themselves so.
The only cost, is friction in the BK process itself. Which is what the focus needs to be on lowering. Of course, lowering friction is just another way of saying getting leeching lawyers, PR hacks, influence peddlers etc. out of the honey pot.
So, quick BK and no backstop, benefits those who can, at least conceivably, make use of the assets for productive purposes. At the expense of the currently incompetent who obviously could not. Along with the incompetents who lent money to the former incompetents. Along with the above mentioned frictional leeches, whose livelihoods depend on helping those two groups of incompetents grab and hang onto as much of productive people’s output as possible.
In short, quick BK helps innovators, workers and the competent. At the expense of ambulance chasers, lobbyists, banksters and currently wealthy and connected incompetents. Which, considering the latter group has been running, and increasingly also nominally owning, the country since the Fed’s creation, is why you don’t hear much about it.
Also, only in the vapid minds of uncritical, indoctrinated clowns, will an economy sans a central bank get “flushed” down some drain. I’ll personally guarantee it, by offering a positive number of micrograms of gold for every productive asset about to be “flushed.” A market clearing out malinvestment is a good thing. It frees resources from the grasp of proven incompetents. Making them available to those not yet proven to be. That’s a good thing. By definition.
Sounds good on paper but the fact is a bank may be technically slovent until an event occurs that freezes the financial system up. This may be more an economic psychology issue where no one wants to lend and thus a catastrophich death spiral occurs that really should not be happening. I completely disagree with your premise. There absolutely are times when this liquidity provided by the central bank is the right thing to do.
“By keeping interest rates unusually low after the zero lower bound no longer binds, the lower-for-longer approach promises, in effect, to allow the economy to boom,” Yellen said
It allows the economy to bust, as the boom causes the bust.
These officials will never understand, or perhaps don’t want to understand, that artificially depressed interest rates don’t help the real economy, they merely create financial bubbles and tons of malinvestment…Peak prosperity under Reagan saw the prime rate at 8%.
Japan or bust. 🙂
What I do not understand is how Japan has continued to print money to buy JGB’s and even stocks without any economic repercussions thus far . Their debt/GDP ration is about 2-3x., the highest in the industrialized world. Why does this work over there and why wouldn’t it work the same way here. Its unfathomable that a govt would act this irresponsibly but it seems to be working over there. It makes no sense, like an alternative economic universe. Even the fiscally responsible Swiss are printing money to buy securities trying to depress the value of their currency.
It does NOT work in Japan.
There is NO growth.
All Japanese economy is dependent on a mercantilist export lots more than you import model and this is enabled by low yen that is enabled by lots of government debt (that is mostly financed by selling that debt to Japanese people) and Japan’s central bank also prints money out of thin air and buys Japanese ETF’s and stocks with it so price discovery does NOT exist.
Switzerland also prints money and Swiss central bank buys EU area stocks with it to keep Swiss franc low and competitive to boost exports.
The problem in Switzerland is that its a lost cause. They cannot keep the franc from appreciating. I would think it would be better for them to let it remain strong and use it to buy foreign assets instead of stocks. Japan is a mess i know , no growth, but how come has there been no epic disaster yet? These policies seem insane to me.
As Mish is fond of pointing out, the most relevant money supply measure includes credit marked to market.
Marked to market credit in Japan has fallen so far from the bubble highs, that even the BOJs massively destructive policies have been overshadowed by it. At one point, you could supposedly buy the state of California, for what the palace grounds in Tokyo was “worth”….. While now, while still overpriced (in large part due to BOJ printing), Tokyo properties are no longer any more ridiculously priced than they are in many other cities. Ditto for other Japanese “assets.”
Preventing the clearing of all the malinvestment that resulted from the bubble, has dramatically reduced Japanese productivity and industrial vigor. (And contributed to the killing of Japan to a much greater degree than the combined firebombing and nuking America dished out at the end of WW2.., as it has rendered yet another generation or two unable to afford living space for children.) But so did the malinvestment itself, back when that was running rampant. It’s not as if the effect of money created by the central bank differs from money created as debt, on the back of an implied central bank backstop. It’s money supply growth (of the Mish kind), that misallocates resources: By stealing from the productive, and handing the loot to the connected and unproductive who have privileged access to the newly created money.
But during the BOJ Hail Mary period, most of Japan’s trading partners have seen massive money and credit growth as well. For most of them, greater than Japan’s. Which is why Japan hasn’t stood out as the sore thumb an excessively narrow focus on narrow money would lead one to expect. The BOJ turning Japan into economic shit, isn’t all that obvious when the rest of the world is now also an economic sewer.
Mish said: “Ultimately, the only way to arrive at sound policy is to take the economic reins away from Fed charlatans. We need to end the Fed and fractional reserve lending as well.”
It seems like a lost cause today to advocate that the economic reins be given to Adam Smith’s invisible hand and bank lending be strictly limited to deposits + bank assets. Hopefully you are incorrect about that being the only way to arrive at sound economic policy.
I would settle for: [1] Total Federal Government spending growth firmly capped at 2% per year except in case of imminent sovereign peril. Borrowing off-balance sheet not allowed. Lesser problems like an oil price shock or credit contraction cycle are not “imminent sovereign peril.” [2] Financial fraud results in prison time, not just fines, for those responsible, even when stock prices are going up.
Sadly fines alone would be a big step forward. As it stood in 2008, nobody admitted any wrongdoing and hid behind their companies, which paid the fines (often with bailout money, to boot). Going after individuals in any capacity would be a step in the right direction.
It’s mind boggling how corrupt our financial system is.
Ending the Fed would crash the markets some 90% so it will not happen before something else totally crashes the markets…
Greenspan was the guy who started it all in 1987. After that there was no looking back for him till 2007, 20 years later. Followed by “housing never falls with the courage to act” Bernanke and “no bust in my lifeterm” Yellen. This act of reducing interest rates to create a bubble and then raising it when it cannot be sustained resulting in a bust and sometimes collapse of the system like in 2007 is the only textbook that the Fed reads.
I hope that the next crash happens soon and people see them for the charlatans they are and hang them from the nearest lamp post.
Central bank syncronized around the clock money printing and buying virtually everything their is to buy along with regular limit increases on folks credit cards in yellen’s eyes can continue to acheive economic growth in perpetuity ,(until it doesn’t)
In theory there is no difference between practice and theory, but in practice there is. These ivy league educated arrogant assholes in ivory towers, who have collectively never worked in the free market have no business setting interest rates whatsoever. Interest rates should be set by the market.
Implicit in this “policy” is the idea that the policy makers are actually in the driver’s seat of the economy !! Ha ha. Driving by using the brakes and the gas pedal simultaneously !! Good for the car.
Let’s even the playing field… let the general public borrow at the Fed Window rate directly. Let’s skip right over Lloyd Blankfein.
Reductio ad absurdum Financialism: The more “inveeeestment,” the better. Never mind whether it is 100% malinvestment or not. Just do more of it. Call it a boom. Be dumb and uncritical enough to believe “boom” is some sort of direct synonym for “good.” “Bust” ditto for “baaad.” Nuance and even slightly deeper understanding?? Huh???
How these clowns have enough functioning grey matter to coordinate the intricacies of breathing, shall forever remain a mystery..
“Please keep rates lower for longer or at least until I die!”
-Yellen
I heard former Fed Chair Bernanke this week dispute the notion that Fed activities have had anything to do with the growing populist movement. Under Yellen’s strategy, income and wealth inequality will amplify at a greater pace than we have seen thus far. Does she really believe that Fed actions had nothing to do with a Ferrari recently selling for $42 million? She should be careful with her extreme and unproven prescriptions for controlling the economy as there are likely some very unexpected and negative outcomes that could arise.
Retards or crooks – kinda hard to tell. Probably some of both in positions of power at the Fed. End the Fed.
In general, crooks are crooks because they are too retarded to hack it in fair and open competition…….
Stupid is as stupid does
The Fed is like a box of chocolates. You never know what you’re going to get.
Yellen was nominated by President Obama to succeed Ben Bernanke as Chairwoman of the United States Federal Reserve. On January 6, 2014, the U.S. Senate confirmed Yellen’s nomination. She was sworn in on February 3, 2014, making her the first woman to hold the position.