Reader Valissa pointed to an article at Bloomberg which looks like an effort at hagiography gone flat. Titled “Central Bankers Worldwide Race to Save Growth in 72 Hours of Policymaking,” it tries to perpetuate the myth of the overlords of the money system as all powerful, concerned with the public good, and competent. But as we know, they are increasingly politicized, hostage to ideology, unduly concerned with the pet wishes of banks, and tend to deny the existence of problems until they are acute.
Look at this impressive list of actions:
In the 72 hours after a Group of Seven conference call on Aug. 7, the Federal Reserve pledged to keep interest rates near zero through at least mid-2013, the European Central Bank intervened in bond markets and the Bank of England indicated it’s ready to add more stimulus if needed. Japan signaled renewed concern about the yen and Switzerland yesterday stepped up its fight to curb an “overvalued” franc.
Lets see….the FOMC had a regularly scheduled meeting and issued a statement that had three dissenters who wanted zero interest rate language that was open ended, meaning they though conditions were so lousy that they thought it was better not to commit to a time frame.
The ECB did step into the markets to buy Italian and Spanish government debt, but as far as we can tell, the intervention on Monday was the biggest and wasn’t consistent enough to put fear in the hearts of banksters, and their actions on Tuesday and Wednesday were smaller. Their hand was forced by the widening of Italian and Spanish bond spreads the week prior, when the EBC had indicated it was not going to buy that debt. In other words, markets took spreads to incipient crisis levels, the ECB took action only because the alternative looked worse. This isn’t pro-active or heroic, folks. And as various commentators have said, the EBC needs to be prepared to buy hundreds of billions of dollars of Eurobonds if it is to hold off the existential threat to the Eurozone. One of our colleagues with good contacts at the ECB has said it is too deeply steeped in Bundesbank sensibilities for that ever to happen.
The problem is that we have the same central bankers who steered their monetary systems into the iceberg in the financial crisis still in charge. Admittedly, the Bank of Japan is blameless, since its banks unlike its Eurozone peers, did not act as a ready market for toxic US subprime-related debt. The Bank of England, which was admittedly caught flat footed when Northern Rock failed, has been willing to stare down the banks, in sharp contrast with the ECB and the Fed, and has advocated, in no uncertain terms, having the banks broken up. Aggressive lobbying by the banks and the opposition of the Treasury served to check this initiative. And the Swiss central bank is raising capital levels to 20%, which is forcing accident-prone UBS to consider locating its investment banking business in another domicile.
Look at the market action today. The Euromarkets fell into a tizzy over rumors of a downgrade of France. Rating agency affirmations of the French AAA didn’t help. European bank stocks were hammered due to rumors about wobbles at SocGen, France’s second largest bank, and bank CDS spreads widened. Eurodollar interbank funding is drying up. US money market funds had been major suppliers of dollar funding to Eurobanks, and they have been pulling back. Chris Whalen also reported that US regulators are telling US banks to reduce credit exposures to Eurobanks. So much for the sort of central bank market-saving interventions that Bloomberg wants its readership to believe in. This regulatory intervention is like throwing gas on a smoldering fire.
Those market upheavals transmitted to the US markets, and banks here took it on the chin too. Ban of America fell 10.9%, Citi 10.5%, JP Morgan 5.6%, and our new watchlist candidate, Bank of New York, 7.8%.
We have the 5 year Treasury yield at an all time low of 0.9%, which our Jim Haygood describes as “awesomely pathological”. Even with the yuan at a 17 year high and gold at $1788, the dollar has not fallen out of bed, as some have anticipated. Even with yesterday’s decline, it is still well within recent trading ranges:
More as of this hour: S&P futures are up over 20 points (don’t you love these schizophrenic markets), and Asian markets trimmed earlier losses. The Nikkei is now down 0.63% and the Hang Seng down 0.93%.
But the bigger issue is that central bankers are not deserving of praise. They screwed up massively in the runup to the crisis, and only the central banks with strong institutional memories, namely the Bank of England and the Swiss National Bank, understand what the priorities are, which is preserving the integrity of the system, not particular players. Instead, the US regulators in particular have moved heaven and earth to try to prop up asset prices to keep the current incumbents looking solvent. That has not only entailed interventions that has made the public leery, such as QE 1 and 2, but the widespread belief that the authorities are intervening on a regular basis to keep stock indexes from falling out of bed (if so, that program has not been as successful as usual). These actions have all served to undermine faith in financial markets at a time when credit is a market based phenomenon, and conditioned too many participants to be nervous longs, investors with no conviction, happy to ride a trend, but quick to try to exit if conditions deteriorate.
There was no pretty path out of this crisis, but the better way was to get tough with the banks and use more aggressive fiscal stimulus to offset the contractionary impact. Part of why were are where we are is that remedies have been left to central bankers, and more liquidity simply fuels speculation if businessmen and consumers are nervous about conditions in the real economy.
Not only are investors more nervous about markets that are more and more subject to official intervention, but the Fed has come under increasing scrutiny from the Tea Party, which means the Bernanke put might not be there in full when investors have come to rely on it. The markets are beginning to feel like a patient with an infection that is resistant to antibiotics, and the medics are out of remedies. But all the Bloomberg of the world can do is cheer the officialdom, in the hope that placebo effect might provide some relief.
Update 5:30 AM: Holy shit. The perils of not having a real Bloomberg access. I have to depend on the kindness of friendly hedgies, in this case reader Scott. German CDS spreads have risen above UK CDS spreads and the Swissie has shot higher. The crisis has officially spread to the core.
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dma’am it sounds like you feel in terms of options that roubini’s prescription wouldn’t do it. (regardless of likelihood.)
http://www.ft.com/intl/cms/s/0/f443f640-c115-11e0-b8c2-00144feabdc0.html
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So can we avoid another severe recession? It might simply be mission impossible. The best bet is for those countries that have not lost market access – the US, UK, Japan, and Germany – to introduce new short-term fiscal stimulus while committing to medium-term fiscal austerity. The US downgrade will hasten demands for fiscal reduction, but America in particular should commit to look for significant cuts in the medium term, not an immediate fiscal drag that will worsen growth and deficits.
Most western central banks should also introduce further QE, even though its effect will be limited. The European Central Bank should not just stop rate hiking: it should cut rates to zero and make big purchases of government bonds to prevent Italy or Spain losing market access – the outcome of which would be a truly major crisis, requiring doubling (or tripling) of bail-out resources, or debt workouts and a eurozone break-up.
Finally, since this is a crisis of solvency as well as liquidity, orderly debt restructuring must begin. This means across the board reduction on the mortgage debt for the roughly half of America’s households that are underwater, and bail-ins for creditors of banks in distress. Greek-style coercive maturity extensions, at risk free rates, must also come for Portugal and Ireland, with Italy and Spain to follow if they lose market access.
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Roubini was very astute in the runup to the Big One but he has become a celebrity and frankly is really lost in the post crisis phase. He is too often the mouthpiece for bad conventional wisdom. I quoted him a ton in 2007 and 2008 and have found him to be pretty useless now.
I’ve had access to Roubini’s stuff since 2009 and I completely agree with you. Not really worth the time to read IMHO.
File: Roubini The Wandering Jew
I think he’s preoccupied with trying to figure out where to move next. He started out life as an Iranian Jew. Then became an Italian Jew. Finally thought he had it made as a New York Jew, then this.
Moving to Miami is out because that’s still in the states.
All the low hanging fruit has been picked.
I fully agree with the above entry. If you may, I like to show the actual way things look like from a Swiss perspective by giving a translation of yesterday’s Tagesanzeiger (the most popular new paper in Switzerland):
Quote
National Bank throws even more Swiss Francs onto the markets
Yesterday evening the Swiss Franc (chf) and the EURO were close to pari. The Swiss Nationalbank (Swiss Fed) reacts to the currency turbolence and increases the volume of Swiss Francs by 40 billion.
The Swiss National Bank (SNB) wants to help the economy suffering under the strength of the Swiss Franc for the second time within a week. SNB adds additional Swiss Francs to the financial markets and hopes to weaken the Swiss Franc as a result. The banks are encouraged to lend in the form of sight deposits upto chf 120 billion and at very low interest rates. Only a week ago, the SNB had increased this volume from chf 30 to 80 billion. Fundamentally, the SNB starts the printing press with this actions, with the risk, that the inflation rate might increase in Switzerland.
With the second announced measure i.e. foreign currency swaps, the SNB buys foreign currencies from the banks and provides them with Swiss Francs. The SNB implements this monetary policy strategy the first time again since 2008. At that time the world stumbled into the financial crisis.
Swiss Franc remains strong
Unlike a week ago, when the SNB moved the base rate further towards zero with the aim to reduce the attractiveness of the Swiss Franc for investors, no serious effect could be registered on the currency markets.
The EURO who traded close to 1:1 to the Swiss Franc, went shortly to 1.05 chf, and settled after at 1.04 chf. Prior to the announcement the rate was 1.03 chf.
Also the dollar whose value sank close to 70 Swiss Cents during the night, did not increase much above 73. On Wednesday the rate was chf 0.7258.
Criticism by Experts
Experts assessed SNB’s renewed attempt to weaken the Swiss Franc as insufficient. Economists are missing a stronger engagement in favor of the currency. Proposals range from issuing a target exchange rate for the EURO by the SNB to purchases of other currencies by the SNB, even though such a step is controversial and disputed.
The foreign currency swaps are expensive, the research department of Credit Swiss wrote in a commentary on Wednesday. For the experts of Credit Swiss, it is questionable whether these transactions will weaken the Swiss Franc again.
A week ago, the EURO did cost chf 1.07. The measures did not show the attempted effect. The worldwide sharp falls in the stock markets in the wake of the downgrade of the US credit rating pressured the value of the EURO in relation to the Swiss Franc factually to pari at this point in time, despite the actions by the SNB.
Possibly new measures by the SNB
The SNB justifies its latest measure with the fact that the continued flight of investors to the safety of the Swiss Franc is representing a threat to the Swiss economy. The SNB considers the overvaluation of the Swiss Franc to be out of bounds.
As a result of this, significant risks to the stability of prices exist according to the SNB. The SNB seems to keep additional measures ready for implementation as well: The SNB announces also to implement additional measures if required.
Unquote
Based on the way the Government is informing the public in the news, I can recognize how scared they are and not really know how to solve the problem. My personal observation (and when looking at the price of gold) is that the Swiss Franc did not really appreciate much but that the EURO and dollar depreciated seriously. But nobody should be surprised about that considering the policies implemented (saving everybody instead of facing overindebtness straight on and stopping bail outs) in the EURO area and in the US.
If one could get together all those targeted exchange rates of the various countries playing marbles here and build an algol to play the margins…..hmmmm.
Think of the stupid opportunities going forward and laugh the global inherited rich out of control of our society.
Fiat currencies provide one of the few real-world examples of the oft-posited ‘race to the bottom.’
Switzerland was the last nation on earth to end its currency’s partial gold backing … in the Eighties, if I recall. The reason was the same as today — CHF appreciation got so out of line that it was snuffing exporters.
Now, like the central bank of Argentina, the SNB is buying forex and paying for it with newly-minted thin-air CHF, which are supposed to dilute the CHF’s exchange value.
Pursued with sufficient vigor, such a policy may work. But it’s a dismal example of defining deviancy downward, such that every central banker is obliged to sink into an ink-stained Bernankian squalor.
“,,,sink into an ink-stained Bernankian squalor”
Stolen. I may not have a chance to use it often, but I will use it with relish.
“one of the few real-world examples of the oft-posited ‘race to the bottom.’”
What in the world could possibly be your definition of “few”? I’m thinking it must be something akin to my definitions of “voluminous”, “abundant” and “extensive”.
Bizarro World, how I’ve missed thee!
why not try negative interest rates for awhile?
it certainly is a race toward the bottom. And with politicians and bankers at the wheel in every country, it’s going to be one ugly race.
The Real Powers (Bankers & Big Business) are not trying to save the system, rather, they are deliberately trying to crash the system (or allowing it to crash) in order to get rid of Obama. Didn’t anyone notice how this crash has been timed to coincide with the election cycle? When the markets collapse in August or September, the markets inevitably end up deep in the red, due to forced tax-selling. If the Dow ends the year below 10000, in addition to all the other problems in the economy, Obama is toast. And didn’t anyone notice that his anointed successor, Texas Repub Gov. Rick Perry, emerged as a serious candidate just this week?
It may seem counterintuitive that the Real Powers would want to dump Obama, since he has been such a useful tool and done much good work for them. But a Republican like Perry would allow to proceed unimpeded as they completely finish their agenda:
– no tax cuts of any kind
– large reductions in SS
– capped vouchers for Medicare, and further cuts in reimbursement, which would gut the system
– minimal reductions in Defense spending
– another round of bailouts for the banks, QE3, complete government backstopping of all banking and insurance debts
– further reduction of laws and oversight on Big Business by the government
It doesn’t matter that much to the Real Powers if the economy collapses, it only matters that they are protected and the public fisc – the Little People – pays for it.
There was no particular reason for the S&P downgrade, and no good reason why it should have triggered a collapse. The Real Powers simply used it as a pretext (if they didn’t actually engineer it) to pull the rug out from Obama’s economy. The next president, a Republican, will give them everything they want.
I made much the same argument yesterday.
The Fed has ensured that Obama will be gone by 2013. Economic recovery and unemployment will languish until after this political-business cycle runs its course. Of course, with the Republicans controlling all three branches of the federal government the adherents of austerity will steamroll US into DEPRESSION on the premise that such creative destruction will benefit US in the long run. The “willing penitents” will accept this purgative as penance for past sins – sins that many of them had no hand in. In fact, expect to hear that more tax cuts and deregulation are what are needed to cure what ails US.
Perhaps more importantly is where is MMT in all this? Nobody is listening… it has been effectively silenced or so marginalized as to be irrelevant. God is already dead and Keynesianism soon will be. Talk of additional fiscal stimulus is DOA. So when it’s all said and done, the squabbling will take place on the RIGHT because the LEFT and the CENTER have been eliminated from political discourse.
Gentlemen;
Do I hear you all aright? Obama as a (gasp!) Democratic president? If you hadn’t heard, the NC Intelligensia has pretty much demonstrated that Obama is a Republican in Democrats clothing.
The US was gently nudged toward Depression way back when the Bushies started the bank bailout programs. Yes kids, Bushs’ crew set that all up. Obama just continued and amplified it, hence, exhibit A in our Quisling Democrat narrative.
As for all the quibbling being on the right; Obama had several distinct opportunities to take strong action against the Doom on the Horizon. He chose to, instead, continue the earlier, Republican Administrations policies: War on Terror, Quantitative Easing, Defunding of Regulators, Assault on the Constitution etc… Yes, the Right is having a knock down drag out fight for internal control. This would be the perfect time for a real populist administration to attack. Instead, we get craven acquiescence. So, yes, all the quibbling is indeed on the Right, between the Tea Partiers and the Administration. It is not that the Left has packed up and gone home. Rather, they are the bitter victims of a ‘Bait and Switch’ game.
As for ‘Creative Destruction,’ have you been watching the news from Europe lately. Indeed, the news from Wall Street? I know how it’s affecting my home town here in the Deep South; a rise in begging and petty crime. Creative Destruction my a—!
So, I’ll end with a steal from Shakespeare. “A curse on both your Houses, and Administration too!”
Would you be “happier” if I said he was to the right of a Southern Democrat?
You’re stuck on this notion of New Deal Democrats that began to wane in 1976 – Jimmy Carter’s election, if not sooner. When are you going to realize that the whole goddamn country has moved to the RIGHT and the Democrats had to move similarly. They are not stuck on this nonexistent political continuum – you are and so are many NC intelligentsia. It’s long gone, and it ain’t coming back soon, if ever.
Dear MMAO;
I had forgotten the emotional baggage the term ‘Intelligensia’ carried. As for the country going to ‘the Right.’ Which country do you mean? The Country Club Country, or the Par Three Country? No, I take that back. It should be Private Personal Golf Course Country versus Everyone Else. Down here “On the Street,” there is a huge wave of anger building up as ordinary people see their own, and their childrens lives becoming ‘less affluent’ while various ‘elites’ flaunt their wealth and power. In the ‘good old days’ ‘regular’ people loved to watch the antics of the ‘rich and famous’ secure in the belief that anyone, given hard work and a little luck, could join those exalted ranks. Thus, they ‘bought into’ the Myth of the American Dream. Now, the ‘structural divide’ between the Neo Aristocrats and the peasants is out in plain sight, and the people as a class are waking up to the ‘awful truth.’
Whether this turns out to be a Reichstag Moment or a Finland Station Moment. I don’t know. God help us, we’re going to need it.
“When are you going to realize that the whole goddamn country has moved to the RIGHT and the Democrats had to move similarly.”
No, the the whole country didn’t move to the right and the D-Party didn’t “have” to “move similarly.”
The upper middle class portfolio building liberal pundit intelligentsia and liberal policy entrepreneurs who sought and continue to maintain CONTROL-FREAK level control over the D-Party voluntarily moved right because that’s where they perceived their OWN personal(short term) interests to be, while culture war bagging the remaining D-Party stooges who are still looking for FDR and wondering who just mugged them.
Maybe you think this swindle can be propped up, but since more and more of the remaining stooges are finally awakening to the con, I kind of doubt it.
Now might be a good time to quote Hannah Arendt:
“What makes it so plausible to assume that hypocrisy is the vice of vices is that integrity can indeed exist under the cover of all other vices except this one. Only crime and the criminal, it is true, confront us with the perplexity of radical evil; but only the hypocrite is really rotten to the core.”
The culture bagging Democrats moved to the right then as well, right? I mean they – Reagan Democrats – voted Republican right? But they were suckered by the upper middle class portfolio building elite is what you’re saying, right?
So when do two rights make for a “working class” in rebellion? The TEA Party? I see no such evidence on the LEFT.
I do see whites vilifying people of color and blaming them for the country’s ills. In other words, racial and ethnic conflict are alive and well but class conflict has yet to surface in any organized fashion. And so long as whites and people of color are at each other’s throats rather than united against their common enemy, the situation will not change soon. Until we see the common enemy…
Both you and Ambrit appear to subscribe to the immiseration thesis. I don’t. Atomization, demoralization, and depoliticization all work against class formation. The spirit of a people can be broken. Whether it can be rekindled is another matter. And I certainly don’t believe this is going to play out according to some Marxist blueprint.
I base these observations on my large extended family and friends over four decades – all of us middle/working class white collar and blue collar folks, many of whom vote Republican because they will stick it to people of color. Democrats will take THEIR TAXES and give it to the latter. I’ve listened to them carefully for years. Yes, they’ve been played and some are beginning to realize it. But their anger and frustration are not class consciousness – not yet at least.
Dear MMAO;
I take your point and admit inability to predict when and if such “class consciousness” reaches critical mass. What I do see is a well supported Rightist Media Project keyed to forestall and coopt the ‘glimmerings’ of serious class awareness. Mayhap this has always been the case. I’ll not go as far as to posit an ‘Illumanati’ pulling the strings from behind the curtain. However, processes like this do tend to follow recognizable rules and, for want of a better word, behaviours. The best reasoned arguement about this tendency in group behaviour I’ve read is Prof. Feynmans addendum to the Space Shuttle Challenger Accident Report. I’m not subtle enough to spot these trends in advance, alas. I’m like most people. It’s not “Watch out for that truck!” It’s “Did anyone get the number of the truck that hit me?” As the example of the Depression has shown, it might take society as a whole being thrown under the bus for us all to do something usefull for a change.
Keep the faith baby. It won’t be easy, but someone has to do it.
I just have one question, with the recent news announcements on BAC yesterday, selling back of loan servicing, and the stake in a China construction bank, are we seeing the beginnings of the winding down of BAC?
The servicing move is misunderstood. All the banks have been trying to dump their servicing since at least early 2009. I advised some hedgies then to avoid it like the plague. It makes a thin but decent profit in good times and is a loser now, both on a profit and a cash flow basis.
BofA won’t escape past liability (no one is dumb enough to eat that). All these “sales”, like of Goldman’s Litton to Ocwen, were financed. There is no way Ocwen could afford to or did pay the nominal sales price for Litton.
As to this action, it was pretty clearly misreported by the WSJ and Fannie denied it was a sale. It really looks like Fannie is terminating BofA but dressing it up to save face for BofA.
I can’t comment on the China action, I haven’t looked at it. But it makes sense that BofA would sell small ops where it can at a profit despite Moynihan’s denials that the bank needs more capital.
‘As various commentators have said, the ECB needs to be prepared to buy hundreds of billions of dollars of Eurobonds if it is to hold off the existential threat to the Eurozone. One of our colleagues with good contacts at the ECB has said it is too deeply steeped in Bundesbank sensibilities for that ever to happen.’
Perhaps, but old-school Bundesbankers would have balked at Monday’s ham-handed intervention, which had all the finesse of a drunken elephant trampling a village. As bond wallah Michael Ashton astutely commented,
http://mikeashton.wordpress.com/
At mid-morning today, Societé Generale is getting birch-whipped by another 6 percent, whilst Italian deposit takers UniCredit and Intesa Sanpaolo languish in the sick ward. Another day, another bloodletting.
As I said two weeks ago, when the ECB megalomaniacally insists on pegging insolvent debt at noneconomic levels, it becomes our fiduciary duty to punish central bank stupidity by selling everything that isn’t pegged by the deranged central planners.
Liquidate France; liquidate Italy. Liquidate banks, liquidate the DAX … it will purge the rottenness out of the system. High costs of living and high living will come down. Europeans will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people. [/Andrew Mellon schtick]
Yes, European stocks will keep on dry-heaving over the porcelain throne until Jean-Clodhopper Trichet leaves or European equities go to zero, whichever comes first. Take your pick, banktards — je ne give a damn pas!
German CDS surging? I have long wondered what a CDS covering US or German debt really means. Which counterparty will be able to pay for this event? I would assume that the German CDS would be much higher if it wouldn’t have the tiny flaw that the insurance is worth something only until the insured event occurs.
Don’t know what abject capitulation would look like but I for one would like to see it.
For the Elizabeth Warren aficianados, one needs to ask whether she has any opinions on the current stock/bond market and currency market schizophrenia. Paul Krugman, Yves Smith, Mark Thoma among others, do. The current loafer-in chief hasn’t a clue. Better vetting, the sunshine of experience and the votes cast in the Senate are a better harbinger of a good vs. a bad chief-executive. If people had only paid attention to that dear man, Ralph N.
Isn’t funny how QE2 ends and the traders don’t have a clue how to value the market anymore? It’s just like the volatility of 2008-2009.
Unfortunately for us, Bernanke determines deflation based on the S&P 500, so QE3 here we come.
Maybe they have saved the world…Dow up 300+, topping 11,000 again.
I think the trigger was good initial jobless claims numbers.
Some one hundred and fifty years ago, one of the last honest optimists in the Enlightenment tradition wrote, “[The modern banking system] does away with the private character of capital and thus contains in itself, but only in itself [a Hegelian locution for “implicitly”–solo], the abolition of capital itself . . . . But at the same time, banking and credit thus become the most potent means of driving capitalist production beyond its own limits, and one of the most effective vehicles of crises and swindle.”–K. Marx, Capital, vol. III, ch. 36. It should be noted that this volume was left in an incomplete state by Marx, and was published as such after his death. Apropos Yves’ “irony alert”: In the same chapter Marx referred to “the irony of history, which turns pious wishes into their very opposite during the process of realization.” –Alas, the last refers also to the sustainability of the remedies offered by Yves herself; which, while undoubtedly better than those served up by the U.S. conventional wisdom, will at best prolong the existence of a system (capitalism) that has already failed humanity (and humanity’s biosphere) and is doomed to periodic failure (crises, etc.) on its own terms.
“Central Bankers Worldwide Race to Save Growth in 72 Hours of Policymaking”
Did I miss something? What growth? Or did the writer have a lisp and meant to say Gross, as in Pimco’s Bill Gross?
Let’s see: How to put this? American corporate capitalism, supported by central banking, is a gigantic 230 foot snake that started eating on its tail about 230 years ago. At the rate of one foot per year, that puts us at the the last foot to go–the head of the beast itself.
Theoretical mathmeticians know that complexity begets order and chaos. Ergo, the human species is in for the dance of Shiva(chaos). Raw survival looms first for those at the bottom, then the move begins upward.
“[FOMC] statement that had three dissenters who wanted zero interest rate language that was open ended, meaning they though[t] conditions were so lousy that they thought it was better not to commit to a time frame.”
Yves, I think you have made an interpretive error in regards to the FOMC dissenting opinions — those of Fisher, Plosser, and Kocherlakota.
Despite all three having gone along (read voted in agreement to stay the course, and not rock the boat, during those FOMC meetings falling within the QE2 policy period), the first two are not particular supporters of further monetary easing, and the third could be described along the lines of a soft hawk.
Just after Bernanke’s July 13th Congressional testimony (which really only provided us what everyone already knew; that the FED _might_ act with further policy measures if conditions warranted it … yeah, I know, surprise, surprise!), Fisher commented that:
“I firmly believe that the Fed has already pressed the limits of monetary policy. So-called QE2, to my way of thinking, was of doubtful efficacy, which is why I did not support it to begin with. But even if you believe the costs of QE2 were worth its purported benefits, you would be hard pressed to now say that still more liquidity, or more fuel, is called for given the more than $1.5 trillion in excess bank reserves and the substantial liquid holdings above the normal working capital needs of corporate businesses…US banks and businesses are awash in liquidity. Adding more is not the answer to our problems.”
The take away from that was that, at that time (all so long ago at what, 4 weeks now?), further monetary easing was seen politically unpalatable not only within most circles, but even within the ranks of the FOMC. Hence, as many commentators observed, the bar set in place, and which needs to be crossed before further action can be initiated, was/is failrly high. (See P. Boockvar http://www.ritholtz.com/blog/2011/07/feds-fisher-says-no-more/ ; E. Harrison http://www.nakedcapitalism.com/2011/07/the-fed-is-on-hold.html ; B. McBride http://www.calculatedriskblog.com/2011/07/misc-greece-downgraded-did-bernanke.html ).
Speculation through the lead up to to the August 9th FOMC meeting consisted of what steps the FED might take given the recent global slow downs and market swoons. Many of the liquidity crack junkies were expecting (or was that hoping ?) that the FED would deliver a new hit of QE, though that was pretty unlikely given the aforementioned context. However, many watchers did correctly guess that the FOMC would provide further guidance on how long they would hold an accomodative policy ZIRP. Lets review their message:
The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
The key words here, and which form part of the basis for my criticism of your interpretation, are: “currently”, “likely”, “at least”. Contrary to what you have written, Yves, the FOMC delivered just that – an open ended commitment. As E.Harrison called it, the FED had engaged in “permanent zero” (http://www.nakedcapitalism.com/2011/08/permanent-zero-is-official-policy.html).
This setting of a duration on ZIRP of, currently_likely_at_least, two years flies in the face of the likes of Fisher and Plosser. Conditions aside, it is likely the very extention and open-endedness of the FOMC pronouncment which they are dissenting too. Further, if you follow Harrison’s line of thought, that this was quite possibly “the first salvo in a renewed easing campaign by the Fed”, then you can see why three hawkish members of FOMC dissented – knowing full well that the next steps coming from the FOMC are to be even further accomodative monetary policy (with QE3 and possibly more drastic policy measures; e.g. http://www.creditwritedowns.com/2011/08/nominal-gdp-income-targets.html to come in the near future).
Anyway, that is the extent of my criticism that I believe you have made an interpretive error.
Just for sake of thoroughty, I would just like to draw attention to more of what E.Harrison wrote: “Two months ago I said political concerns meant the Fed would probably not go full QE until 2012 … Again, politically the Fed is constrained. But, my call on 2012 is starting to look wrong because the global economic environment is weakening quickly. If the economy deteriorates further, expect the timetable to speed up”.
Part of me agrees with Ed here – the Bernanke doctrine (see the 2002 “making sure it doesn’t happen here” speech which has largely been accurate in terms of a playbook) calls for hitting hard and quick. So, perhaps the latest economic slow down and asset price waterfalling will spur the chairman to act, say by another Jackson Hole (Part deux!) telegraph.
But the other part of me says – nope. He’s going to make them wait till everyone is begging for the FED to act i.e. he’ll wait until it is again politically palatable, and this would include waiting until Jan 2012 when the voting members of the FOMC become more open to further easing (i.e. will tow the company line and will be non dissendental) when upon the yearly change in FRB president composition occurs (at which point, only Lacker looks like a potentila objecter ). As Jon Hilsenrath at the WSJ (whom is quite often used as a medium to lift FED trial ballons off the ground and signal policy shits) recently wrote, Bernanke is “reluctant to pull them out until he is sure the audience is ready” (see http://online.wsj.com/article/SB10001424053111903454504576490752107376100.html ).
Is this evidence of Bernanke showing he knows how to play ball? Is he going to purposely let Rome burn for now? Prior to yields on the long end of the curve really coming in, I would have strongly suspected he’d have been happy to undertake a modern day operation twist (which of course, is just shifting the composion of the FEDs balance sheet, not expanding it). Which, if the eoconomy continues to slow, would probably also be viewed as the equivalent of undertaking a deck chair rearrangement on the Titantic. Now, the “poor guy” might just feel compelled to have to say damn the torpedos and slam the chadburn to full ahead.
PS – I hope this doesn’t double post … I tried earlier but it didn’t go through (or maybe posts are vetted first?)
” Yves, I think you have made an interpretive error in regards to the FOMC dissenting opinions — those of Fisher, Plosser, and Kocherlakota…This setting of a duration on ZIRP of, currently_likely_at_least, two years flies in the face of the likes of Fisher and Plosser. Conditions aside, it is likely the very extention and open-endedness of the FOMC pronouncment which they are dissenting too. Further, if you follow Harrison’s line of thought, that this was quite possibly “the first salvo in a renewed easing campaign by the Fed”, then you can see why three hawkish members of FOMC dissented”
Posting a follow up for posterity. All three dissenters (evidently, as I had actually missed seeing Kocherlakota’s own comment) have now provided some insight as to their objections. The following links address these reasons:
* http://www.marketwatch.com/story/fisher-explains-fed-dissent-texas-job-picture-2011-08-17
* http://www.ritholtz.com/blog/2011/08/why-plosser-said-no/
* http://www.ritholtz.com/blog/2011/08/fisher-gives-reason-for-his-dissent/
More discussion on the dissent:
http://ftalphaville.ft.com/blog/2011/08/18/656531/the-fed-dissenters/