Category Archives: Federal Reserve

Ed Harrison: Why Quantitative Easing and Negative Interest Rates Will Fail

While most NC readers are skeptical about quantitative easing and negative interest rates, those reactions are often aesthetic: they are so far away from any normal operation of financial markets that something has to be wrong with the idea. The problem is that while that instinct may be (and we’d argue is) correct, policy wonks who have drunk the Fed’s Kool Aid will treat those who have visceral negative reactions as simply having a case of novelty aversion, which means they can be ignored.

Ed Harrison provides comparatively short and accessible explanation of why QE and negative interest rates are bound to bomb. I encourage you to send his post to friends and colleagues who’d like to be able to discuss in a more rigorous manner why these approaches are deeply flawed.

Fed Testimony in AIG Bailout Trial: If It Walks Like Perjury and Quacks Like Perjury…

One of the most striking things about the testimony in the AIG bailout trial is the degree to which Fed officials play fast and loose with the truth. And I don’t mean the normal CEO version of having no memory of events that are inconvenient and very detailed recollections of things that boost their case. I mean statements that are flat out false.

Slimin’ Jamie Dimon Tells Howlers About Persecution of Banks, “Fortress Balance Sheet”

Jamie Dimon seems to think if he can tell his Big Lies long enough, he’ll be believed. In reality, the only ones who will buy his blather are his fellow members of the elite banker looting classes and their hired help.

Dimon’s latest opportunity to play Ministry of Truth came in an analysts’ call last week, when he tried presenting JP Morgan and banks generally as “under assault”. This was so patently ridiculous that it quickly elicited the scorn it deserved.

MMT Versus the CBO: Replacing the Budget Constraint with an Inflation Constraint

Yves here. MMT, or Modern Monetary Theory, is in the process of becoming vastly more visible by virtue of leading MMT advocate, Stephanie Kelton, becoming Chief Economist on the Senate Budget Committee on behalf of ranking member Bernie Sanders. And that means, as this post demonstrates, that MMT has gone through the “first they ignore you, then they ridicule you” stages and is now in the “then then fight you” phase. And one of the chief strategies of MMT opponents is to misrepresent it.

Richard Alford: The Fed’s Dual Mandate – “Pirate Code” or “Alice in Wonderland”?

How the Fed refuses to come clean about what it means by “dual mandate” and why that matters.

The Fed’s and Republicans’ War Against Dodd Frank and How That Preserves the Greenspan Put and Too Big to Fail

A new story by Gretchen Morgenson of the New York Times highlights how the Federal Reserve and the Republicans* are on a full bore campaign to render Dodd Frank a dead letter, with the latest chapter an effort to pass HR 37, a bill that would chip away at key parts of Dodd Frank. But the bigger implications of this campaign is how these efforts serve to limit the Fed’s freedom in implementing monetary policy. In other words, Fed general counsel Scott Alvarez is undermining the authority of his boss, Janet Yellen.

The CBO’s Bad Math: Putting $7 Trillion of Notional Value of Derivatives in Taxpayer-Backstopped Depositaries Will Cost Zero

So why did Elizabeth Warren lose her battle last month to stop banks from continuing to park $7 trillion notional value of risky derivatives like the credit defaults swaps in taxpayer-backstopped depositaries?

One of the less well-recognized reasons is that the CBO’s dubious analysis said it would not cost taxpayers a dime.

Fed Holds Fire on Disinflation Threat

Yves here. This post will not doubt give readers some grist to chew on in the ongoing debate as to whether the Fed is a very very clever bank stooge or not all that smart (and therefore a bumbling bank stooge, by virtue of cognitive capture). This discussion of the Fed’s blindness on disinflation, when commodities prices have fallen, oil is continuing its downward slide, and Europe has tipped into deflation, strongly suggests that the Fed is so desperately in need of believing in its own virtue that it will ignore any contrary evidence. That refusal to look at reality and to learn, particularly after how the central bank’s past ideologically-driven policies helped drive the global economy into the ditch, is a form of stupidity that seems to be drummed into orthodox economists.

“Summer” Rerun: Quelle Surprise! Hank Paulson and Goldman CEO Talked to Each Other a Lot!

As I like to say, I started out on Wall Street when it was criminal only at the margin. The unseemly coziness between Goldman and keygovernment agencies in critical episodes during the crisis illustrates how much standards of conduct have deteriorated.

Stephen Roach Takes the Fed to the Woodshed

While the Fed appears to be getting nervous about increasing (and long overdue) criticism for its undue coziness with banks, it has for the most part ignored opponents of its aggressive monetary policies. And for good reason. Most of them have been fixated on the risk of inflation, which is not in the cards as long as labor bargaining power remains weak. There are other, more substantial grounds for taking issue with the central bank’s policies. For instance, gooding asset prices widens income and wealth inequality, which in the long term is a damper on growth. Moreover, one can argue that the sustained super-accommodative policy gave the impression that Something Was Being Done, which took the heat off the Administration to push for more spending. Indeed, the IMF recently found that infrastructure spending pays for itself, with each dollar of spending in an economy with high unemployment generating nearly $3 in GDP growth. And a lot of people are uncomfortable for aesthetic or pragmatic reasons. Aesthetically, a lot of investors, even ones that have done well, are deeply uncomfortable with a central bank meddling so much. And many investors and savers are frustrated by their inability to invest at a positive real yield without being forced to take on a lot of risk.

Stephen Roach, former chief economist of Morgan Stanley and later its chairman for Asia, offers a straightforward, sharply-worded critique: just as in the runup to the crisis of 2007-2008, the Fed’s failure to raise rates is leading to an underpricing of financial market risk, or in layspeak, to the blowing of bubbles. He argues that has to end badly.

Combatting Eurozone Deflation: QE for the People

Yves here. This post describes why having the ECB give money directly to citizens would do a better job of fighting Eurozone deflation than the US version. The author starts from the premise that QE worked in the US, when there is ample reason to believe it worked only for financial institutions and a small portion of the population. Here, the ECB would engage in what amounts to a fiscal operation, which also would have dome more to stimulate the economy than the Fed’s QEs.

Michael Pettis: Is China Really Turning Away from the Dollar?

Yves here. This important post by Michael Pettis addresses whether the efforts of the Chinese to diversify their foreign investments away from the dollar will be a negative for the US. Pettis is skeptical of that thesis, and some of his reasons are intriguing. Like quite a few experts, he doubts that China’s role in sponsoring an infrastructure bank will be a game changer, and he also points out, as we have regularly, that the Chinese cannot deploy their foreign exchange reserves domestically without driving the renminbi to the moon (via selling foreign currencies to buy RMB), which is the last thing they want to have happen. A more surprising, but well argued thesis is that reduced Chinese purchases of US bonds would be a net plus for the US.

Get a cup of coffee. This is a meaty, important article.

Quiet Distress Among the (Ex) Rich

While the wealthy don’t get much sympathy on this website, the restructuring of the economy to save the banks at the expense of pretty much everyone else has hurt some former members of the top 1% and even the 0.1%. And it’s also worth mentioning that some of the former members of the top echelon occupied it when the distance between the rich and everyone else was much narrower than it is now.

The fact that economic distress has moved pretty high up the food chain is a sign that this recovery isn’t all that it is cracked up to be.

Jeffrey Sachs Channeled His Inner Bill Black – and Obama and Holder Ignored Him Too

Yves here. This post by Bill Black serves to illustrate the difficulties of effecting change. As much as Black in particular has been a forceful and articulate advocate for tougher bank regulation and prosecution of executives, arguments like his get at most polite lip service from the enforcers. Recall that Black is far from alone. Others who’ve called for a more tough-minded approach include Charles Ferguson of Inside Job, Eliot Spitzer, Neil Barofsky, Joe Stiglitz and Simon Johnson.

We are seeing more and more of the elite willing call for more aggressive measures to combat bank misconduct.

Who Will Wind Up Holding the Bag in the Shale Gas Bubble?

We’ve been writing off and on about how the sudden fall in gas prices has been expected to put a lot of shale gas development on hold. In fact, quite a few analysts believe that one of the big Saudi aims in refusing to support oil prices was to dent the prospects for competitive energy sources, not just renewables like wind and hydro power, but shale gas.

Even though OilPrice reported that US rig count had indeed fallen as oil prices plunged, John Dizard at the Financial Times (hat tip Scott) gives a more intriguing piece of the puzzle: the degree to which production is still chugging along despite it being uneconomical. The oil majors have been criticized for levering up to continue developing when it is cash-flow negative; they are presumably betting that prices will be much higher in short order.

But the same thing is happening further down the food chain, among players that don’t begin to have the deep pockets of the industry behemoths: many of them are still in “drill baby, drill” mode.