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Bernanke Knew Back in 1988 that Quantitative Easing Doesn't Work
Ed Yardley notes:
Two
economists, Seth B. Carpenter and Selva Demiralp, recently posted a
discussion paper on the Federal Reserve Board's website, titled
"Money, Reserves, and the Transmission of Monetary Policy: Does the
Money Multiplier Exist?" [Here's the link.]
[The
study states:] "In the absence of a multiplier, open market
operations, which simply change reserve balances, do not directly
affect lending behavior at the aggregate level. Put differently, if
the quantity of reserves is relevant for the transmission of monetary
policy, a different mechanism must be found. The argument against the
textbook money multiplier is not new. For example, Bernanke and
Blinder (1988) and Kashyap and Stein (1995) note that the bank lending
channel is not operative if banks have access to external sources of
funding. The appendix illustrates these relationships with a simple
model. This paper provides institutional and empirical evidence that
the money multiplier and the associated narrow bank lending channel
are not relevant for analyzing the United States."
Did you catch
that? Bernanke knew back in 1988 that quantitative easing doesn't
work. Yet, in recent years, he has been one of the biggest proponents of
the notion that if all else fails to revive economic growth and avert
deflation, QE will work.
Yardley is right. But he's only got half the story.
On a deeper level - as I pointed out in some detail in March - the Fed is intentionally locking
up "excess bank reserves" so that they will not be loaned out into the
economy. Specifically, in an ill-conceived attempt to prevent
inflation, the Fed has been paying sufficiently high rates of
interest on reserves deposited at the Fed by the big banks to encourage
banks to lock up their reserves at the Fed instead of lending that money out to borrowers who need it.
So
on this level, all the quantitative easing in the world won't increase
lending, because the banks will just continue to stockpile their money.
(On the deepest level, banks actually create credit out of thin air. See this, this and this.
In other words, the commonly-accepted process for money creation is
false, and banks don't need any reserves to create credit).
Indeed, multiple lines of evidence demonstrate that quantitative easing helps the biggest companies, but not the little guy or the American economy as a whole.
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First the Money Multiplier does work in a normal environnement. Second if it was only equal to 1 it would still be sufficient. Third Quantitative Easing has worked on the short run in the March 2009 - March 2010 period without it things would be much worse. It has created investments although not for businesses which don't have access to the bond market.
What is true though is that it does not work anymore and can't work on the long run.
I have proved that in order to work now, at the minimum and it wouldn't even be sufficient, the Yield on 10 years US Treasury Notes should be at -1.50%!!!
QE How Low is Low?
JR post by Richard Benson right on ! Inflation is right around the corner and many will be hurt including the young generation twittering and text messaging out of reality. But must admit, BB has very few options and overwhelming pressures force QE II and III if necessary. Default is akin to the Pope resigning for lack of faith. Only sign of change is new atttude developing to live within one's means and being more self reliant by those hurt or feeling insecure. However, it is counter to an economy built on consumerism. Therefore policymakers are desperatly trying to keep the game alive without changing the rules. Good Luck !
George is right that the Fed contradicts its own theories. Fed economists themselves have been at the forefront of trying to prove that the money multiplier is dead. Here's a paper published by Fed economists in May, purporting to prove that the money multiplier died in the 80s:
http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf
It argues: "open market operations, which simply change reserve balances, do not directly affect lending behavior at the aggregate level."
Which is very hard to reconcile with the Fed's enthusiasm for QE.
But my take on this is very different from George's: the death of the money multiplier has been wildly exaggerated, and QE2 will be more powerful than markets are expecting. It will lead to credit expansion, dollar devaluation, asset and commodity inflation and greater availability of credit for useless investments.
All the Fed economists really prove is that real life doesn't work exactly like the grossly oversimplified models you read in textbooks. The articles George points to purporting to disprove the money multiplier are of the same ilk.
For all the talk of the money multiplier being dead, if you look at the ratio of M2 to (currency plus required reserves), it hasn't really changed that much over the last four decades, despite all the loosening of reserve requirements and growing use of sweeps to avoid them.
If reserves weren't needed to increase credit, the federal funds rate would not be built into all lending rates. The federal funds rate would be irrelevant.
Yes, banks create credit out of thin air, and they don't need to have sufficient reserves on hand at the precise moment when they lend. But, banks always take into account the general availability of reserves when they make lending decisions. That's why the federal funds rate, which is the cost of obtaining reserves, is built in to all bank lending rates.
It's also true that the Fed's paying of interest on reserves changed the way the money multiplier works. By doing so the Fed gave up control of the money multiplier and handed it to the private financial sector.
If the Fed's priority in 2008 was to revive lending, it would have injected far fewer reserves into the system but not paid interest on them, which would have resulted in all of the newly injected reserves being converted through credit expansion into currency, required reserves and multiples of commercial bank money. But the Fed's priority was to bail out Wall Street, so it injected far too many reserves, enough to potentially drive >100% inflation, then countered that by paying interest on reserves, which very directly discourages credit expansion.
That is how the Fed lost control of how much new credit is created. Now, different kinds of credit are growing or shrinking according to market demand without any thought to the availability of reserves, which is far more than anybody needs.
Most people are looking at QE2 as simply more reserves, which wouldn't change anything. The logic goes: demand for credit wouldn't change, availability of reserves would only go from very excessive to extremely excessive, so what.
It's not that simple. Lending isn't only a "supply", it's also a "demand", as various kinds of financial investors demand financial assets. QE is an intervention into this market, a creation of artificial demand for financial assets. Unless natural demand for financial assets is shrinking, QE creates an incentive to increase the supply of financial assets, that is, to expand credit. Given enough incentive to expand credit, willing borrowers will be found.
During QE1, natural demand for financial assets was falling off a cliff as a result of the Lehman bankruptcy etc, so the Fed's creation of artificial demand didn't lead to much expansion of credit. QE2 will be launched into a basically stagnant economy, not a panicked economy. It will drive a boom in financial assets and that will drive inflation.
http://keynesianfailure.wordpress.com/2010/08/13/qe2-the-overblown-herohorror-stories-and-the-mediocre-reality/
http://keynesianfailure.wordpress.com/2010/09/24/why-this-time-qe-really-will-spur-inflation/
Lend money to who?? There is little demand from the credit worthy. Certainly "may" be demand from those willing to give it one last shot but with a high probabity of a bigger underperforming loan in 6 to 9 months. All the dicussion here of the assumption that credit worthy people or business need loans and the banks are unwilling to lend is complete nonsense.
+100
yuk!
firstly, why are you asking me math questions? i hate math. in all its peregrinations.
secondly, what is the safe harbor, now? owning lots of physical gold and/or silver?
or, moving to another country?
such as greece now that the chinese have decided to acquire it.
i cannot think of a better thing to happen to greece. makes it a country worth of expatriating oneself to. a wonderful country owned by the best gamesters in the world.
this should improve the grecian[bows to gwbush] real estate market immeasurably.
and i want them to buy crete and cyprus as well. and cuba.
china, making the world a better place. saving us from j p morgan chase et alia.
Virtually all US banks would be declared insolvent if forced to recognize their bad debt.
So Bernokio has two primary goals to accomplish with quantitative easing.
One goal is to quietly helicopter-drop enough money to re-capitalize the banks before they are forced to recognize all of their bad debt and thus be declared insolvent.
More importantly, Bernokio's other goal is to ensure that the borrowing required to cover government deficits can be funded without the embarassment of failed Treasury auctions.
Updated GOLD monthly chart:
http://stockmarket618.wordpress.com
Yes, Quantitative Easing does not increase the money supply in the market if banks dont lend and yes Bernanke is paying interest on the excess reserves to avoid them lending this money and avoid inflation.
BUT (big big but) monetization does increase the money supply in the market, and Bernanke has been monetizing a lot of money. This is how he stopped the deflationary correction back in 2008.
What Bernanke is dong in reality is saving the banks (cleaning their balance sheets through QE and paying interest in excess reserves) and saving the government from default (by monetizing the debt) while at the same time he is starving the private sector by limiting the credit by paying interest in the excess reserves.
When inflation starts showing (after QE2) Bernanke will control the flow of credit from the banks to the private sector through the interest paid in the excess reserves. If prices are rising too fast he will raise interest in the excess reserves, to avoid any kind of hyper-inflationary danger. This means he will keep supporting the government through monetization, creating inflationary presures, while at the same time he will starve the private sector. This will create stagflation (there are other factors) because prices will rise but the private sector will be unable to fund any real expansion and will be unable to create jobs.
After some years, when inflation has cured the banks balance sheets and has reduced the government debt to payable level, then Bernanke will end the stagflation period, and will allow for the private sector to start creating jobs.
If prices are rising too fast he will raise interest in the excess reserves, to avoid any kind of hyper-inflationary danger."
But, QE 2 could have the effect to have the USD sold by the rest of the world which will drop the value and cause inflation in the US, regardless. If the game is to lower the value of the USD, then prices of commodities and imports will rise and the Fed can't do anything about that.
What Bernanke wants is to have high inflation as to devaluate the government debt to payable levels and rise bank asset prices so their balance sheet are ok again, BUT without causing hyper-inflation and loose the control of the system.
This is why I am saying that Bernanke will allow for prices to raise, probably even going to double digits CPI, but will try to avoid hyperinflation playing with the interest on excess reserves, cutting credit to the productive sector if needed (thus stagflation).
This is a internal analysis. As you mention the other danger comes from abroad and it is that foreign nations start selling their dollar reserves. The USA counts on its army, the biggest in the world, to avoid that. This is the reason why following the chinese military technology development is important.
Fed has the best game on the planet, run fancy paper off printing presses, call it money, enforce it's acceptance as money all over the world with military power.
Their game could go on a long time.
During the Mexican revolution starting in 1910, Pancho Villa had a personal train with a printing press on board that printed his own bills.. He forced banqueros to sign them under threat of death. Good as gold. Seems like a simple procedure, if you have the guns(not gold) to back it up
Ah, the Bernanke Express, running from Los Angeles, through Chicago, to DC in a continuous circuit. Nice, comfy dark-panelled state car for the New Maestro.
September 30, 2010
AN INFLATIONARY COCKTAIL IN THE MAKING
Written and published by Richard Benson, www.sfgroup.org
The interesting part of growing older, that my wife and I have noticed, is the appearance that time speeds up. As each month that passes turns into years, as a 60+-year-old I’m feeling the passage of time quite differently than a child would; a year to me feels more like a month, whereas a month in a child’s life feels like a lifetime.
Needless to say, I’m still encouraged to continue my favorite pastime of tracking the fluctuations in the cost of living, and my fascination with prices and values has not waned one bit. Also, my wife’s frugalness and aversion to throwing food away has made me very curious about commodity prices, so recently I did some research and discovered the facts weren’t pretty. Below are some Commodity Price increases over the past year:
Commodity Price % Increases
Year over Year
Agricultural Raw Materials 24%
Industrial Inputs Index 25%
Metals Price Index 26%
Coffee 45%
Barley 32%
Oranges 35%
Beef 23%
Pork 68%
Salmon 30%
Sugar 24%
Wool 20%
Cotton 40%
Palm Oil 26%
Hides 25%
Rubber 62%
Iron Ore 103%
Yep, looking at key raw material prices compared to last year, the recession is over. These prices are getting loaded into the system now and will flow through to the consumer in higher prices to come at the supermarket and elsewhere.
But it’s not just raw materials soaring; it’s everything. One example is my health insurance bill that came with the usual 20 percent annual increase. With Obamacare starting to take effect, insurance companies are rushing to push in price increases to cover expanded care and no caps on total payouts. Airline fares are already up 14 percent from last year, and if you plan to book a flight over the holidays, the rates have been jacked up to total price gouging levels.
Don’t believe the Wall Street hype, either, about being consumer-friendly and adding efficiency when it comes to the announced mergers of United and Continental Airlines, Southwest and AirTran, and Hertz and Avis bidding for Dollar Thrifty. The real reason mergers are done is to cut workers, destroy competition, and stick it to the consumer with higher prices, while Wall Street reaps huge profits.
Expect the prices at supercenter retail stores to increase as well. Wal-Mart, as one example, grew so large and great by blowing up small stores on Main Street, along with our American factories, which were moved to China to take advantage of cheap labor. Wal-Mart and other superstores have effectively become storefronts for China, Inc. However, given labor unrest in China, major Chinese manufacturers have caved in and given their workers 20 percent wage hikes. The days of cheap Chinese labor are fading. Worst yet, for consumer prices, it actually looks like our government has made a conscious decision to throw the dollar under the bus and go for a 20 – 40 percent dollar devaluation against the Yuan to try and boost exports, limit imports, and create American jobs. Moreover, with higher wages and a higher currency, those 1.3 billion hungry Chinese will be better positioned to bid in the world for oil, wheat, and pork bellies. So, the likely trend for commodity demand will be up in a world where the Russian wheat crop failed, and the world’s coffee and cotton crops were duds.
As our government officials continue to scare us with a phony deflation scare, the Federal Reserve is geared up for QE II, and it looks like we may be willing to get tough with China to force its currency up. Moreover, America is not the only country with a central bank that prints money to try and hold the exchange value of their currency down. England, Japan, Korea, Switzerland, and Brazil have all used a version of central bank money printing. Rising commodity prices, a rising Chinese currency, and a world money supply – growing at double digits in a world where output is hardly growing at all – are all the ingredients needed in a recipe for a very potent inflationary cocktail.
If you’re getting older like me and notice time speeding up, the next ten years will pass quickly. At the rate we’re going – in terms of world money printing and federal deficits – I honestly expect the cost of buying the necessities of life, such as food and energy, will double over the next decade. A doubling of prices is the order of magnitude that is necessary to rebalance the world economy and make the bad debts in the credit system manageable. It seems to me that the biggest losers are going to be those who have to spend the greatest portion of their income on the necessities of life, including the 41 million people on food stamps, and the 60 million receiving Social Security. Because so many of us will suffer, take heed if you live in the suburbs; at least you can start a Victory garden. ...
http://queenbee-insidethehive.blogspot.com/
... "I honestly expect the cost of buying the necessities of life, such as food and energy, will double over the next decade" ...
Huh?! Less than 3 years for all of those listed items.
We're all born terminal. We're just a few behind.
I recommend hoarding sugar --- you can eat it, ferment and drink it, or use it for fuel. Good stuff.
.
I should google it before I ask but what's the shelf life on that stuff ?
You got it, grampa. That's the game. Thing is, Bernanke will still die and rot like everyone else. Dust to dust.
Meanwhile, they will make sure you die in poverty. That is their mandate.
We all end up in the dirt bed. Helping future generations should become our mission.
Atomizer, you are correct. I am not sure what the age threshold is for being screwed for the rest of one's life is. If we all sit back and do nothing, this threshold is going to be quite high. We have got to get as many people at least critcally thinking about the fed. Then we can move to politics and the nwo. If the guy on the street had a full appreciation of these three elements, well that would definitely slow things down, and perhaps force a change. We've all been suckered - there is absolutely NO positive reason to allow the coming generations to suffer our fate.
Why? What have they done for us? What if they are all fascists or something? Let them find their own way. They are probably irreparably damaged anyway.
as you may already realize those future little fuckers
give us the gift of life. granted, this is a temporally
ironic perspective but true, non the less.
anyway...
It's all very simple it's a heist. Steal the money (accomplished) mitigate the damages and pacify the agrieved (the political function of QE especvially after they start forgiving mortgages), the subbordinate thieves leave to enjoy their spoils (Romer, Orzag, Summers, Emanuel and then Geithner) and then wait while the political lead and those adorable jug ears of his continue to "looking forward" as the statute of limitations on the crime expires and whalla, el crimen perfecto.
Why are American Companies holding so much of their Money off Shore?
Think about it Microsoft Borrowed Money to pay a higher dividend because so much of their Wealth is Off Shore. They will not bring the Money in the United States.
What about Buffet and Munger buying a stake in a Chinese Auto Company? They bought 10% and want to buy more. This transfeers their Money from the US to China.
What do they know that we do not?
Why not send them an email and ask. What's to lose. Someone might cough up.
He knows and will take whatever means to complete the agenda. Don't be fooled.
Iron Mountain
http://video.google.com/videoplay?docid=-6745627342652553091#
"For example, Bernanke and Blinder (1988) and Kashyap and Stein (1995) note that the bank lending channel is not operative if bankshave access to external sources of funding."
Isn't the argument that the banks do NOT have access to external sources of funding, and therefore that QE might work? Demonstrably, that argument is moot as well, but I don't see any evidence here that Bernanke "knew" QE doesn't work. Just the opposite, he's clueless as ever.
Just as I had deduced: the new air-backed liquidity that was made available to financial institutions is "sequestered". It appears in the various M's (and thus affects our view of the situation), but it cannot cause a rise in wages and prices until it actually competes with the other holders of cash or cash equivs. That being said, when the US Treasury sells debt instruments that the Fed buys with air-backed liquidity and then uses the money to pay its bills, that liquidity quickly gets converted into cash and does affect prices and wages.
Those quarantined reserves of previously printed money will be used, and are already being used, to acquire USTs - it is stealth monetization. Period.
Maybe it is just Basel III operations. I know we like to think everything is in the shadows, but maybe it is out in the open. Just where the paranoid would not look for it.
GDP is going to take a hit, to the head, no flag.
Some thoughts by a banker:Bank of Canada Governor Mark Carney says commercial banks should explore ways to shield borrowers from bearing the full brunt of new higher capital standards – among them, by cutting their own personnel expenses.
In a speech at the German central bank Tuesday, Mr. Carney pointed out that avoiding the massive costs of another crisis far outweighs any short-term pain felt by banks and their customers.
The economic case is “compelling” for implementing the so-called Basel III deal struck over the weekend by global regulators.
“Contrary to what some in the industry would have you believe, there is some price worth paying to reduce’ economic consequences in the future, he said at the Deutsche Bundesbank in Berlin. “
Based on a new estimate by the bank of Canada, Mr. Carney said the net benefit of creating a less risky global financial system is worth about 30 per cent of gross domestic product, or $13.3-trillion, to the Group of 20 countries. For Canada, the benefits of tougher capital and liquidity standards are worth roughly 13 per cent of GDP, or $200-billion, he said. The gains for Canada are less dramatic because the financial crisis here was much less severe.
The estimates assume banks put in place strategies to cope with the proposed two-percentage-point increase in capital standards, agreed to over the weekend by global regulators.
Mr. Carney said banks have many ways to reach that mark. They can raise capital in financial markets, hang on to more of their profits or jack up fees and interest rate spreads.
But he suggested that if banks slashed compensation by 10 per cent, they could fully offset the cost of the new capital standards. And that would lessen the impact on the economy, by keeping borrowing costs lower.
Multimillion-dollar pay packages and bloated bonuses for bankers have become a sore point for many investors and business who suffered in the crisis.
“The point is not to pile up so much capital in our institutions that they are never heard from again, either as a source of instability or of growth,” he said. “The challenge is to get the balance between resiliency and efficiency right.”
And he said the weekend agreement “strikes exactly the right balance.”
Many bankers have argued that the reforms are too strict, imposing punishing costs on the economy through sharply higher interest rates and fees for borrowers.
Mr. Carney rejected that notion. In his speech, he said the recent financial crisis took a huge bite out of the global economy, and countries have to do everything they can to reduce the likelihood that it happens again.
The Bank of Canada estimates the recent crisis will cause a cumulative hit to GDP of 9 per cent in Canada between 2009 and 2012, and 30 per cent over the longer term. For Europe, the cost is even greater: 16 per cent between 2009 and 2012, and 40 per cent over all.
“Given the scale of potential losses, there are clearly large benefits to reducing the frequency of crises,” Mr. Carney said.
http://www.perfecteconomy.com/
Bush knew.....oh wait....Bernanke knew....
at what cost?
Only time will tell.
Well, it's preventing the credit bubble from collapsing, so...
How can you say he has done a good job? Only time will tell if Bernanke did a good job. Don't forget, it took mainstreet years to figure out his good ol' friend Greenspan...
Its wrong because it messes with natural market forces over the long term. The govt only makes this more unpredictable, more costly, and less efficient.
Why can't you guys just admit Bernanke is doing a good job-just printing enough money to offset asset deflation so that it doesn't worsen the economy. What's wrong with that?
deflation = stronger dollar. in our current state, deflation is good for the economy. however Bernanke is preventing that which is why the economy is not recovering. the value of the dollar is becoming worthless.
The Fed's job is not to control the economy, it is to protect the value of the currency. Some job, eh? They've overstepped their mandate to keep the PTB and banksters afloat.
Bernanke is doing a good job? I guess that depends on your perspective. I suppose he's getting an "atta-boy" from someone, but it's not anyone I know.
Uh. How about because it's not true? It's a last ditch attempt by a Federal Reserve Chairman to go down in the history books as the saviour of the economy. That's what an ivory tower academician sees as the ultimate payoff. Less moved by money than fame.
First, he's not very successful at preventing asset price deflation, housing and commercial real estate for example.
Second, if he was successful at maintaining asset price stability, value deflation still occurs as dollars lose value due to boatloads of new dollars coming off his presses.
Third, asset price deflation is the very thing that would turn the economy around. Housing gets cheap enough, people start buying again.
Fourth, asset price deflation would clobber banks and Wall Street, exactly why he's trying to prevent it.
Fourth is the best.
The actual goal of the Fed is very different from the stated one. They clearly exist to insure the continued existance of the big banks and brokerage houses.
asset deflation avails one of "opportunity". without it there
is no adjustment, innovation or creation; nothing to work with
or for. the reigns of power shift from the controllers of
monetary policy to the people in times of deflation, and success
is defined as what helps the people satisfy their needs and wants,
not what the "state" wants. for better or worse then a people either
survive or perish, but it is their own doing.
with no asset deflation the "state" decides whether or not a people
survive, the mechanism of survival becomes political , level of coziness
becomes critical and innovation and freedom outlawed. perhaps
and without deflation just exactly how is the next generation supposed
to survive in this debt saturated(inflated) economic(political) environment?
the old regime believes in the "power" of their money and political connections
neglecting and burdening the new driving them to revolt, i think the
dynamic is in here somewhere that triggers the tipping point. ignorance
and lack of appreciation of the actual effects of merely intellectually narrow minded
"leadership" forcing the young to the streets in revolt, revolt of everything.
no way to achieve a state some might call civilized.
Excellent
is there anyone left in the country who is not so used to the good life that the sudden plunge into austerity, if not abject poverty is enough of a motivation to make the masses beg for the government to step in. whoever is pulling the strings of the fed knows that the people will soon be willing to give permanent control to whoever can give them their old life back.
hey, this new world order thing is not so bad , pass the chicken and don't hog the remote.