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One Man's Critique Of A Loose Monetary Policy
It seems these days everyone is happy to blame Greenspan for creating the biggest housing/credit bubble in American history, yet few have the same problem when it comes to voicing their support of Ben Bernanke, who is repeating exactly the same monetary steps (mistakes) as performed by his predecessor. Proponents will say that this time the justification was to prevent a full financial systemic collapse, and the trillions of excess liquidity (an approach that even Greenspan did not embark on full bore) that drowned the capital markets were just what the doctor ordered. Whether that is true or not will be debated by historians who analyze the 2009 as the year when China, the US and the Eurozone let loose the most unprecedented monetary loosening in the history of the non-gold standard world.
Yet is today really that different? Objectivists will agree that every single time there is an excuse for any action. Alan Greenspan no doubt felt justified in his actions to keep interest rates low for as long as he did (incidentally, higher than they are now). The fact that those around him voiced their support for his actions is eerily reminiscent of the widespread acclaim that Bernanke seems to be enjoying currently.
However, not all agreed with Greenspan. A paper by BIS economist William White presented at the 2003 Jackson Hole Symposium, argued for a monetary policy that was diametrically opposite of what central banks were accustomed to in fighting bubbles (using relaxed credit to fight credit bubbles, or colloquially, using future stupidity to fight precedent stupidity).
The paper is a must read for all who believe that this time is in no way different from every other "response" that merely effectuates a much more adverse economic reaction years or decades down the line (and with the level of credit concentration, one may even add months).
An excerpt from the White paper:
On the monetary side, it would imply being alert to the possibility that financial imbalances can also build up when inflation is low and stable and standing ready, occasionally, to lean against those imbalances as they develop even if near-term inflation pressures are not apparent. Current frameworks should be capable of accommodating such a monetary policy response. In most cases, a lengthening of the policy horizon and greater attention to the balance of risks in the formulation of policy may be all that is required.
Alas, Obama does not have a lenghty "policy horizon" - in fact, whether it is midterm elections, or the next presential one in 3 years, the policy response by the Central Banks are always contingent on political contexts. And while a slow, protracted unwind in both the early housing boom, and currently, would undoubtedly be the preferred route, it is a practical impossibility, as even one more year of comparable market volatility and unprecedented economic deterioration would result in the President vacating his position even before his first term's maturity. Which is why the politico-financial block is always, and will be always, willing to push for immediate responses which manifest themselves by such liquidity driven indicators as the capital markets, while the underlying economy flounders under the burden of exponentially growing leverage.
Every modern leveraged corporation has to operate under the limitations of leverage covenants imposed on it by its creditors. Why the US is any different is simply a function of the fiat currency system, of China's symbiotic relationship with the US, and the two countries' closely intertwined economic, monetary and fiscal fates. This will only change, when the 8% required growth rate for social stability in China is discovered to be the artificial construct it is, courtesy of a freely definable GDP number, and the Chinese communist-capitalist experiment goes awry, which on a long enough timeline, it inevitably will.
But by then, it will not be Obama's problem (or so the administration hopes). But, and as always, maybe this time it (the timing event horizon) really is different, courtesy of unprecedented tens of trillions in gratuitous pieces of paper floating and supporting global asset bubbles.
Amusingly, in 2003 as now, few dared to critique Greenspan, except for the occasional outlier such as White. The reason: not only is there a political constraint, but the very essence of the argument goes to such core, human failings as feeling, and hubris in particular. Der Spiegel reported the reaction by Bernanke to this critique:
The Jackson Hole paper was an assault on everything Greenspan had preached and, as everyone knew, he was not fond of being contradicted. Other members of the audience glanced surreptitiously at the Maestro to gauge his reaction. Greenspan remained impassive, his face expressionless behind his large spectacles, as he listened to White. Later, during a more relaxed get-together, he refused to even look at White.
Historians will likely forgive Bernanke for his flawed policies if, as expected, they are dictated by political "rationalizations." They (and we) will, however, just as in the Greenspan case, not forgive his hubris.
The full William White paper is attached.
h/t Richard
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William White of the Bank of International Settlements Predicted the Economic Crisis
http://www.thenewamerican.com/index.php/economy/economics-mainmenu-44/1641-william-white-of-the-bank-of-international-settlements-predicted-the-economic-crisis
His arch-rival was none other than Alan Greenspan, who was serving on the BIS Board of Directors in addition to his role as Fed chairman. This made him White’s superior. Their rivalry dates to the mid-1990s. Having grown critical of Greenspan’s ideas on the role of monetary policy in 1996, White challenged Greenspan’s view that central bankers cannot slow the causes of asset bubbles. In an important meeting of the Kansas City Fed at Jackson Hole, Wyoming, White confronted Greenspan directly. White recommended “rais[ing] interest rates when credit expands too fast and forc[ing] banks to build up cash cushions in fat times to use in lean years.” Greenspan came away from that meeting unconvinced, believing that one can only clean up after the fact, as it were, when a bubble deflates. He said dismissively, “There has never been an instance, of which I’m aware, that leaning against the wind was successfully done.”
In plain English, what White was in essence challenging was the money creation that powered the tech bubble of the late 1990s, which was then fueling what Greenspan had termed “irrational exuberance.” In the 2000 decade, White observed the real estate bubble begin to develop. He noted the risky loans and the lack of credibility in the rating agencies. He and his immediate associates contended that the problem was the amount of cheap money floating around — encouraging what economists of the Austrian school call malinvestments.
In a housing (or other asset) bubble, you borrow the asset you want to sort (a) in this case dollar
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Americans can keep playing the bubble game only to the extent that other countries keep financing the american real economy (the real consumption).
The external (real) financing of the american (real) economy is not made of dollars, bonds or other recycled bits of financial-monetary paper. The real financing is made of arabian oil, japanese cars or chinese clothing.
Because the bubbles do not create wealth but americans need to continue to consume real goods, while blowing bubbles, the real foreing financing must keep flowing, in exponentially increasing amounts (the bubble game is a exponential game), to the USA to avoid the bubbles collapse (dollars or bonds can not be eaten nor wear, food or clothing can not be printed)
This external real funding has colapsed. No matter whether japanese and chinese buy more or less treasurys or other paper debt, they only exchange some bits paper (dollars) by other bits of paper (bonds). The real financing occurs when oil or other real good, with actual real economic value, is exchanged for freshly printed papers with no real value.The volume of this exchange has colapsed.
The magnitude that measures the real foreing financing, the magnitude to watch, is the trade deficit. American trade déficit has sunk. To blow bubbles is no more possible.
(I apologize for my horrid english)
Actually, that was very well said.
You will probably enjoy reading this excellent paper by Dirk Bezemer where he explain how a flow of fund view is a good way to identify bubles.
http://mpra.ub.uni-muenchen.de/15892/
I agree. It is critical to understand that a shrinking trade deficit when GDP is stable or growing and gov't debt is stable or shrinking is a good thing, because it means you are producing more of what you consume. However, a shrinking trade deficit when GDP is shrinking and gov't debt is growing is a disaster reflecting nothing more than reduced gross consumption itself.
Keep the party going, then really juice it up when things start to fall apart.
I've been reading Austrian economic theory lately. They've been fighting this ridiculous bubble-cycle since at least ~1915 when Mises argued against it. This is a good read:
http://mises.org/story/2810
"The Austrian School of economics not only suggests that the current credit crisis is a direct result of government-controlled paper-money-supply monopolies, which have embarked upon a policy of artificially suppressing the market interest rate; it also suggests that central banks will continue to respond to a monetary-induced crisis by a further increase in the stock of money, thereby increasing malinvestment and inflation."
William White (a good old Canadian boy, by the way) has Austrian leanings. In contrast, Alan Greenspan had Ostrich-ian leanings...
The way I see it, Paulson pillaged the Treasury for his Bankster Buddies, because the real problem was solved by the FDIC GUARANTEEING MONEY MARKET FUNDS, once the breaking the buck went away, problem solved, right? They could have then merged financial/investment banks with cool heads, no?
As my 13 yer-old daughter states, you cannot pay for debt, by issuing debt, then, re-issue more debt. Simply, this is a Ponzie Scheme (nothing more complex). The system is essentially bankrupt. Eventually, the system will collapse. It is only a matter of WHEN (i.e. timing), not if. In the meantime, this is a "game to buy time" in order to insulate and protect those who knowingly caused, and created it.
you cannot pay for debt, by issuing debt, then, re-issue more debt.
And yet, when you control the printer that the debt is denominated in, you most certainly can.
Let's say I own the printer that makes 'zero bucks.' I owe you 1000 zero bucks. Turn the printer on, out comes 1000 zero bucks. I give them to you. Debt cleared!
This is the difficult notion that at the national level, debt doesn't seem to matter. I don't have an opinion either way because the ideas just aren't that interesting to me.
If I printed $5 trillion of counterfeit money, indistinguishable from the real thing, and spent it on hookers, ferraris and blow, would that not affect the dollar?
"Deutsche Bank (DB) and Societe Generale, who've sold €1.25B ($1.79B) and €1B ($1.34B) in Tier 1 sub bonds respectively, yielding 9.375-9.5%"
a picture of the bank subsidy
how could there be so much overt consumption in the US and lifting up of other countries' economic develop with so little inflation?
All these guys are doing is monetizing what has already been spent, no longer counts and certainly will never be paid back.
The real problem is there is a vacuum in demand.
That's the problem that needs to be fixed.
You CAN fool all the people all the time if the people are willing (or desperately want) to be fooled.
"Daddy, will everything be OK"
"Yes honey, don't you worry your little head one bit. Everything is going to be just fine."
This always leads to those "surprises" no one could possibly predict or see coming, except for those who were actually looking.
Is this the monetary equivalent of a Crazy Ivan?
Abolish the Fed.
Ryan was right. The next one *was* to the left.
The issue with Bernanke is that the book hasn't been written yet-- and he essentially has 4 more years of writing.
My sense is that the policies implemented thus far are not flawed-- in the sense they have been put in place primarily to avert financial disaster. To that end, the liquidity flooding, helicopter raining actions to date have produced the desired stalemate.
But at what cost? With the economy poised for a government stimulated recovery, pulling off the liquidity throttle would be the right thing to do. But it's going to be much easier to give in the "political rationalizations", and adopt a "keep the throttle open until we get a self-sustaining recovery going" mentality.
Its that perceived belief that will cost Uncle Ben dearly, as the risks of keeping this "ultra extreme" easy policies (he's essentially doing monetary and fiscal policy now) becomes inordinarily high.
"...he essentially has 4 more years of writing."
Unless, of course, he is found swinging from a lamp post first.
Ouch... good point.
The only way Bernanke can print without getting fired or lynched is if he starts a wage price spiral.
If he causes a US currency crisis or inflation without increasing US wages, the fall in the value of the dollar will hurt the public, who will complain to politicians and call for his head. Figuratively in terms of firing him. Or literally in terms of doing worse things.
while we (might) agree that Ben isn't an outright fool (in that he is intentional in his current gambles), I look at the coming four years and wonder why he would accept the re-nomination. I'd claim health problems and skip town...
there must be more blood somewhere in that stone.
Well, the easiest solution would be to abolish the barbarous relic known as the Federal Reserve.
+10. Agreed.
Easiest, perhaps. Best, I think not.
For all its flaws the Central Bank will not disappear.
Until perfect markets exist, the lender of last resort role is still required.
Until a better solution is developed to restrain the governments natural impulse to print and inflate, an independent Fed is required.
Until a better mechanism is developed to constrain credit growth the central bank is needed.
Until these roles can be performed elsewhere, the Central Bank must exist.
What would replace this barbarous relic?
From around 1861 until 1913, arguably one of the most prosperous and progressive era in US history known as the industrial revolution, there was no central bank or official currency. Monetary anarchy worked well enough.
Point well taken. And the dollar remained stable in value!!!
The alert was out years ago that all debt would be monetized and eventually made worthless as the dollar is to collapse.
That is why all the outrageous building in Dubai and petrostates, hand over heel development in China and a building of factory infrastructure, Bankers worldwide engaged in open conspiracies to defraud via bonds/derivatives, ad nauseum.
Right in front of everyones eyes. None of the large players took the prudent and careful course. All went balls out after debt (or in China for acquiring tech knowledge, materiel, industry, use of latent labour).
Open secret was run this debt wave to the max, because afterwards comes a new resolution, a new organization which will wipe out all the prior balance sheets and start internationally anew.
Debt/currency bubble is the last one.
Currency bubbles are logically inconsistent. All assets bubbles are always based on a short-bearish leveraged especulative trade. Bubble especulators are all always bear especulators.
If you think that the price of an asset will collapse you short sell this asset. To short an asset (a), you borrow that asset (a) and then you exchange the borrowed asset (a) in the market for other asset (b) you think will keep its value. Example: to short a stock (asset a), you borrow the stock and sell in the market the stock getting money (asset b). In the future you will repurchase asset (a, stock) paying with asset (b, money).
In a housing (or other asset) bubble, you borrow the asset you want to sort (a) in this case dollars. Then sell the borrowed asset in the market.
This is what a especulator is doing when he buys a house. He is selling short (borrowed) dollars (asset a) and geting houses for the sale (asset b). He is not buying-going long houses or tulips, he his shorting the dollar (whitch is the borrowed-shorted asset).
Which is the long asset in a bubble is anecdotal. Houses, dotcom, gold, tulips, anything works. The business is not on the log leg of the trade, on the bubble asset. The business is always in the short side of the trade. In a bubble you win because the money loses value.
The central bank can not make the tulips or houses increase in value, but the central bank can always (or almost always, not now) make money lose value (and they always try).
Thus, asset bubbles are bearish bets on the currency. The dot com bubble and the tulip are both the same bubble: a bearish bubble on currency. Thus, there can't be "currency bubbles" Any asset works in the long side of a bubble unless the currency, because for a bubble to work currency must be on the sort side of the trade. (Money is the shorted asset in all bubbles)
(I apologize for my horrid english)
Interesting perspective, thank you.
Your english is fine!
While I like the nature of your argument, I would---at least initially---disagree. Tulips, dot.com stocks, Japan RE until 1990 were bubbles and not currency shorts. If everything had gone up at the same rate, then I might agree, but when massive price rises are limited to a small number of assets whose economic value is far below the market price, I think that is the definition of bubble. Tulips went up relative to everything, not just the Dutch currency, though in and of themselves the tulips had little value and even less staying power as a store or transfer of value.
FDIC has run through its industry funded pot of money and are now accessing the Treasury guaranteed credit line. The Fed is nearing the end of its $300 bill QE and still buying strong the quick flip Treasuries.
Corporate tax receipts have collapsed by 60%, personal income taxes fallen 22%.
Broken guv-dependent banks and superbankrupt GSEs are making up 25% or more of daily volume on the NYSE.
Social services are ramping, with 34 million on food stamps and counting, a 3rd extension of umemployment being considered, and stimulus projects gaining momentum. Cash for Clunkers and artificial demand by gov't are dampening the fall in industrial production.
Meanwhile mainstreet real economy production is gone.
Our financial terrorists from the Fed to the primary dealers to the GSEs are artificially surviving, but John Q. Public on average has only 2 months of liquid wealth squirreled away.
The Fed has just begun QE, the printing will only stop when the greenback will no longer be generally accepted. There is no other way now. When TBTF prevails, eventually everything fails.
Brisk business for coffin makers, saloon keepers, street sweepers.
ECRI and the Street keep proclaiming that pent-up demand will drive a massive recovery at the intersection of Main and Wall. I say, who’s going to buy? Pent-up demand on Main Street is for Recovery of Opportunity, not gewgaws. If the parasites on Wall continue to hold down opportunity, pent-up demand is going to slap and kill them. They are damaging their host.
America doesn’t need or want these too-big-to-fail bankers; they are unecessary. Pent-up demand is for freedom—for opportunity to invest, to find a job, to create a business, to build a better mousetrap and a better life. That’s what leads to economic recovery. Parasitic central bankers have taken away that opportunity.
Personal income is falling in the land of opportunity. Consumer credit is falling in the land of opportunity. Public outrage is rising in its demand for opportunity. A herd of buffalo with a strong, fearless leader can down a pride of lions. If you don’t believe it, watch the Battle at Kruger, on You Tube:
http://www.youtube.com/watch?v=LU8DDYz68kM
Main Street isn’t going to live in recession while it finances the bankers to buy up everything in the United States.
When does the bond market dole out its punishment? This train has to stop somewhere....
It would be worth your while to read George Coopers book, The Origin of the Financial crisis. He covers your 2 main points (below) cogently.
1.Which is why the politico-financial block is always, and will be always, willing to push for immediate responses which manifest themselves by such liquidity driven indicators as the capital markets, while the underlying economy flounders under the burden of exponentially growing leverage.
2.Why the US is any different is simply a function of the fiat currency system, of China's symbiotic relationship with the US, and the two countries' closely intertwined economic, monetary and fiscal fates.
On a second note , the "Objectivists will agree that every single time there is an excuse for any action." doesn't make any sense.
Did you mean, For Objectionists there is always an excuse or rationalization for any action taken?
and that since Alan G was the most powerful objectivist (i.e A Rand cultist) of all time, you meant to point out he was under the spell of her mad philosophy? And since none could stop him we were all trapped by her madness. And that the objectivists surrounding Greenspan are the same eerily familiar Bernanke enablers?
This seemed like a critical paragraph in your piece, but I can't make any sense of it.
But if the music stops, the currency and debt are shredded, and the 'rich' (i.e. functioning middle class-democratic) states end up with all the debt to be paid by the middle class, then the oligarchs, mafioso and pigmen have already won.
The big debate they've certainly been having is, where to park with all the loot?
The big debate they should have been having is, how can we scrub our childrens' identities to prevent them from being soiled and outcast for the next thousand years?
Pretty much like the Nazis going to Argentina and hiding the loot in Swiss vaults, or Blackbeard.
It is a truly horrible commentary on the Human Condition, that gave us the World Wars, the Holocaust, and now the enslavement of our children and the end of the great democratic middle class experiment of the last several centuries. Unless the Chinese and Indians can come up with something it may be millenia before another arises.
Laugh and posture all you please. Then look upon my 2 year old daughter and soon-to-be born son, and tell them they have been given hundreds of thousands worth of debt for these fat bastards. They will never have the opportunities that pimple-faced kids in 1972 had (a one income family? College? AND retirement?)
Then wonder what has become of our Republic and her erstwhile allies. Until you see income-adjusted bond writedowns, ha ha ha ha ha ha ha
--Jim in MN
Don't worry so much. "American Exceptionalism" (helped by our international reserve currency and monster military) will see to it that we don't ever have the dollar fall enough to keep the world from buying our debt. Therefore, there is no need, and no plan, for that debt to ever be paid off - by your children, grandchildren, great-grandchildren, or anyone else. National debt was invented by the Bank of England four hundred years ago as a tax on the stupidity of its citizens: the money is borrowed and never paid back. America is simply - as usual - pushing the concept to new heights. As short-term political theater, it is amusing to see the Republicans presenting themselves as fiscal purists, when the latest debt binge began with Reagan, was accelerated by Bush, and Cheney (correctly) announced that "Deficits don't matter" - meaning Americans are to dumb to get it and make it stop.
JR - nice theory but only way to do that is if all the jobs sent to China, India, Germany et al are brought back here. Sending jobs overseas worked for so long since folks found jobs in the housing and finance (sneer sneer) industries but with those imploding, folks will on their knees for a long time. With our government indebted to China et al the chances of those job returning are getting ever so slim.
If American jobs could be offshored, they can be onshored again: it was the bankers and CEOs that orchestrated the hostile acquisitions and mergers of America’s manufacturing base in the 70s and 80s. It was they who began the offshoring of America. And the people, through a representative government, can force its return.
And, as Jeffrey Blankfort points out, which is somewhat revealing given the decades involved, in "The Israel Lobby and the Left" published by CounterPunch: “Jews played a central role in American finance during the 1980s, and they were the chief beneficiaries of that decade's corporate mergers and reorganizations."
Richard J. Herrnstein and Charles Murray, authors of “The Bell Curve,” published in 1994, wrote: “The proportion of CEOs who came from wealthy families had dropped from almost half in 1900 and a third in 1950 to 5.5 percent by 1976. The CEO of 1976 was still disproportionately likely to be Episcopalian but much less so than in 1900—and by 1976 he was also disproportionately likely to be Jewish…”
The corporate philosophy that is destroying America opposes that of Henry Ford who had it right, pay your people a fair wage and build a good solid base product that your workers can afford and you will make a fair profit. The modern corporate philosophy, enabled by a lobbyist-ridden Congress, disregards political systems and offshores to any corrupt political regime regardless of its human rights abuses, not for comparative advantage, but for private gain to be stashed offshore in the Cayman Islands.
It is time Americans stood up and took their country back, to preserve a land for the free, and that includes the restoration of an economic system here at home that outlaws government-sanctioned monopoly, Fed control of the money supply, lobby control of the Congress and President and embodies an economy where the market is supreme. As Ludwig von Mises recognized: “The market alone puts the whole social system in order and provides it with sense and meaning.”
anyone else misled by the headline and disappointed this is not a post featuring an angry southerner beating the shit out of chinese-made appliances?
Jim in MN: pimple-faced kids in 1972 were being conscripted to fight in the useless war called Vietnam. The problems of today probably started when Eisenhower warned about the military-industrial complex.
Draft ended in December 1972. Not sure what your point is, unless it's that the superrich developed more 'peaceful' means of destroying societies starting in the 1950s. An interesting debate for history buffs I suppose.
It's all baloney. Choose any monetary system. Add time.
Observe the result.
Fix human greed and ANY monetary system will work just fine, thank-you.
Fixing greed means ONEROUS penaly on the greedy. Take away all assets and throw the bum in a Jean Val Jean style pit.
Make it public and make it STICK!
At then end of the day(which is today, actually) the only remaining question is
How will the debt be extinguished?
1.Will it be through currency debasement?
or
2.Will it be through creating another bubble and kicking it down the road?
or
3.Will it be through a worldwide collapse where every debtor fends for himself?
So far 3 is unlikely since the fed and global gov'ts have steped in to avoid that for now.
Some combination of 2 and 1 are baked in. The trick for govts/central banks is to strike the balance between the 2 and 1 remedies out over the longest possible time horizon.
Global economic growth is dead for the next decade at least.
The US will default on its debt, either explicitly or effectively through currency debasement.
Changing the regulatory org charts now to ensure this never happens again is a distraction at this time. It assumes the crisis is over and a fix is in. The fix is not in. Far from it.
O.K., I'll explain it again: the debt will NEVER be extinguished. National debt is inherently designed not to be repaid, and everything else is noise.
White observed the real estate bubble begin to develop. He noted the risky loans and the lack of credibility
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Eisenhower to blame? He should be tried for war crimes. He sent 500k americans to their deaths fighting for stalin and his communism; the same communist party Obama belongs to. eisenhower allowed 3 million innocent german soldiers to starve to death in his charge. Eisenhower warning us about the military? What a hysterical joke. Only in America would they believe this pap.
Why do you all insist on calling these policy decisions "mistakes" or "flawed"? These folks are brilliant. Their actions are designed to achieve an objective. That objective is different from what you think it is.
You determine an intention by the reasonably foreseeable consequences of the action. I see a vast accumulation of wealth and power in the hands of a few, facilitated by the State, and the complete destruction of what's left of the middle class. That, or something like it, is the intention of the Fed's actions.