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Roubini Blasts Faulty Fed Monetary Policy
Joseph Mason from Roubini Global Economics has written an interesting analysis of Fed monetary policy, focusing on the Fed Fund rate as the primary tool of economic intervention, in which concludes that the Fed's traditional weapon for moderating the business cycle is becoming increasingly irrelevant, and has reached a point where the traditional central bank arsenal could be considered irrelevant. By analyzing historical data of rate tightening into and during recessions, coupled with loosening interventions, Mason observes that by "reducing rates before recession may both add to the
speculative fury that will (eventually) necessitate the (potentially larger)
downturn and leaves no room to lower rates in order to address lagging effects
like unemployment." If correct, and if the excess reserve phenomenon currently witnessed, which is purely a function of negative implied interest rates per the Taylor rule, is unable to force the economy into a recovery mode, the Fed will be left with absolutely no additional mechanisms to facilitate monetary expansion, resulting in an impotent Federal Reserve, whose only function would then become to fund balance sheet shortfalls at major financial institutions. And if there is a an actual empirical point arguing that the Fed no longer needs to exist, in addition to all the rhetoric we have witnessed over the past year which implicates the Fed as merely a proxy vehicle for banker status quo perpetuation, this could very well be it.
The key problem for the Fed, encapsulated in the Roubini analysis, is as follows:
The ongoing history
of US monetary policy has to be one of a continuing search for
monetary targets in an ever-changing institutional context for at least
temporarily stable relationships between monetary policy and economic growth. Hence,
it makes sense to ask “how is it coming along?” Unfortunately, I think the
answer is “not well.” While I present here only one dimension of monetary
policy, Fed funds rates, the lesson is straightforward: the recent era of managing the Fed funds rate to reduce the depth and
duration of business cycles is failing.
The basis of Mason's argument lies in the data contained in the following graph:
Mason's critical summary of the graph's implication:
The graph [above] illustrates both the reason for embarking on
the experiment with Fed funds policy, as well as the failure of the policy to
date. The graph shows the Fed funds rate with NBER recession dates (monthly)
illustrated in gray. Visually, two things are apparent. First, recessions prior
to 1990 are pre-dated by rate increases,
which can be thought to have precipitated or at least worsened the ensuing
recessions. Second, many recessions are followed by further Fed funds rate
declines, which can – intentionally or unintentionally – address the lagging
effects of recessions (like unemployment), but which risk adding stimulus after
the “horse is out of the barn,” so to speak.
It would seem that the arrival of Greenspan to the monetary scene is in many ways equivalent to the K-T boundary applied to Keynesian economics:
Consider the first line of the
table lying below the graph, which reports Fed funds movements as the percent
change in the rate over the six months preceding each recession date. Prior to
the Greenspan era, rates typically rose in those six months by an average of
nearly fifteen percent. Moreover, while rates increased just over five percent
pre-dating the 1957 recession and just over two percent pre-dating the 1960 and
1969 recessions, they rose almost forty-one percent pre-dating the 1973
recession and almost thirty-four percent pre-dating the 1980 recession.
Yet something changed in monetary policy about 20 years ago, and that something became particularly obvious in the last two recessions - those of 2001 and 2007:
Given the disruptiveness of those latter two recessions, it
is not surprising that policymakers perceived policy mistakes, having
effectively tightened into both recessions. (Note, however, that the Fed funds
rate was not a target in those periods, so the tightening is not a conscious
policy decision.) Contrast that tightening with conscious policy movements
prior to post-1990 recessions, where the Federal Reserve, unlike previous
periods explicitly targeting the Fed funds rate, began reducing rates in the
six months prior to recession. In the 1990 recession – the first application of
the principle – rates were reduced by almost two percent. But in later
applications, the 2001 and 2007 recessions, rates were reduced about fifteen
percent before the recession began.
Of course, in neither of those cases did the Federal Reserve avert recession,
but they avoided tightening into the recession as in previous episodes. While
causality is difficult to verify, the 1990 and 2001 recessions both lasted
eight months, shorter than the historical average of ten months for recent
recessions.
Yet while one can observe the Fed Funds rate heading into a recession with skepticism as to causality, it is the exit policy (or lack thereof) that is most relevant to our current situation. First, what happened in those long-ago, bubble-free pre Greenspan/Bernanke days:
The fourth and fifth lines of the table demonstrate the
historical difficulties the Federal Reserve has always had with exit policy. It
appears that the most dramatic after-the-fact loosening took place after the
1957 recession, where the Federal Reserve continued expanding until Fed funds
rates had declined another forty-six percent on top of the sixty-one percent
decline during the recession. In 1969, policy resulted in a follow-on decline
of twenty-four percent, on top of the almost thirty-eight percent during the
recession. In 2001, explicit policy reduced rates almost another seventeen
percent, on top of the roughly sixty-one percent during the recession.
In the past, as today, overshooting was thought to be a
problem. Hence, in the six months following
the 1957 recession, rates went up almost one hundred eighty six percent from
their recession lows. In 1960 and 1969, rates were fairly stable in the six
month window, declining slightly beyond their recessionary lows. Following
1973, Fed funds rates six months after the end of the recession were up roughly
thirteen percent over their recessionary lows. Following 1980, they rose almost
one hundred percent from their recessionary stimulus levels by six months after
the recession, only to be slashed a year later by fifty percent and another
eight percent in the 1981 recession, in quick step.
How does that compare to the Maestro's actions:
Looking holistically at recent policy, in 1990, the Federal
Reserve decreased rates roughly two percent prior to the recession, then
another twenty-five percent during the recession, and another almost eight
percent after the recession. It wasn’t for another 108 months, until May 2000,
that rates again rose above their stimulus lows in the 1990 recession.
Of course, by March 2001, the economy was in recession,
again. The Federal Reserve cut rates by over fifteen percent before the 2001
recession, another sixty percent during the recession, and then – like in 1990
– roughly another seventeen percent after the recession. But, like 1990, the
Federal Reserve did not raise rates above the stimulative 2001 recessionary
lows until December 2004, approximately a year before the real estate bubble
burst in California.
By 2007, the economy is in recession yet again. This time,
the Federal Reserve cut rates by almost fifteen percent before the 2007
recession, and some ninety-seven percent during the crisis. The problem is that
there is no room to reduce rates following the recession, as in all but 1973
and 1980. If you recall, those were not times of widespread economic
prosperity.
And here is the crux of the issue: current bliss substituted for future pain, a lesson so well learned by the current administration.
To me, at least, there is a clear lesson in the Fed funds rate
experience and application: while you probably don’t want to raise rates into a
recession – 1973 saw a six-month pre-recession increase of over forty percent
and 1980 almost thirty-four percent – you don’t want to exclusively wait until
during and after a recession to reduce rates. Nonetheless, reducing rates before recession may both add to the
speculative fury that will (eventually) necessitate the (potentially larger)
downturn and leaves no room to lower rates in order to address lagging effects
like unemployment. The lesson,
therefore, may be that while we have sought front-end loosening to mitigate
recent recessions, we have sacrificed back-end loosening that could be an
important component of monetary policy.
At the end of the day, we are now in a position where additional loosening is impossible due to being on the ZIRP boundary, which has forced the implementation of Q.E. The latter is the Fed's last and only method remaining to stimulate a monetary recovery in the economy, and despite a surge in the Monetary Base, the net impact to the consumer has been a wash due to a collapse in the velocity of money. Aside from keeping Mortgage Rates manageable, Q.E. has been a failure from a monetary standpoint. Ben has no more bullets, and since the decade-long phenomenon of inflation-exporting to China may be at an end, the Fed is truly between a rock and a hard place, where, as speculated extensively, the only two realistic outcomes are either a deflationary spiral or accelerating (hyper) inflation. Perhaps it is only fitting that Bernanke should be reappointed in order to fully deliver this country to Keynesian grave which his predecessor did such a great job at digging.
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the only two realistic outcomes are either a deflationary spiral or accelerating (hyper) inflation.
Personally I see more the hyperinflation scenario. You could see the Dow Jones at 100'000 points in nominal terms, but worthless in real terms. I wish nothing more than that to the idiotic permabulls as CNBCOMACSTAGANDA.
Perhaps it is only fitting that Bernanke should be reappointed in order to fully deliver this country to Keynesian grave which his predecessor did such a great job at digging.
Ya know, you got a point there Tyler.
The USA never learns its lessons until it's a crisis and then we pretend it didn't happen, lie about it, create diversions, blame it on someone or something else, spin it, and move along, whistling past the graveyard. The exposure of that crisis was Bear and Lehman. One year later, the Fed has created an echo bubble and NOTHING has been fixed on a fundamental and structural basis in the banking system and housing market. With banking it is actually worse in my view as we have legitimized fraudulent accounting via the FASB FAS 157 modifications.
There will be a Minsky moment, just a question of when, and it could be a long time as the US will probably outlast all of Europe's collapse first. Japan as well.
We have fucking blown it for the next several generations of Americans (and many other world citizens as well).
I respect your posts DH, I read here alot more than I actually post.
If the future is blown for the next several generations... What would you have us do?
What am I supposed to do, exactly, for myself, my family, and my toddler? What the fuck am I supposed to do? I have nothing. We have a house. My wife got laid off, I've been laid off and found employment in a TBTF call center that feels alot like the pit of hell... I'm living month to month with all savings depleted.
I'm not sure I can take it anymore. I'm damned if I do and damned if I don't. I can make a stand and most likely lose everything, or I can keep my head down and slave the rest of my life. I'm getting real twitchy.
I need a light at the end of the tunnel. I have it alot better than most, and I'm in it up to my ears.
.....Man I don't have anything else to say.... I'm just speechless...
get a federal gov't job.
What would you have us do?
in a nutshell:
gov't, regulators need to tell the truth.
truth is recognition of massive debt problem we have.
the debt must be delevered, defaulted, or discharged for future economic growth.
adding more debt is insane and that is what is happening on the failed attempt to fix housing.
zero interest rate policies cannot continue. they will only cause bubbles like what we have now.
an honest and open plan must be implemented to reduce corp, gov'tal, consumer debt with specific timetables. example, banks must recognize true value of assets via FASB 157 back to mark to market and every nickel of profit must be allocated to capital account to provide funds for delevering. if a structured plan was agreed to (this will never happen by the way, hence why we are fucked), then some regulatory forebearance on capital could be the guiding point (we are doing this anyways right now!) with the provision that it goes away when the delevering plan is accomplished and if banks don't delever, take 'em over by the FDIC, too bad shareholders and bondholders, it used to be called capitalism.
allow me a few moments to respond about your family, but in advance of that, particularly as a family man with wife and child, whatever you do, NEVER give up as your child needs you. by the way, that's what drives me now as my 3 children are 17-24 and I'll definitely be dead before the ultimate shit hits the fan.
That's good advice. My kids are older too, and we see the effect of the demise of the 'American century' all too clearly. But we'll take care of it, even if my grown children have to live in my house for a few years - quite a few years.
J.M. Synge "The Playboy of the Western World: . . .six strong men retching into an open grave."
Crab...your situation sounds a bit tough, no doubt.
If it is any help, both my wife and I have been unemployed since April 2008 (not a typo). The only reason we are okay is we did our finances the old fashioned way and that is the lesson to be learned here, i.e. we worked hard, we saved, my debt to income ratio was always well below conservative standards (i use D/I for my old banking days on a gross basis, i.e. no more than a 36% D/I ratio on gross income). We weren't crazy types that just had to have a new car every year or two or live in a house that was more than we can afford.
I'm sorry your wife is laid off, but the bright side is that she is home with your toddler raising that child according to your values which is a big benefit that cannot be quantified by money, and that toddler is your MOST important responsibility, period. Ergo, given the option of as you say: "I can make a stand and most likely lose everything, or I can keep my head down and slave the rest of my life. I'm getting real twitchy." My strong and urgent advice to you is that the only option you have, now that you have a child, is to keep your head down and keep working, keep getting the paycheck. Most of the people in this world are in the same situation, so just keep your nose to the grindstone and do NOT allow yourself to "lose it". Remember at all times your toddler, ok?
some money ideas for you to think about given your current situation with no savings.
would it be cheaper for you on a cash flow basis to sell house and rent.
can your wife take in one or two kids from neighbors, friends and day care them during the day. (my wife did that for many years, helped alot and she raised our 3 as they never went to daycare or anybody else's place)
this may touch a chord with some here, but see if you are eligible for food stamps (yes, I know folks, just giving the guy some ideas here)
do not spend any money on anything that is not a necessity and put that money, I don't care if it is 5 bucks per week, into a savings acct and try to save something.
the one thing you CAN control is attitude.... even though things are tough, if you can put on a positive attitude every day and view things from the bright side of your life, you will get through this much better.
a nationally well known guitarist who is a friend of mine came up with the following after he successfully and recently beat stage 4 cancer (he is still doing great) and I think it is appropriate here:
Life is not about waiting for the storm to pass, but learning to dance in the rain.
Keep your chin up Crab and keep working through it.
+1
This may be odd, but it is a perspective:
http://www.youtube.com/watch?v=-wBqYoBhmTM
Rough. At least you have a job.
If your job was a big party you probably wouldn't have to get paid to work there.
Keep learning and keep earning.
Take some xanax for the twitch and accept a lower standard of living.
The sooner you accept that, the better off youll be while every other american is demanding free american idol and mcdonalds youll smile while you cook up a nice meal from your veggie garden and play scrabble with the fam. Shit is gonna change here over the next ten years...
Hang in there, Crab. When the chips are down I just try to remember how much panic, stress and frustration can cloud one's judgment. I think we all have made decisions under extreme stress that, when the dust settles, we regret.
Please keep a cool and clear head for the sake of your family.
I wish you the best.
I am very surprised that none of you recommended Crab Cake to reach out to his extended family, friends and his community for support, encouragement and guidance. Pardon me for saying this, but why it is that in this nation extended family and community are such alien concepts. Very rarely do people talk about forming a community of like minded people and preparing for rainy days? I don't mean to offend anyone with my question, but why do most Americans shy away from such relationships? I see around me people who live in silos - me, my wife, my kids, my car, my house and my accoutrements. That's it. And, now, get away from me. Leave me alone. I notice people going to Church and as long as they in the Church they are all very social. The moment they are out of it, they are all back in their silos. We have built so many walls around us that we are almost living in a labyrinth.
Why are many Americans like this? Could somebody explain this to me?
When I moved into my aparment, I went around saying 'Hi' to my neighbours, and they looked at me as if I was nuts. So, I stopped. I just acknowledge their presence, now, whenever I see them.
Well, Crab Cake, in addition to everything above, my advice to you is to go reach out to your extended family, mend broken fences, talk to you friends about getting together and forming a community of like minded people. The more you share your worries with your friends, the faster the worries will dissipate. And good luck to you and your family. I am sure you will come out with flying colours.
Mr EhknowkneeMass the reason is very simple - worker ants serving a queen have no energy or time to socialise.
Workers in America work much harder then those in Europe and have much less disposable income , believe it or not French workers are very productive(when they work) but have time for the other things in life.
EhKnow....an excellent post and thank you for sharing those thoughts.
True Nobel peace prize of the post!
Crabcake:
There is no shame in working for your family, even if it is in hell. There is only honor.
Crab Cake, one additional suggestion to Deadhead’s and others' excellent advice if I may. Be willing to go where the jobs are. Don’t be wedded to an area or your relatives if you can help it. This advice has served me well. It recently changed the life of a fellow I know, 28 years old, a talented carpenter. He worked for a builder in a resort town for two years without pay on the basis he would get paid as soon as they finished a custom home—i.e., when the builder got paid. The builder didn’t pay him or the rest of the crew and the fellow's credit went bad. The housing market slumped and without credit and as a self-employed craftsman, he could not get work because he couldn’t buy supplies. For two years he and his young brother lived on his brother’s earnings as a busboy because they wanted to stay in ****. I convinced him to go elsewhere, where the work was, and return to the area when he retired. He traveled 80 miles to a large city nearby, found work with another builder, and within a year his salary doubled, he got his carpenter’s license, met a young CPA, they married, moved out of state, opened their own building business with her as business manager, and, then, to top it off, his parents moved all the way from the East Coast to the West Coast to be near their two sons.
As for 401(k)s and savings, deadhead has sound advice. Save, little by little, if you can. James Quinn, a senior director of strategic planning for a major university, wrote on September of 2009 in “Living in Beverly Hills”: “The median 401k balance in the U.S. is $26,000. Boomers realize they are 60 years old and have $50,000 of retirement savings and $30,000 of credit card debt.” It's only the Blankfeins, Rubins and Dimons who can loot free to the tune of billions...
http://www.financialsense.com/editorials/quinn/2009/0909.html
Bernanke is a monetarist , he ain't no Keynesian
He is printing dollars to bail out the bank bond holders who have not paid a penny for their bad decisions and that is sucking nearly all the demand out of the world economy.
I do not see the infrastructural development in America that would be the footprint of Keynesian spending
Minsky himself called for emergency spending on high technology when his moment arrived.
The problem with the US economy is that there is no Goverment spending other then on the Military. You have to invest in capital before you can make long term money.
The money changers have been merely feeding off long term investments made during the 50s and 60s and the returns have been falling because you have failed to invest since then.
Exactly. This is just crony capitalism.
It is not capitalism. It is crony corporatism.
The profits are being privatized and the
losses nationalized. If it was capitalism, the shareholders and the bondholders will take a hit first. It is the taxpayer who takes the hit now. Look at FRE and FNM. if it was capitalism their shareholders and bondholders should have been wiped out.
Its the Triffin paradox/dilema writ large. Its a fundamental problem with a host country having the reserve currency they print. It necessitates large trade deficits in order to put all those dollars in other countries hands to conduct business. Its just the endgame now.
That's why I wanted McCain to win the last election, so that he could bear the blame of Bush's policies. Might as well hang the blame where it lies.
Now, Obama gets the honor of being blamed.
This started with with Roosevelt and has been signed off on by every administration since.
And even if it was all Bush's fault, then why is Obama continuing to do more of what Bush did?
Wake the fuck up, lemmings!
How did FAS157 legitimize fraudulent accounting? Please explain
Yet something changed in monetary policy about 20 years ago, and that something became particularly obvious in the last two recessions - those of 2001 and 2007....
That Wall Street completed the final phase of its takeover Washington DC and Main Street?
Yet something changed in monetary policy about 20 years ago, and that something became particularly obvious in the last two recessions - those of 2001 and 2007...
I'll tell you what happened. Along about that time high level criminality in the usa went completely meshugana and gutted the real eCONoME for some hookers and blow.
Slightly OT:
The german insurance giant Talanx has sued the Bundesbank to be given a checking account at the Bundesbank, because it considers a checking account at a normal german bank prone to insolvency risk....
http://www.ftd.de/unternehmen/versicherungen/:beispielloser-streit-talan...
If I may expand with a simple economic model
All money is spent eventually even in the hands of a tight WASP because all money is merely a token of energy yet to be used.
So if you accept that premise then money can only be spent on 2 things - present consumption or future consumption , to sustain that future consumption you will have to reduce your current consumption to build energy infrastructure for the future - any other infrastructure such as road building is not a investment for the long term because it runs down present finite capital such as oil.
The false economic models of the Chicago school gave the illusion of wealth because they set up money transfer agreements and protocols to continue the running down of wealth while not paying the cost for future infrastructure.
This was possible during the first oil crisis of the 70s as there was capital infrastructure built up during the post war period on a sea of excess oil.
This second oil crisis does not have the advantage of new capital infrastructure to run down so therefore has to make some hard choices.
But to accept hard money libertarian views on the world would be a mistake as there economic policies would not accept a deficit for building large new nuclear power plants for example - this would condemn the planet to large scale poverty and feudalism where the average joe would be free legally but in reality would be slave to his master
Isn't that what we have already?
Gold Standard = slower, more robust growth.
Maintaining the status quo of credit systems, fiat currencies, etc encourages malinvestment. Instead of creating jobs we are focused on how to keep the food stamps coming.
There is nothing wrong with deficit spending if you invest for the future - the current deficits are crazy no matter what you do with the money but getting back to a super hard currency would precipitate a collapse that would usher in a dark age where there would be very few winners
Beware the siren song of some libertarians who believe they will be the new elite when this sorry mess is all over - there policies will usher in a new era of the plantation.
correct me if i am wrong here, but what i think we are observing in the market is the fact that people who have come into power/wealth through very little work of their own, are now working harder then they ever have to keep that weatlth from being transfered to more prudent/conservative buisness or investors. A general synopsis i have formulated is that everyone leveraged up to A. either buy up the competition with large loans of printed fiat money because they had a friend that was a banker or B. read A. My family has been involved in the auto parts buisness for 90 years and we don't want to dominate the market, just make a fair living and pay our people a fair wage. Giant corp's which mainly appeared in the early 80's now dominate much of the market. They have incurred large debts and if intrests rates were ever to rise to levels such as in the early 80's they would not be able to meet their obligations or if they were to surive they would have to close many of their stores, since they have oversaturated much of the market by haveing a store on every corner. So where am i wrong? Are not the rich just screwing the rest of us by denying their unethical and unsustainable buisness models? The Power elite as some might call them
Yes
edit, denying that their unethical and unsustainable buisness models are dying
You do make a very interesting point. My view is that, in the subsequent rebuilding, it will require us to take a very hard look at what went wrong under the Constitution - which in my view was simply the breakdown of the Rule of Law, that is, corruption became the status quo. The principles of the Constitution were discarded, and not to blame, as the destroyers would have us believe.
Libertarians will help society maintain focus on the basics. They will not be the only ones with gold, of course, but we will need to allow the least amount of restriction on trade, travel, education, and the Press in order to grow in the best fashion. The true Libertarian mindset is essentially that of Thomas Jefferson and the Anti-Federalists. Would their ideals lead us unto serfdom/slavery?
Borrowing and investing in the future is very important - as long as it is not done with a printing press to insure against default - which is always performed by wreckless politicians that promise hope in order to stay in office. They only succeed in furthering the rot when not held accountable. Public office should be something the very prudent avoid at all costs. It should be a thankless job.
"Banker status quo perpetuation" -- it's not just Fed monetary policy, it's the all institutions in Washington, D.C.
I never said central banks should control deficit spending , the treasury can do that to build vital utilities - you do not have to pay the fed any interest - issue greenbacks instead or silver certs if you are fiscally conservative
Inflation on a large scale is baked in the cake ,the FED has lost all credibility so tell it take a long walk off a short plank
“Pessimism never won any battle.” Dwight David Eisenhower
If I could expand the model and invert it into a hypothetical world.
We are back in the 13th century and the local lord has discovered oil on his Land.
Now this medieval Lord is notably enlightened for the period and realises how much BTUs are in black gold - the one little problem is that his engineering skills are not up to building a internal combustion engine. So he drags his best most intelligent serf into the dungeon and commands him to build a engine to the best Teutonic standard.
The peasant responds with a uhhhhh
The point that I am driving at is that for societies to evolve and grow they have to both increase their capital and knowledge. A man of capital in 19th century Europe has access to both coal and scientific knowledge to build a petrol or diesel engine
Similarly now -to get to the next energy level countries will have to both build their capital base and their expertise , the paper shufflers stopped this process in the late 60s but it is still not too late - it can be done
This 'analysis' is worthless.
The lending fraud of 2002-2007 dwarfs anything seen previously.
What does monetary policy have to do with the availability-or-not of Option ARM/Interest-only/Alt-A (5X-6X income, eventual default)? The impact from returning to standard loan underwriting is far larger than anything short-term rates might mitigate.
All those strange exotic named bits of paper - were a form of counterfeit currency that the bottom feeders used to extract wealth
This caused tremendous distortions in the capital markets where capital was spent in areas such as housing rather then necessary energy infrastructure
This was given a quasi-scientific backing by the boys in M.I.T. and elsewhere which was endorsed by professors of both the chicago school and other schools for the mentally impaired and these experts were given the full support of the FED which controls monetary policy and were quite happy to make enormous amounts of money from the poor Proles who did not Know any better
I just keep looking at that statement" What does monetary policy have to do with the availability-or-not of Option ARM/Interest-only/Alt-A (5X-6X income, eventual default)"
Not only were the FED increasing the base money supply but they were propelling the velocity of money into orbit by those strange bits of paper.
I have to ask you Mr Anonymous have you left the planet
The report states : "the recent era of managing the Fed funds rate to reduce the depth and duration of business cycles is failing."
This recent business cycle was built upon giving $500,000 home loans to Mexican berry-pickers, $20,000/year income.
Tell me how choosing short-rates at 0% or 8% mitigates the reaction from the lender / pension manager / tranche owner (i.e., 'bag holder') when he finds out he won't be repaid on his $500,000?
In my country the interest rates are a irrelevance now because banks are not lending period - they are just trying to farm the taxpayer by buying goverment bonds and pocketing the interest - the ECB allows commercial banks to borrow below the official base rate and recapitalize by stealth - this is perhaps necessary but the fact that bank bond holders are getting 100cent on the dollar + interest is crazy - I do not know enough about your country's finances to be sure that this is happening but I suspect that it is the case as they work off the same handbook (how to screw taxpayers and get away with it VOL IX)
Correction I meant euros not dollars - Trichet is not a fan of FRNs
What does monetary policy have to do with the availability of "complex financial intruments?"
It's been often referred to as the Greenspan Put. Basically, if you KNOW the score of a football game before it is over ... then you can bet on it and win the bet. The Greenspan Put implies that no matter what degree of insolvency is created in an economic cycle, the Fed will provide the necessary liquidity to ensure that the merry-go-round doesn't stop.
The most recent financial crisis is tied heavily to the completely fraudulent "complex financial instruments." Knowing the Fed would provide the liquidity to bailout anyone on the top tier of the financial totem pole allows investors to throw money at these TBTF behemoths without regard for actual risk.
Given massive amounts of investor cash to play with, the TBTF's operate without consequence ... enter the Interest-Only Loan and his friend the Liar-Loan, with the help of the Federal Reserve, these are dubiously labeled as "complex financial intruments." A scam will continue for as long there is a sucker.
But as with all Ponzi scheme's, eventually there is no one left to play the game. Then the TBTF has to go back to the Fed to get another massive bailout and restart the merry-go-round.
At $13.5 trillon in debt, the US Government is finding fewer and fewer carpets to sweep the garbage under.
At $40 trillion in consumer debt, Americans are having amore difficult time hiding the medical and credit card bills.
Monetary policy is at the heart of what defines the central banks role in the economy. Since the central bank, the Federal Reserve, is a quasi-government institution that is essentially owned by the Primary Dealers what we have is corporate communism. Where a central planner establishes the value of money (the most important commoditiy) with the short-term "Fed Funds Rate."
Using this price-fixing tool, knowing that the Fed will give them a blank check bailout, the primary dealers intentionally sell faulty mortgage products to unsuspecting investors and then double their profits through short selling the same assets without the investors knowing!
There are more options....
The US FED is on the track to economic hell....
The first reaction is to raise taxes from a diminishing base....that is cut down more orchard trees and expect more fruit....THIS IS WHAT IS HAPPENING....
The world needs a new set of valuations to replace the old lost valuations....and also a way to better spread the wealth....
Here is what is left to do....
AND THE GOOD NEWS IS THAT IT WILL WORK....
1) Eliminate both individual and corporate taxes....
to be replaced with a sole 15% Consumption tax....10% for the states....5% for the FED....
Chips fall where they may....cannot lose what one does not have....
2) Remake the securities exchange into a defragmented worldwide electronic direct access exchange that is far more efficient with better factual wiki style information....There would be no taxes of anykind on any securities....The exchange has to built for RETAIL and not the BlackRocks of the world....
If the US performs 1 and 2....the US wins big time....
If the US keeps up this populist run bullshit....BULLSHIT=US....
And no....THIS IS NO JOKE....
The policy of the Fed is to facilitate the transfer of wealth to their friends.
They have succeeded.
all else is a smokescreen, including the apologia/mea culpa from Roubini.
Bravo. Very well stated but odds are whatever we get to replace the treaserve will be just as bad or worse.
The result is far too clear from here. Rampant inflation in all core goods, ie. Food and energy. Rapid deflation in all overinflated assets, ie. real estate and equities, which is all the Fed really gives a rats ass about. Fwiw, whomever has that snake eating it's tail as a pic/icon, that was my idea, I had it first.
We like to think of ourselves as a civilised and advanced culture, objective and analytical, immune to rhetoric and deception, and resistant to dogma.
5,000 years ago perhaps, when the shamen and high priests told us that the crops would fail if we didn't make sacrifices to the gods, (and drop off some gold in the temple while we did so), we rushed to appease the offended. Whatever we were told to do, we blindly followed the insider experts.
Perhaps in 5,000 years we have made some progress -at least now the dissenters aren't shoved off the nearest cliff- but not really................
As Spock would say 'fascinating, and so illogical .'
Ya we have to keep god smug and self satisfied. He can't attract people and control them without his smug self satisfied aura of blissful I don't give a shit about you, I'm happy. Make me happy I'll share less than you gave me. What's really funny is the witchcraft laws of 3 and 10. If you harm someone you have to pay 3 times as often or 3 times as hard. And we end up with a god slavishly devoted to harming and punishing because he SUCKS at math and uses the greater than sign instead of equal sign all the time.
Everthing isn't black and white, one thing or the other, this or that. Things are not that simple. We bought a house in the fall of 1989. Less than 3 yrs. later, I wanted to choke my wife, the realtor, and myself for ever getting involved when I had a decent rent stabilized apartment that fit me fine. The house had lost a third of its value. I whined, I blustered, I cursed, but mostly I just paid; the mortgage, the up-keep, the price. In the spring of 2008, we sold it for three times what we paid for it. In almost twenty years, it provided us with a roof over our heads and filled our heads with wonderful memories. Real estate is financed in 15 and 30 year mortgages for a variety of reasons. One is this: over a period of time, if you maintain, it will increase in value. This past decade, with over reaction to 9/11, was an abberation. The bubble in real estate was obvious. Anyone who says different was a fool, a liar, greedy, or turned a blind eye because that's the way they were making a living. Will this all turn around? Eventually. Life is not a ladder. Life is like a river. It is fresh and flowing. When we are all gone, life will still flow. Crab, do what you are supposed to do in the present and the future will take care of itself.
point taken, its just too bad that inflation on most things has gone up even more then the 3 times you made on your house. www.Shadowstats.com