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Bernanke - Post Schumer Gaffe
I'm adding myself to the long list of folks who have commented on NY Senator Chuck Schumer's choice of words to Bernanke the other day:
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Schumer is a political hack. He wants the Fed to do ‘something’ today that would give the economy a lift heading into the election. Chuck knows that the Legislative side can’t/won’t do a thing before November, so he begs Ben to light another monetary fire to help the Democratic cause. Chucky boy is an ass.
I doubt that Bernanke listens to the noise from Senators very often, but Chuck’s words got a lot of press. I'm wondering what Ben is thinking. Schumer has brought politics into the outcome of the August 1st Fed meeting. Whatever Ben decides to do, he will be accused of partisan politics.
There are many scenarios for the August Fed meeting:
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I) Do nothing
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Arguments For:
a) The economy stinks, but it is not in a crisis. More “crisis monetary measures” are not justified.
b) With the 10-year already at 1.5%, the Fed can’t accomplish anything by pushing rates a few basis points lower.
Arguments Against:
The election and related political considerations will absolutely tie the Feds hands after the August meeting. The next chance for the Fed to “do something” will be in late November. If Bernanke wants to buy some insurance, he has to do something in August.
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II) Extend the ZIRP language past 2014
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Arguments For:
I can’t think of any.
Arguments Against.
Because there is no substance to this, there is a very strong likely hood that the markets will take a few seconds, and then puke. Bernanke knows this. He doesn’t want to lay an egg.
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III) QE3 – $600B LSAP targeted to Agency Mortgage Bonds
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Arguments For:
a) This is what the market wants to see. Failure to do QE3 will disappoint, Ben does not want to disappoint.
b) This a is “populist” approach. Ben can say that he is doing his best to allow homeowners to ReFi and prospective buyers to get a record low rate.
Arguments Against:
a) This is an “all in bet”. Even Bernanke has been questioning the efficacy of additional QE of late.
b) Senator Shelby and Speaker Boehner will say, “The Fed is printing money to play politics!”
c) Bernanke’s critics will go wild.
d) There is absolutely no certainty that another big LSAP will do a damn thing.
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IV) QE3 - $250B LSAP targeted to Agency Mortgage Bonds
Arguments For:
A small QE would create less political backlash. Ben could argue that he is being “moderate” and will, as always, be willing to do more if this modest monetary “bump” proves to be inadequate.
Arguments Against:
a) A “half a loaf” is going to fail miserably. Bernanke wants monetary policy to jack up stocks, as he thinks this creates jobs. Stocks would nose dive if this is the result. Bernanke understands this.
b) Both Blues and Reds would be upset. Schumer will be pointing at Bernanke and saying, “He didn’t do his job!” At the same time Ron Paul would be calling for Ben’s head on a platter.
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V) Something Else – A cut in the deposit rate from a 1/4% to a 1/8%
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Arguments For:
a) This appears to be a modest step. As such, it would be less susceptible to criticism.
b) The small change in the deposit rate would achieve something that Bernanke has been shooting for a long time. Returns on short-term money would go negative. Three and Six month Bills would certainly be negative. One-year paper would trade around flat.
c) Germany and Switzerland are already in negative territory. Other, smaller bond markets like Finland and Sweden are also in the red. For the US to follow suit would not be that big a surprise. Bernanke could blunt critics by saying he had done less than Europe - an 1/8th in the US versus 0% for the ECB.
d) The change to negative yields, (regardless of how small), will force money to move around. There are trillions in money market funds, Trillions in short term Treasury paper, and trillions more on corporate balance sheets. All of this is now going to be looking at negative returns.
e) With the first rungs of the yield curve in the bucket, the longer maturities would be dragged down. The Ten-year would move toward 1%. This result would be similar to the (hoped for) outcome of a large LSAP.
f) Bernanke could still say, “The Fed has more it could do”, as the deposit rate could be cut again (to zero) at some point.
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Of these options, I believe that #V has the greatest probability of occurring.
I hope that the Fed sits tight, and does nothing. But that seems unlikely. Bernanke knows that the economy is now decelerating, and that his hands get tied after the August meeting. So “something” is more likely than “nothing”.
It’s hard to predict what might happen if Ben pushes rates into negative territory. It could end up resulting in an orderly market transition from cash, to high-risk securities like stocks and junk bonds. The virtuous cycle of higher stocks leading to higher spending and more jobs might be the result. But I doubt it.
Arguments Against:
a) The knee jerk reaction to negative rates might be positive, but in a short period of time the market will come to realize that negative rates are not going to force people (more) into dividend stocks. Quite the opposite, it will scare the crap out of them.
b) This is not good for the banks (who cares); but the financials are still a big chunk of the S&P.
c) This move will likely cause more “unwanted inflation”. If China or India is faced with negative returns on their reserves, they might be inclined to just buy commodities with the billions of cash they are sitting on. Prices of grains, beans, copper, coal and oil come to mind. Gold would be on the list as well.
d) If three-month bills went from +8bp to -7bp you might think that it wouldn't matter. The change is so small on a relative basis. I think of it as stepping off the edge of a cliff.
The entire global financial system is based on fiat money and the presumption that the money has “value” as a store of wealth. Nearly every action by the Fed over the past few years has led to the debasement of money. In the final stage, the issuers of money debase it to the point where it is no longer desirable to hold. I see the move to negative rates across the globe as a tipping point, one that will be damn hard to reverse once undertaken.
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I would think that more monry would move out of fiat and into gold. When real interest rates are low (and negative is pretty damn low) then people go to gold. Now imagine the case where NOMINAL interest rates are negative. It seems pretty clear that people get screwed by holding fiat. This should be clear even to KFC-sated, high fructose drinking Americans. It's been clear to many of the emerging markets already. And the inference from rising gold prices has to be that fiat is dying. The banks do not want this...especially those central banks who print the worthless fiat.
best post of the week-you summed the whole clusterf*** up in a few sentences.
Honestly the best, straightforward QE analysis I've read of late... A sincere thanks BK.
Yes, but what does it have to do with anthropogenic global warming?
I took a ton a shit for that one, didn't I??
Remember the title I used??
"I Start an Argument"
I actually thought it was a good argument. Many good comments and some great cat fighting.
I was clear in the blog that I was not convinced, either way, on what role humans play in this story. And I went out of my way to make it understood that I was no "expert" on this topic. Who is??
I'm glad I pissed you (and about ten thousand others) off.
That's what the blogs, and places like ZH are supposed to do. No?
I'm just a writer, if it bores you, it's no good. I try not to bore.
Anyway, I'm working on something related to El Nino. It might give you another opportunity to vent.
bk
I am El Nino!
http://www.youtube.com/watch?v=IvmeUStFvz8
I agree with your analysis. The simple fact that Schumer got into the press means that the backdoor channels to Bernanke are not working. This type of thing needs to be done in the shadows... not cried from the mountain tops.
I whole heartedly expect the Fed to do nothing. The White House cannot do anything prior to the election to change this tack. Maybe winds of change will sweep through the White House?
In watching what is happening in Europe, I wonder about the expected consolidation in their banking industry. Target2 is a double edged sword, but is a sword none the less. Capital controls and exclusion to Target2 can cause a serious mess in any national banking scene if the country defaults on it's obligations to Target2. I suspect any country walking away from Target2 will find it's banking system "Europeancided". Those monies shipped out of the country to weather the storm may have a difficult time getting back into the country without a European banking prescence. In that environment, violin sales will go through the roof. Expect large European equity stakes in the new national banking system.
Schumer is the prime example of why the constitutional amendment requiring direct popular election of senators should be repealed.
What good would that do?
By having the senator picked by the state legislature rather than a direct election by the soverigns, they are not protected from recall as now. The people of the state have far more control of a U.S. senator and can remove him by controlling the state legislature. Milestones
Choose Representatives like Jury Duty.
You have to be a citizen (imagine that), live in the district (not just have a P.O. Box), and be registered to vote.
Serve for two to four years, get median wage, no retirement package or special healthcare, and then you are done and you have to go back and live with the people you just represented.
With the Supine Court calling corporations individuals and the cost of campaigning astromonical we have almost guaranteed cronyism and career politicians who are self-serving lackeys for everyone but their constituents.
Once a douche always a douche.
I see you beat me to calling Schumer a DB. Of course, he has good competition in Levin and Reid.
"anarchitect and boehner 4ever"
"All of this is now going to be looking at negative returns."
Shadowstats.com sez real inflation is running ~9%, so if your current returns aren't at least that, you're ALREADY "looking at negative returns."
Duh.
I hate to be a downer, but the drought is really going to cause some problems with food prices. In a few months we could be wishing for 9% inflation.
Yep. The drought could result in the devastating combo of cost-push AND demand-pull inflation.
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Whatever Ben chooses he will be wrong.
Right or wrong, it certainly wouldn't be the first time the Fed has done something to help a sitting President.
Yeah someone has it all wrong for sure. It's not even remotely about electing the two-headed snake. It's all about the niagra falls of liquidity that gets them all soaking wet. Since they are also all Goldbugs, and collect interest, they are tripple-dipping. Anyone that thinks that they are not or will not print is drinking WAY TOO MUCH KOOL-AID.