This page has been archived and commenting is disabled.
Peeking Inside Yellen's Mindset
From Scotiabank's Guy Haselmann
Yellen’s Mindset – Implementing Her Professor’s Theories
Bloomberg printed an article about Yellen’s educational background, noting that two of her professors were James Tobin and Arthur Okun. The article is interesting because the Fed is currently trying to implement QE and “Twist” which are theories developed by these two Nobel Laureates. Tobin attempted a form of “Twist” in the 1960’s. He also championed Keynesian ideas and advocated government intervention to stabilize output and avoid recessions. Okun developed an empirical “law” relating” changes in unemployment to GDP.
- The FOMC is placing great faith in these theories; thus, policies are an experiment of colossal proportion but whose effectiveness has limited supporting evidence. Fed models try to estimate benefits, but they assume that markets remain efficient over time. Model errors are likely to occur when trying to asses market risks, particularly because markets are typically irrational and illiquid during crisis periods.
- FOMC policy veered into unchartered waters as soon as it moved Fed Funds down to the zero lower bound. When official interest rates were eliminated as a monetary tool, directly manipulating financial markets became the Fed’s only conduit to try to affect the broader economy. Evidence of its effectiveness is open to debate. Since asset price inflation has been a policy objection, knowing when to stop is critical to Fed’s credibility, especially with its history of fueling boom/bust cycles.
* * *
And some additional thoughts from Guy on markets:
FOMC Statement – Smart Tweaks to Buy Time, and Manage Expectations
The FOMC was probably uncomfortable that market expectations for tapering had moved to March or later. Yesterday’s FOMC statement was successful at opening the possibility of an earlier move without changing overall policy direction. The statement downplayed the effects of the government shutdown and left in place the word “moderate” to describe the state of the economy, rather than downgrading it to “modest”. More importantly, the statement removed the sentence about how financial conditions had tightened.
FOMC Discussion – Growing Risks for Every Decision
The discussion in the boardroom was likely more intense than reflected by the simple changes of the statement. The risks to tapering at this meeting had grown due to the weak September employment report, and because the market was not expecting any changes to policy. However, there are several FOMC members who believe the risks to not tapering grow higher every day in sync with the size of its balance sheet. The stakes are rising not just because their exit strategy becomes more difficult as the balance sheet expands, but also because the Fed has lost any sense of the market reaction function once they actually announce a slower pace of purchases.
Markets – Expensive, but Carry and QE Trying to Keep Them That Way
The bottom line is that the current QE policy will continue for another 6 weeks (at a minimum). The Fed is trying to “buy time” in the hopes the economy can heal further. Therefore, the attractiveness of carry and roll-down trades in Treasuries will partially offset the lack of attractiveness Treasury yields (expect a slow leak next week on 10s down to 2.62%).
- Buying equities because bonds look expensive is a bad rationale. Equities are saturated with speculative excess based on Fed promises or the perception of promises. This may work for a while longer, but speculators are likely playing a greater-fool-theory ‘game of chicken’.
»
- 8594 reads
- Printer-friendly version
- Send to friend
- advertisements -
Queen Printsalot ready to rumble. You go girl!
Tobin tax no more, common currency here we come.
"Tobin saw two solutions to this issue. The first was to move “toward a common currency, common monetary and fiscal policy, and economic integration." WP
Left vs.Right, Euro vs. Dollar ,shoot no more...
Does it resemble the cell of a Spanish Prisoner?
If these FED globalists aren't stopped one way or another they are going to get us killed.
Chinese state-run media revealed for the first time this week that Beijing’s nuclear submarines can attack American cities as a means to counterbalance U.S. nuclear deterrence in the Pacific.
Read more: http://www.washingtontimes.com/news/2013/oct/31/inside-china-nuclear-submarines-capable-of-widespr/#ixzz2jQMKLulA
Follow us: @washtimes on Twitter
Re: Beijing’s nuclear submarines
Cool... Another arms race. Looks like "the fittest" looting Big-MIC will be getting more "fitness" pretty soon.
Ugh, so many people are out of touch. THIS IS NOT REAL NEWS. China has had SSBN's for decades. Go grab a copy of Jane's Fighting Ships from the 80's -- it's all there. Xia class SSBN with 12 JL-1 nuclear tipped missiles. Horribly inaccurate and unreliable. It was just the Chinese officially telling THEIR OWN people.
FWIW, the 094 boats are still really loud, but the JL-2 missiles have a long enough range to mitigate that, ahd the accuracy is decent, though still not high enough for hardened targets, with a low yield MIRV anyway.
In a sane world the FED would set the prime rate at 5% and end QE RIGHT NOW and get the hell out of the way.
No bailouts, no TARP, no backstops, nothing; and the rule-of-law enforced upon Wall Street and Washington.
Problem being we are so far down the rabbit hole we're in Wonderland popping pills and eating mushrooms.
Would that be the Red pill or the Blue Pill. Morphious Yellen would like to know.
One, then the other. Giant, then tiny; back and forth, chasing the white rabbit, painting the roses red, never escaping Wonderland.
Tea with the Mad Hatter at regular intervals (FOMC press conferences).
why should the fed get to 'set' any rates at all? in a 'sane' world, market forces would set rates.
Re: and the rule-of-law enforced upon Wall Street and Washington
How would that help "the fittest" member of society to remain "fit"?
Kinda OT ...... RBS is chucking $ 61B of its trash paper into an ' internal bad bank ' .......WTF is that supposed to mean ?? < other than an elaborate, confused ponzi scheme >
http://dealbook.nytimes.com/2013/11/01/rbs-to-split-off-troubled-loans-of-about-61-billion-into-bad-bank/?_r=0
It means the mean statists are investigating the 5T forex rape; and RBS is amongst the potential guilty parties.
When you put your finger in the honey pot you put your finger in ALL the honey pots; its an addiction. That's Tobin's law of twisted mind sets.
Keep Yelling.
.....Tobin attempted a form of “Twist” in the 1960’s. He also championed Keynesian ideas and advocated government intervention to stabilize output and avoid recessions. Okun developed an empirical “law” relating” changes in unemployment to GDP...
Lets twist again like we did last summer...very 60s even 50s. Tobin was a SWINGER.
Tax the rich and twist again. I hope Yellen has not forgotten the first commandment when she executes the second.
anyone worried about the fed's credibility is not credible
Peeking Inside Yellen's Panties
I cannot unsee this. That I even imagined it as I read it is bad enough. And then I read it again. Suddenly I was looking through George Akerlof's eyes coyly whispering "who wants to happy funtime with the nobel winner?" then I woke up in a pool of vomit. Now I share this out of pure caution and warning to others. DO NOT READ THE ABOVE STATEMENT WITHOUT FULLY UNDERSTANDING THE DANGER.
And yes, someone did the unthinkable...here is the spawn of Yellen: http://www2.warwick.ac.uk/fac/soc/economics/staff/academic/akerlof/
I've developed an "impirical law" relating success to assholeness.
Where to I apply for my Nobel. Actually, I'd just like the Laureate.
http://www.marketwatch.com/story/how-to-know-if-bernanke-failed-2013-11-01?dist=countdown
The QE money "printed" by the Fed has no credit multiplier. It is designed to be captured by the Federal Reserve Bank of New York via interest on excess reserves, which is higher than fed funds rate for a reason.
If the QE money is not lent in the inter-bank fed-funds market, as excess reserves used to be lent before there was interest paid on such balances, it does not multiply in a factional reserve banking system.
Both monetary velocity and the credit multiplier have been intentionally lowered by the very mechanics of QE. They will not rebound on their own. Simply put, both the credit multiplier and the velocity of money are a function of QE. The more the Fed does QE, the more they go down. (For more details on the mechanics of QE, see this missive.)
QE is a game of interest rates, not the quantity of money. It is a bit surreal to watch the mechanics of the U.S. Treasury borrowing excessively in order to keep the economy afloat; the Fed dominating the Treasury auctions in order to keep long-term interest rates subdued, after which, the Fed pays 25 basis points for its QE excess-reserve funding, only to take in the remaining coupon interest from its giant fixed-income portfolio, aka the Fed's balance sheet, and remit it back to the U.S. Treasury in the form of an $88.4 billion profit for 2012.
QE is the largest carry trade in the history of finance, the success of which will be known after it is completely unwound, which will not happen for a few years after Chairman Bernanke leaves. I believe that with QE, Chairman Bernanke tried to get the U.S. economy to re-leverage, or at least stop if from de-leveraging. Regrettably, I have to report I do not believe he has succeeded on that front.
The total leverage in the U.S. economy has begun to fall again, coming in at 345.5% at last count. Total leverage in the economy is simply the sum of all credit market instruments in the U.S., total debt if you will, divided by GDP. The total leverage in the economy doubled in the past 30 years and peaked at the onset of the financial crisis, after which we began a process of de-leveraging, or falling total leverage. The U.S. economy registered rising leverage in Q3 and Q4 of 2012 but has again begun to de-leverage in 2013.
In the grand scheme of things, this renewed de-leveraging may seem like a blip on a long-term chart, but I believe it is what keeps Ben Bernanke up at night, for if it continues, it will likely prove that QE under his tenure was a failure.
Another way to think of this rising-leverage ratio is that it takes ever-increasing amounts of debt to produce the same unit of GDP, where the level of total debt in the economy goes to the stratosphere, while GDP is subdued. That rising differential between total debt and GDP has been a source of prosperity for much of the past 30 years, and QE is a maneuver to get it to move in the "right" direction.
Yes, but the Fed should have KNOWN that QE would not stop deleveraging long before they ever embarked on this grand little "experiment" of theirs. After all, QE hasn't stopped (or even slowed) the rate of deleveraging in Japan for over 30 fucking years...
These Ivory tower idiots are simply too myopic. They would rather stay heads-down tweaking and refining their "Atmospheric condition and weather forecast predicting models" than to lift their heads and LOOK OUT THE FUCKING WINDOW to see whether the sun is shining, or not...
Academic Ass-hats. Every last one of them.
The flaw in the first part of your argument is that the velocity of money started collapsing before even QE1. What keeps Bernanke up at night isn't leverage, but that the huddled masses will notice the devaluation of their purchasing power and drive inflation into orbit.
Excellent comment, polo007.
It is unfortunate that Bernanke does not understand statistics, and instead relies (at least in public discourse) on averages. Because Bernanke is only able to understand average discretionary income, average debt levels, etc., he is unable to understand that as more of the US population becomes marginally employed his crude metrics are really tracking a smaller and smaller portion of society. Those at the upper income / wealth range (essentially 100% correlated, so we can speak of them as one) have relatively no debt, and no intention of increasing their current debt levels. Those from 0% to 80% or so have less discretionary income, and dropping. The more successful Bernanke is at raising inflation, without inflating wages in the depressed income regions (<80 percentile), the more he is actually killing the economy.
Until we see significant wage inflation, spread across all income percentiles, the US will remain in a downward death spiral. It is simple math / statistics. Too bad economists are not required to learn that subject.
In the meantime, in addition to depressing interest rates to not very much effect (because the targeted population cannot afford to borrow and becomes less able every day), QE has the following three beautiful characteristics, two of which have remarkable downsides:
I have been doing this analysis for 5 years now, with the same result every time. But I had not updated for the 2012 data (latest available). Just checked. People with incomes at the 95% have seen their incomes go up significantly. At the 80% -- no change whatsoever. If somebody is interested I'll confirm, but my bet is that most below 80% have seen their incomes drop. The Bernanke Squeeze is on -- destroying America, one QE at a time. BR.
In other news... the Fed today unveiled some of it's latest stress test parameters for TBTF banks. Including a 50% plunge in the stock market. Almost like they know it's coming or something.
"If it were positive to take interest rates into negative territory I would be voting for that."
Janet L. Yellen
Februrary 2010
That's all I fucking need to know.
the whole US financial community, like the whole first world financial community, locked in incestuous derivative fusional passion, lock stock and barrel, waiting for the phoenix to rise from its ashes, victims of Holy Borgiastic Oligarchy Papal Decree-- aka FED QE to infinity -- has bought into can kicking since 2008.
Its doing God's work as decreed by GWB who saw this awesome unexpected yet predictable fall of Rome while he played his lyre of 9/11 serenade.
Any action against the unified CB squiddish controlled market MANTRA is VERBOTEN.
All we can now do is navigate between Charybdis and Scylla and...PRAY. We ain't no Ulysses!
SO Yellen prays and kicks the can....while the Sirens sing their sad, sad song..."Sitting in the morning sun, i'll be sitting when the evening comes...watching the ships roll in; sitting on the dock of the bay!
Scary, but why couldn't you have negative interest rates? Are not some banks already doing this by charging a fee to hold a deposit with 0% interest rate. Seems possible the Fed could do this. Also, if you push the value of the underlying bond high enough, you'd make the yield to maturity go below zero.
QE is negative rate policy....as long as excess reserve basis exceeds the Funds rate. The FED is confident that their harem of banks will abide by the FED unwind by controlling the flows of excess reserves. A dilemma exists when the FED gives the signal to release excess reserves.....banks will want to move first in profit-maximization with the highest credit worthy borrowers still available. This is the payoff for the FED still and continually bailing out the banks with the reserve spread. As banks transition into credit creation the flows supporting equity flows will decrease....this is why Bernanke is NOT worried about the 'bubble' in equities. His model predicts that the two will converge----a growing credit expansion ie. growth and at the same time equities be gently lowered to the market clearing equilibrium. I think HE IS FULL OF SHIT.....the FED CANNOT control flows with any precision in a normal cyclical downturn and Banks DO NOT play the game of taking one for the team---BANKS will move FIRST to protect profits on bank....NOT the security of the Economy---irrational in the long-run.....but in the long-run...we are all dead!
Yellen = More Tobin and Okun = More Philips Curve = More Bunk.
"Tobin attempted a form of “Twist” in the 1960’s. He also championed Keynesian ideas and advocated government intervention to stabilize output and avoid recessions."
Every cycle has an UP phase and a DOWN phase. A recession is the down phase of a cycle. There is no getting around the down phase of a cycle.
"Peeking Inside Yellen's Mindset." I'd rather not..."Buying equities because bonds look expensive is a bad rationale. Equities are saturated with speculative excess based on Fed promises or the perception of promises."
Looking at a chart, equities are way expensive, reflective of financial fraud.
More colours to the potrait:
Peter Schiff On Gold Catalyst: Janet Yellen Exposed - The Truth Behind the Myth GLD, MUX, TNR.v, GDX
"Peter Schiff separates truth from the mass media hype about Janet Yellen's real track record. As we have discussed before, her core beliefs are even more neo-keynesian than those of Ben Bernanke. The new play book for the FED is written by Michael Woodford and it will be even more fundamentally positive for the Gold. We can expect continuation of "pro-growth policies" with very little regard for the created bubbles along the way.
Peter was right about the Housing Bubble in 2006, he was right about the "Tapering" in September, what will happen if he is right again with his Call on Gold? We will provide his discussion on Gold and our entry on Michael Woodford to dig it out more for interested."
http://sufiy.blogspot.co.uk/2013/10/peter-schiff-on-gold-catalyst-janet_26.html#
The FED can print money but they can't print AA batteries.
What do you get when you mix politics with an academic? A Nobel prize! As long as it is left wing politics.
When will they all start a sellin?
When the markets reek of dead fish?
When they do they'll all start a Yellen,
And the bears may then get their wish.