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The Fed Won't Let the Economy Heal
Submitted by Frank Shostak via The Ludwig von Mises Institute,
Most commentators are of the view that the massive monetary pumping of the Fed during 2008 prevented a major economic disaster. The yearly rate of growth of the Fed’s balance sheet jumped from 3.9 percent in January 2008 to 150.9 percent by December of that year. The federal funds rate target was lowered from 3 percent in January 2008 to 0.25 percent by December of that year.
According to popular thinking, the Fed’s actions have bought time to allow the US economy to heal — much like keeping a coma patient on life support. Consequently, popular thinkers are harshly criticizing commentators that advocate allowing economic recession to take its course.
Contrary to popular thinking, economic recessions or economic busts are not about the end of the world but about the removal of various non-productive activities, also labeled as bubble activities brought about by previous loose monetary policies of the central bank.
Observe that by means of loose monetary policy wealth is diverted from wealth generators to non-wealth generating activities. The stronger the pace of monetary pumping the stronger is the divergence of wealth. (Bubble activities, which don’t generate wealth, cannot exist without this divergence.)
Obviously then the longer the divergence of wealth takes place the weaker wealth generators become. Note that once the ability of wealth generators to generate wealth comes under pressure the so-called economy follows suit. After all it is the increase in wealth that supports overall economic activity.
It is increases in wealth that fund increases in productive and non-productive activities. So how then can aggressive monetary pumping by the Fed during 2008 have allowed the economy to buy time and to heal?
We suggest that the massive monetary pumping of 2008 has bought time for non-productive bubble activities. However, as we have seen, such activities undermine wealth generators thereby weakening the economy as a whole.
If loose monetary policy is enforced over a prolonged period of time it runs the risk of severely weakening the process of wealth generation. A situation can then emerge where the pool of wealth becomes stagnant or starts to decline.
Once this happens the economy plunges into a severe slump since there is now less funding available to support both productive and non-productive activities. In such a case, what is required to heal the economy is the fast removal of bubble activities.
This will leave a larger amount of necessary funding in the hands of wealth generators thereby strengthening the process of wealth generation — the key for economic recovery.
Again, we suggest that rather than healing the economy massive monetary pumping by the Fed during 2008 has strengthened bubble activities thereby weakening the economy.
To clarify our points further, consider a company that is comprised of ten divisions, of which six are making profits and four divisions are suffering losses. A responsible CEO would be expected to either restructure the four losing divisions or to shut them down. If he/she were to keep them going then this is going to weaken the company.
The profits from the six profitable divisions, instead of being used to strengthen the company’s ability to generate profits, will be employed to support the four losing divisions.
The longer this lasts the worse the fundamentals of the company become. At some stage, once the company’s ability to generate profits diminishes, it runs the risk of going “belly up.”
Would it be valid to say that by allowing the non-profitable divisions to stay longer the company buys the time in order to heal itself?
As we have seen, the longer the CEO keeps the losers the worse the company’s “bottom line” is likely to become. Contrary to popular thinking then, the sooner the cleansing takes place the stronger the company is likely to become and the better the shareholders’ interest is going to be served.
Obviously, the restructuring or the elimination of losing divisions is going to be painful for some of the individuals that are employed in these divisions. However, a strengthening in the company’s fundamentals is likely to increase their chances of being re-employed in other divisions. Likewise, with the elimination of bubbles in the economy individuals that were made redundant are likely to be re-employed in newly expanding wealth generating activities.
Summary and Conclusions
Most commentators are of the view that the Fed’s massive monetary pumping of 2008 has prevented a major economic disaster. We suggest that the massive pumping has bought time for non-productive bubble activities, thereby weakening the economy as a whole. Contrary to popular thinking, an economic cleansing is a must to “fix” the mess caused by the Fed’s loose policies. To prevent future economic pain, what is required is the closure of all the loopholes for the creation of money out of “thin air.”
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Loopy.
Ready to reach for the 1.5L Scotch and the sleeping pills? Read this feel-good story first.http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&u...
My question is: Can this economy be healed? Or is the Rubicon already crossed?
How do you define "healed"? What would a "healed" state look like?
We don't need no stynkin economy!
Fed proved it.
We can all just accept hand outs and credits
Well, that IS an economy right?
The smart-n-savvy - the most fit, highest evolved humans - have the most, everybody else gets handouts and credits for some trinkests and bling to keep them happy.
What other system is more fair than that? The most-fit people didn't kill anybody, they just took everything. But, what would keep the smart-n-savvy from doing that? You want them NOT to take the dumbasses stuff? How would they prove - in a competative society - that they weren't the MOST fit if they didn't completely screw the dumbasses. Weakness is NOT how the most-fit win. If the dumbasses didn't get screwed they wouldn't respect the most-fit-members of society.
I wonder if the FED is a junky and can't help itself.
Cheap energy prices are the engine of economic recovery.
Gas was $1.79 when the Obowelmovement took over, left alone the economy would have healed itself.
"To prevent future economic pain, what is required is the closure of all the loopholes for the creation of money out of “thin air.”
Now there's some pie in the sky..(wouldn't that be nice...)
Rubicon crossed.
It would require productive industry and the rule-of-law.
It was crossed in 1913 and 1971, then in the 1990's (repeal of Glass-Steagall and off-shoring).
Exactly correct. The root cause of the problem is the disintegration of the Rule of Law. Sociopaths have gained control of the money supply, and through it, infected every facet of existance, including govt. They have succeeded in creating and enforcing a feedback loop of govt. benefits, debt, money printing, business control via crony capitalism, and an all encompasing and growing security state. All to both entice and coerce the masses to insure the Debt Ponzi is perpetual. The system is so corrupted, that we now have 2 sets of the Rule of Law, one for the elites, the other for masses. A "healed" state has only one true rule of law for all classes. The Great American Experiment really never accomplished the "healed" state, but at least had the chance to do it until about the 70's. Since then, it's devolved to the Feudal New World Order. The Rubicon has indeed been crossed. It will only change by revolution, and things will have to get much, much worse before the masses are ready for that.
Re: Rule of Law
The has always been laws for "the rich" and laws for "the poor".
How could ANY system be created where the smartest-n-savviest member of society wouldn't create bullshit for the dumbasses to actually VOTE to change the laws to benefit the smart-n-savvy people? Hell, remember when everybody loved Greenspan for saying how the banks were self-regulation because the banksters had such nice suits? Dumbasses ALWAYS believe bullshit, and the smart-n-savvy people create the bullshit for them to beleive.
The smart-n-savvy won't completely and totally screw the dumbasses ONLY if they need the dumbasses for protection. That's it, period. If the smart-n-savvy know they are invisible, why would any smart-n-savvy person not kick the dumbasses in the ass? That's what survival-of-the-fittest is about: kicking the dumbasses in the ass and taking their stuff, and then laughlng at them.
How can anyone, even Ron Paul, say that the Fed can keep doing this for years? I’m saying it can’t. When it increases its balance sheet 1000%, what’s going to happen then?
Gold-Eagle asked November 28, 2013: What is one to make of a balance sheet that has exploded from roughly $870 billion in 2007 to almost $4 trillion today. That is the balance sheet of the US Federal Reserve Board as the financial crisis of 2008 saw one of the largest bailouts in financial history followed by three rounds of quantitative easing (QE) plus Operation Twist whereby the Fed exchanged short dated Treasury maturities for longer dated Treasury maturities. It was with QE3 that the Fed began to purchase $40 billion a month of agency mortgage backed securities (MBS) every month greatly adding to its holdings of MBS….
–-The Fed’s Exploding Balance Sheet!
Frank Shostak says, and rightly so: “ To prevent future economic pain, what is required is the closure of all the loopholes for the creation of money out of ‘thin air.’”
Realistically, only one loophole needs to be closed. That’s the "loophole" that created the Federal Reserve System, for it is the Fed that creates the money out of “thin air.”
The problem isn't coming up with nice solutions.
The problem is always: how does the nice solution benefit the smart-n-savvy people who ALREADY own the existing system they are benefiting from and - therefore - have no intention of changing.
There's no way to get from here - the system greatly benefiting (roughly) 10% of the population - to there - the system benefitting the (uh) wait-a-sec, who would benefit.. the "average guy"?
The Federal Reserve figures it has the IMF as a backup and it's SDRs.
When the Federal Reserve blows it's onto the next global Ponzi and the SDRs.
And then when the IMF/SDRs blow?
Glass-Steagall never should have been put in place to begin with. It just allowed .gov more economic control. It was just another piece in the destruction.
There is no Rubicon on the economy.
A free market is a process and that process can begin again as soon as we stop interfering by keeping dead banks afloat.
Yes, as one noted we need to return to the rule of law as well as reduce bariers to economic activity like extreme environmental rules.
"There is no Rubicon on the economy."
You missed your calling: write song lyrics.
How misled can one person be?
Now THAT'S an inflationary article.
OMFG.
Stop bringing her food.
Talk about enabling; she is Wall Street, and her enablers the FED.
Bring her two gallons of water, a multivitamin, and 3 cans of Ensure per day for a year and she'll be 180 lbs.
My question is, how in the hell does she take a crap?
Disgusting.
I really didn't need that question. Really.
I did appreciate the stock photo of a lonely house though.
on the off-chance ZH gets a cease and desist for using the Arrested Development "model" house, this is a good alternative photo.
as to the the other question, there is only disturbing answers.
"To prevent future economic pain, what is required is the closure of all the loopholes for the creation of money out of “thin air.”
You can begin holding your breath.
Well, if most humans were rational the Libertarian might be right. Unfortunately, everybody loves free money - it's the best kinda money there is (which is pretty rational, actually).
Doesn't end up looking too rational when the consequences kick in.
No, but consequences are in the realm of morals.
Normal humans only need morals when they use them against other people.
Otherwise, it's just the 4 F's of life: Food, Fear, Fighting, and Screwing.
"To prevent future economic pain
OOOOOOO
I gots to axe ( just working on my ebonics ) a question
What about the current economic pain?
The top 20% aren't in economic pain. Only the least-fit members of society are. But, not THAT much pain, really. We have the world's first kinder-n-gentler survival-of-the-fittest society. The predators might eat their prey, but they don't eat all of it.
You think we've reached a sustainable equilibrium point? I suspect there is a lot further to fall before we get anywhere near equilibrium.
Suppose the Fed is not the problem? Suppose the problem is not solvable.
Oil was $20 in 2000. It was $147 summer 2008, before anyone had ever heard of Quantitative Ease. It fell to $37 in Feb of 2009 as all consumption stopped. And now, $100+, reached in late Dec of last year before there was any Ukraine crisis.
Why in hell do these economists think they can grow at $100+/barrel?
Re: Suppose the Fed is not the problem? Suppose the problem is not solvable.
Suppose the economists aren't really the problem either. Suppose there's really NOT a problem.
What IS the problem anyway? Nobody is starving in the streets. As the guy below said: It's almost football season and soon his team will win and he buy a big shirt to advertize virility.
What if nothing is "wrong"? People have big shirt, blingmobiles with tinted windows, cable, food, entertainment. What the hell MORE does the Trash Class want?
Thank you for your posts, notarealamerican. I refuse to up-arrow them, but I always read them.
You said:
Iz good question.
Yet the maldistribution of QE to banksters, banksters, and more banksters, is hardly the solution.
"Professor, I did not hear the question, but the answer is to increase the money supply."
Suppose having a system that requires sustained exponential growth that depends on cheap and plentiful oil is the problem, then you have to conclude that we might have been able to steer the ship in a better direction without that system that requires sustained growth. Bankers, economists and the fed are a big problem, but they are not the only problem, nor are they the biggest. There is room for growth with $100/bbl though. Local growth, i.e. more necessities being produced locally. Decentralization. Or their would be if the fucking government would get out of the way. More and more people are wanting local foods though. I saw locally produced cheese in the store yesterday for the first time in my life.
Re: nor are they the biggest.
So, what is the biggest problem then? Oil?
Oil. But bankers, government, existing energy companies, etc... are standing in the way of either letting those of us who can adjust to a world with expensive oil or developing an alternative. We have reached the end of global growth, but the cocksuckers want to keep it going, hence the fraud. Doing what needs to be done would strip them of much of their power and wealth, and they're not going to give that up without a fight.
I spoke to a local science teacher today ( at a garage sale ) who thinks it will be perfectly ok for electric bills to double. He feels this would be good for the country for this to happen.
He admitted to voting for the HNIC
MORONS do vex me
I'll accept a doubling of electric bills if we can nix income taxes, property taxes and seignorage income for the government in return.
From talking to this clown he felt everyone should be taxed & pay more but him after all he IS a teacher &he knows best - just ask him.
a real liberal wack job of the highest order
Oh & like the HNIC evrything is Bush's fault
After about 10 minutes I had to leave for my own saftey because I could not deal with that much stupid. He sucked up the NLP like a sponge.
Tiered billing. $0.06 for the first 1300 KwH over 60 day cycle, $0.11 after that for mid-useage, and then something like $0.15 after that.
Unfortunately, the politicians here have screwed over our hydro-grid by mandating they buy power at above market rates from solar and run-of-river systems, and they're building a hydro dam just to power fracking and a LNG terminal to export the gas.
That, and they decided smart meters were such an amazing idea. Without those cock-ups, we'd be doing pretty good.
Higher rates will in theory encourage more efficient use, but with free public charging stations for electric cars and passing it on to consumers that need electricity for heat, cooking food, etc its kinda BS.
Who cares?
Is it footballs season yet? I must get together with my co-workers and do my fantasy draft. It is so fun!
My fantasy player will score many goals! I will wear the jersey of a big burly footballs player - because nothing communicates my virility to the ladies more than a 200 dollar billboard advertising a better man!
Ha! I loves the footballs season!
Oh boy, I'm off to make sure my cable is working as I don't want to miss a game! What fun! Can't wait to discuss the game with my coworkers! Did M'afume LaTondra spike the oblong brown pig epidermis? Ha!
His victory is mine!
God, how I love the professional sports! I'm just like you, except my team is winner - and that makes me winner!
They don't score goals in football, Francis.
Probably talking soccer. World Cup Fantasy Team?
and you think it is an accident? think again
the fed exists to ensure that the wealth divide only gets worse
the Fed has polarized wealth which has created a depression by killing velocity
the more that participate, through their own earnings, in an economy, the stronger it becomes
Yellen will never see any recovery at any time while the printing continues
government playing the role of redistribution through taxes is just another road block to recovery
centralized control and distribution is communist manifesto
I interviewed Dr. Ron Paul today. One of the questions I asked: with 20/20 hindsight today, does he wish he had asked different questions of former Fed chairmen, or perhaps different follow-up questions when our dear Fed chairmen were evasive. His respose speaks to how even Fed hearings on Capitol Hill are structured to preserve the status quo.
Check it out: http://thenewsdoctors.com/?p=164400
--
Eric Dubin, Managing Editor, The News Doctors
wombat - thanks. that was great. he's a statesman. i don't agree with everything and i don't have to, but the most important thing is, he's working for a world for everyone. for everyone to live a life and be fulfilled (without fullfilment being 20 rolls royces).
go back and re-read Bill Dudley's 2010 discourse on bubbles, what creates them, and what follows. i read elsewhere that the current bubble can be categorized as an 'innovation' bubble, as per his terminology.
the logic goes something like this: innovations lead to overvaluation of how transformative those innovations can be. that overvaluation grows without constraint as long as faith in its transformative nature can be sustained. unfortunately, at some point reality does not reflect the optimism that caused the overvaluation, which leads to a deflation of the bubble.
in those terms innovation in monetary policy (QE, ZIRP) has led to overvaluation of what it can produce (perpetually record high margin economic growth with financial stability), with faith being sustained only through an ever increasing commitment to the policy (larger QEs, longer ZIRP). this sets up the next stage of the bubble, where the reality of above trend growth never materializes, margins continue to face compression, and leverage in the economy (consumers, asset owners, govt) breaks the faith in the innovation's transformative nature. then the bubble deflates and everyone starts looking for the next innovation.
it's a little ironic that the Fed is unwilling to see this dynamic, even when it fits neatly into its own conceptual models, and respond to it in a way that more immediately reduces the risk of collateral damage that will ultimately ensue.
While I fully agree on the effects of low rates on bubbles, it's important to remember the change in Fed rules in 2008 that allows interest on excess reserves.
I admit, I'm half sure there's going to be a bubble with excess reserves so insanely high, but to date it seems like banks have no incentive to go crazy with E/R's...yet.
However, Tyler's recent attention to stock buybacks and the effect on market levels has me with an ear to the ground.
its about the ponzi, not about the economy! The ponzi needed to heal...Jeeesh!
While I agree with the negative and subsequent unintended consequences of Fed policies like ZIRP and QE and how the Fed has boosted the wealth gap...etc. there's a caveat, a big one.
The one "small" detail that I see either minimized as inconsequential, or not mentioned at all, is the effects of higher rates on debt service costs to households.
As of 2007, household debt to income was @ 125%, it's now down to less than 105% due to lower service costs allowing households to survive while deleveraging without going bankrupt. (despite lower median wages)
In terms of the blog title, allowing the economy to "heal" without fiscal intervention or lowered rates would have meant far worse consequences than most here realize, especially where there was such a dramatic austerity / pro-corporate movement in Congress in 2010....replete with referring to low tax rates for TBTF CEO's as "rewarding success" for "job creators".
We'd have become a 3rd world nation overnight in order to "heal" in the Austrian/Classic Liberal sense with no fiscal or monetary counter to TBTF depletion of median net worth & income.
While I agree on the negative consequences of Fed policy, I find myself wondering why the Fed alone is the target of "all that is wrong" while some might be ignoring or underestimating the effects of fiscal & deregulatory causes.
(the government's role implementing "trickle down" ideology in the name of their corporate masters.)
Removing Glass-Steagall and the CFMA enabled continued TBTF omnipotence, ( STILL EVEN NOW TBTF's are manipulating futures at our expense), Citizens united assures that status quo via political bribery....so why is the Fed the priority?
Shouldn't we spread at least some of that anger & blame to Congress, Senate, SCOTUS & POTUS for doing nothing to undo what got us in this pickle?
I get the Fed is largely comprised and influenced by TBTF executives, but ultimately Congress has the last word on policy and Fed authority.
The same Congress that receives campaign bucks from banks, makes decisions that presses the Fed into easy money - to the benefit of TBTF's.
As I see it, the Fed is reactionary after the fact....focusing on the Fed is like going after the goon at the door of a Mafia meeting, forgetting the Don and his cohorts inside.
GOP = DEM = INC
Nothing changes until K Street Burns.
Absolutely, that's why I think focusing on the Fed alone is a distraction.
It's Congress that controls the Fed, wealthy special interests that control Congress.
It's all according to plan which began about three hundred years ago when they switched from metal, tally sticks and barter to coins and paper followed up in around the 1930s when the income tax was introduced to switch the burdon of financing our governement /military from the corporations to the citizens.
The term "the new normal" has not been used much as of late, but going forward it may be about to return. Many investors and the public at large may be about to realize that central banks can only do so much through printing money and lowering interest rates. Both these actions carry with them some very strong and nasty side effects.
Markets have become very distorted as money has flowed into risky assets in search of higher yields. It could be we are about to see the markets morph into a "realizing market", one that grinds slowly downward. Another possibility is that at some point the wisdom of buying every pullback changes and the market simply drops like a stone. More on what the future might hold in the article below.
http://brucewilds.blogspot.com/2013/06/realistic-expectations-for-econom...
A lawless financial system.
A financial dictatorship.
The crooks are in charge.