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Even Harvard Economists Admit Fed Policy Has "Created Dangerous Risks"
No lesser establishment economist than Martin Feldstein - Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research - has some warning words of wisdom for The Fed today: "...the Fed’s unconventional monetary policies have also created dangerous risks to the financial sector and the economy as a whole." When even The Ivory Tower is losing faith, you know The Fed is in trouble...
Excerpted from Project Syndicate...
But the Fed’s unconventional monetary policies have also created dangerous risks to the financial sector and the economy as a whole. The very low interest rates that now prevail have driven investors to take excessive risks in order to achieve a higher current yield on their portfolios, often to meet return obligations set by pension and insurance contracts.
This reaching for yield has driven up the prices of all long-term bonds to unsustainable levels, narrowed credit spreads on corporate bonds and emerging-market debt, raised the relative prices of commercial real estate, and pushed up the stock market’s price-earnings ratio to more than 25% higher than its historic average.
The low-interest-rate environment has also caused lenders to take extra risks in order to sustain profits. Banks and other lenders are extending credit to lower-quality borrowers, to borrowers with large quantities of existing debt, and as loans with fewer conditions on borrowers (so-called “covenant-lite loans”).
Moreover, low interest rates have created a new problem: liquidity mismatch. Favorable borrowing costs have fueled an enormous increase in the issuance of corporate bonds, many of which are held in bond mutual funds or exchange-traded funds (ETFs). These funds’ investors believe – correctly – that they have complete liquidity. They can demand cash on a day’s notice. But, in that case, the mutual funds and ETFs have to sell those corporate bonds. It is not clear who the buyers will be, especially since the 2010 Dodd-Frank financial-reform legislation restricted what banks can do and increased their capital requirements, which has raised the cost of holding bonds.
Although there is talk about offsetting these risks with macroprudential policies, no such policies exist in the US, except for the increased capital requirements that have been imposed on commercial banks. There are no policies to reduce risks in shadow banks, insurance companies, or mutual funds.
So that is the situation that the Fed now faces as it considers “normalizing” monetary policy. Some members of the Federal Open Market Committee (FOMC, the Fed’s policymaking body) therefore fear that raising the short-term federal funds rate will trigger a substantial rise in longer-term rates, creating losses for investors and lenders, with adverse effects on the economy. Others fear that, even without such financial shocks, the economy’s current strong performance will not continue when interest rates are raised. And still other FOMC members want to hold down interest rates in order to drive the unemployment rate even lower, despite the prospects of accelerating inflation and further financial-sector risks.
But, in the end, the FOMC members must recognize that they cannot postpone the increase in interest rates indefinitely, and that once they begin to raise the rates, they must get the real (inflation-adjusted) federal funds rate to 2% relatively quickly. My own best guess is that they will start to raise rates in September, and that the federal funds rate will reach 3% by some point in 2017.
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Your move Janet!
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You don't say...
DAMN!!!... It must be pretty bad for a Harvard economist to see it. If they aren't careful, they may discover the sun rises in the east.....
Even Harvard economist admit FED policy has "Created a debt black hole that even light cannot escape."
There....fixed it.
Acceptable dissent.
Does anyone else get the feeling this guy still thinks "markets" exist?
Of course they do, Markets are merely theoretical constructs created to test a computer model and that's as real as it gets for an economist of the Keynes persuasion.....
these guys only speak up when they are told. this is all to help grease the slide into tyranny.
If you think you need a college education to see what is happening as a result of the tinkering with the economy, you obviously need to get out of your office more.
I don’t think you’ve seen anything yet. Just wait till some economists get their wish, they ban cash and implement real negative rates. They will have to come up with a new term. Bubble just won’t do it justice.
I've been teaching about these things for well over 2 years now...
http://galeinnes.blogspot.com/2015/02/the-velocity-of-fraud.html
(BTW I started that blog in 2013, lost it 2014 & then had to re-upload all of my blog post)
Is Gresham`s law a silly mistake or an example of deliberate juggling with facts and concepts?
silvermail, Did we not see a clear example of Gresham's law at work when they removed silver from the coinage in '64. Silver coins were collected from circulation and the population used the tokens due to the incorrect value on the silver coinage. If the silver were not mispriced, ie no legal tender laws, the good money would have driven out the bad.
All right, but you do not talk about money. You talk about the silver currencies.
Gresham's Law applies only to the currencies. However, Gresham's Law does not apply to money.
Because the best money always and everywhere ousted from circulation, any more bad money. If we are talking about money - as the gold in his weight, but not on the gold currencies.
It is stated in this article:
http://www.gold-eagle.com/article/gresham%E2%80%99s-law-silly-mistake-or...
There absolutely are markets out there but the definition has changed. The Fed is one market, BoJ another, ECB a third, PBoC, IMF, BRICS, AIIB...
Consolidation has and is happening. It isn't good. It is what it is and there is nothing you nor I can do about it.
Your thinking in a fact based way, but we're talking economists here and facts tend to screw up their theories which, of course, cannot be allowed...
Careful, the proposed solutions from these academics is always far worse than the problem or symptom they propose to treat. Don't expect a non-interventionist stance going forward. More control and central planning is all these parasites know.
When...not If
gee, Martin, 'ya just figuring this out now ? ? #Einstein
I like the qualifier "Even Harvard Economists". This is an owned branch of Fed stocked acedemia off the reservation.
Another sign the animals are turning on one another.
Fuck Harvard...
<--- Doesn't come to ZH for the comedy ~ Instead, comes to ZH to redirect all discourse towards Pastifarians ~ LOL
Might as well say ZH posters CH1 & SMG Economists Admit Fed Policy Has "Created Dangerous Risks"
& are trying to warn ZH readers about the problems with society (but, inexplicably, & in a manner NOBODY could have predicted, their utterances are being audibly misconstrued because they happen to be gargling foreskins everytime they try to talk)
BWAHAHAHAHAHAAHAHAHAHAHAAH!
Like I've always said... I COME TO ZH FOR THE COMEDY!!!
Release the Kraken!
Feldstein mistakenly thinks the fed cares about the economy. Free money forever.
Feldstein? Is he like a 'Pastifarian' or something? <refer to ABOVE comment for added yuks>
"Harvard Economists" = danger to humanity
ZWO boot licking sycophants.
What an idiot. It amazes me that they are just now quoting market conditions such as credit spreads and liquidity mismatch after the damage is done and the fed is backed in the corner. We have been warning about the dangers of QE and market manipulation from the beginning. This asshole just wants to get on record because he knows the fed is boxed in and a crash is inevitable.
HCYA.
Yep. Another zerohedge convert. Who is next, Krugman? Stiglitz?
Martin Feldstein come on down! You're the next contestant to win this lovely pneumatic air gun with 1050 inch-pounds of driving power!
The Fed will indeed start to raise interests rates this summer maybe early fall. They will be doing this in the face of a declining economy. So they won't get too far before stopping and possibly reversing gears. If no QE, the next option would be fiscal stimulus; that is if Congress could support. That's the wild card.
"if Congress could support."
No way. They will fall all over themselves arguing about what cronies get the cash.
Raising rates may be their only option.
Their only power comes from the USD, anymore qe(of any type) and the RoW will drop the USD quicker
than you can say Mr.Janet Yellen.
My guess is that well see 3% in September of 2000andnever. I'm thinking we'll see 10% before we ever see 3%, and that will happen after the great reset.
To be fair, this guy has been critical of QE for the last few years..
Yes, but he was never impolite about it. We need impolite people if we're going to get out of this.
Now you know as well as I do there is no getting out of this. Well not without substantial pain anyway...... and a sandwich.
lol Doc you're relentless. ;-)
WHY DO YOU SUPPORT THE ACADEMIC CANCERS OF THE HUMAN RACE? HARVARD/PRINCETON/YALE ETC ARE THE INSTITUTIONS THAT TRY TO ENGINEER CONTROL OF THE REST OF US "SHEEPLE" - WHY WOULD YOU SUPPORT SUCH PROPOGANDA OF ACADEMIC IMPORTANCE WITH SUCH A RIDICULOUS HEADLINE!!!!
but but but they did it for our freedom!
Freedom fries.
It took this long for such a comment?
The fact that so many people who supported QE are now critical just goes to show you how close we are to the end game.
rats (banksters) leaving a sinking ship?
or strategic positioning?
This guy needs to shut his trap and get back to eating honey and locusts.
Otherwise, there may be a nailgun in his future.
"the economy’s current strong performance" ????????????????
According to a recent article published by the BIS:
"There is no precedent in economic history for negative nominal interest
rates, even during the Great Depression in the United States(2)."
http://www.bis.org/speeches/sp150424.pdf
What else is left to try - nothing.
The 30-year Bond is paying 3% interest. That is three percent too much.
Long Bond to zero. All bonds and bills of shorter duration go
negative. Negative interest on savings and money market accounts. Try
to get your money out in cash - will not be allowed. Savers will be
utterly destroyed or compelled to buy over-valued wall street paper.
What?? He didn't scream for cashless policy??
Marty Feldstein from Haaavaaad. He'll get to the bottom of the Fed's indescretions, in the next episode of Jew v. Jew, stay tuned goy!
best Oxymoron I ever heard was Haavaaad economist. Damn
Here is the FED's Policy in one word. Winning.
- Collective says we are winning, join the borg
Janet Yellen: Winning
Mark Carney: Winning
Mario Draghi: Winning
Jens Weidmann: Winning
Christian Noyer: Winning
Klaas Knot: Winning
Luc Coene: Winning
Stephen Poloz: Winning
Agustín Carstens: Winning
Haruhiko Kuroda: Winning
Zhou Xiaochuan: Winning
Tharman Shanmugaratnam: Winning
Alexandre Tombini: Winning
Shri. Rajeev Rishi: Winning
Elvira Nabiullina: Winning (Russia)
Valeriya Hontaryeva: Winning (Ukraine)
Lloyd Blankfein: Winning
Jamie Dimon: Winning
Michael L. Corbat: Winning
John Stumpf: Winning
Brian Moynihan: Winning
James Gorman: Winning
Richard Fairbank: Winning
Stuart Gulliver: Winning
Ross McEwan: Winning
John McFarlane: Winning
David Hodgkinson: Winning
If you cannot buy more time, you're a loser.
Being able to buy an expensive urn isn't my idea of winning.
Too many Jews teaching and attending Harvard.
They are not Europeans.
They are the devil's chosen.
We need to equate the Director of the Central bank of Mexico, Ukraine, Romania, and Poland with the US Central Banker who ever is the Director/Governor.
Ben Bernanke, Alan Greenspan, Janet Yellen are par with this guy Agustín Carstens.
And pointing out FACTS is no longer a part of free speech, it'll get a Goy banned if the Chosen ones don't like it. Even the supposed 'fight club', Zero Hedge, is weak in that regard.
Too bad the chosen don't excel once they are waved in to Harvard.
Not many graduate at the top of the class, don't you know.
Jewish overrepresentation at elite universities explained ...
Jews at US Colleges and Universities | The Occidental ...http://www.theoccidentalobserver.net/2014/09/steven-pinker-on-harvard-ad...
I'm not especially troubled by the over the line, false, and devoid of merit stuff [though who's to judge] but the real agenda here is to prevent any discussion of Israeli war crimes as such, and to prevent discussion of wildly disproportionate Jewish power, wealth, influence, ownership, etc. etc.
Fuck that. any small minority, particularly an ethnocentric one with loyalty to a foreign state busy ethnically cleansing native peoples, and buying Congress and criminalizing historical inquiry should not be allowed to secretly have such disproportionate power. Period. Don't care if they were all originally from denmark and worshipped cows.
Fix It!
"Stop whoring for Wall Street"
http://www.showrealhist.com/yTRIAL.html
http://patrick.net/?p=1223928
A large reason why the Fed finds appropriate action so difficult is because they've so widely diverted from reality through the magic of scientism.
They've attempted to use constant metrics based on changeable human behavior, and formed complex models from these metrics. So complex are the models, and so involved in them they have become, that they now presume changes in the metrics ex-nihilo to equate to changes in reality...and that is not so.
This has lead to widespread goal-seeking behavior and a get-inflation-to-the-public-by-any-means-necessary viewpoint.
They think it doesn't matter to whom the new money goes.
Except it does.
If the new money doesn't go to the inventors or producers you can kiss goodbye invention and production.
Just try to live without those!!!!
FWIW...'Brave New World' was wrong.
You cannot 'freeze' technology at any point and expect for society to 'stabilize'. Nature changes. Invention is man's means to accommodate natural change. Systematic suppression of invention through socialized economics leads to non-adaptation or mal-adaptation...which lead to extinction.
I dont believe this scenario as to what has to happen, First and foremost we need to get off the zero bound. Stairstepping rates to some historically relevant number however should not be written in stone. Once we have some interest rate level that isnt zero, every rate change should be considered on its own merit as has always been done in the past.
You can't get there from here.
Seriously.
The monetary creation mechanism involves creating interest bearing debt as collateral for non-interest-bearing money.
Think about that for a moment.
The debt, therefore, will grow at a compound rate.
The money, cannot on its own grow at a compound rate, but must periodically be re-issued in larger volume so the previous debts can be paid.
Think about that for a moment.
The debt must compound, the money with which to pay the debt cannot compound.
This leads to ever-more of the money supply being debt service...
At some point there is not enough money to service the debt...and the creation of enough money to service it would expand the debt so much that it would still be impossible to service.
When that point occurs, debt cannot bear interest without a general default. (which, by the way, is now...or more exactly it is seven years ago)
SO...
They can't raise interest rates, because there isn't enough money in the system to pay real positive rates, there aren't enough real assets to secure the creation of new money to pay the service on old debt, and the creation of new debt to secure new money inherently drives rates negative.
"...the Fed’s unconventional monetary policies have also created dangerous risks to the financial sector and the economy as a whole."
That was mathematically known before they even started. 1+1 ALWAYS = 2. That is why it is never different this time.
Bernanke wrote in 1988 that QE doesn't work.
They knew all along it wouldn't work. But for 6, 7 years or whatever, they could get away with it, because the next cycle goes up for several years before the truth comes out, on the next down phase.
Experts warned congress not dismantle Glass Steagall.
The outcome of congress doing so was known before it happened. But it took 8 years for the down phase of the next cycle to expose the truth, so who in congress cared?
None of this stuff is new and no one forgot any lessons.
Everyone knows about the reckless 1920's and the crash which followed. A blind eye was deliberately turned, so that reckless era could happen again.
"...the Fed’s unconventional monetary policies have also created dangerous risks to the financial sector and the economy as a whole."
Way too late to admit that now. The damage has already been done. It would be funny if Harvard went bankrupt.
Excellent Comments....
".....None of this stuff is new and no one forgot any lessons....."
Exactly Right.
People who believe that real rates can truly be raised know too little about how fiat money is created.
Fiat money is Central Banks' liability.
The assets used to counter-balance fiat money on CB balance sheets consist of real stuff and debt.
There was never a lot of real stuff there.
The debt bears compounding interest.
The fiat money created by that debt does not bear compound interest.
Therefore there is never enough money to extinguish the debt...
New money must be continuously created to service the debt on the old money.
Except more 'real stuff' won't appear exnihilo.
Instead they create more larger debt, with more interest, to payoff the older smaller debt with smaller interest.
When the debt service is too large relative to the 'real stuff', it is mathematically impossible to create enough cash to service the debt...because the act of creating the cash expands the debt more than it expands the cash... hence they literally can't print enough.
No.
They will instead create 'bad banks' and they will transfer all the unpayable debt to the 'bad banks' and then they will torpedo the 'bad banks'.
Your job is to guess who they are using as the 'bad banks'.
Any ideas?
About who are the bad banks?
Hard to say for sure.
Looks like the money has been moving in mass to Asia.
Looks like some Western CB's are getting stuffed full of bad assets to take the fall.
I suspect the US banking system is toast. Probably the British as well.
I think the main complication with sending out the Torpedo is that we've never had a world-wide fiat money system and global economy. So they don't know what the fallout will be.
A big question is DB, SG, and many of the Euro area large banks. I don't think they want to sink those, but the Euro chaining of liabilities is becoming too big to manage.
After the bad bank is torpedoed there is only one question:
- What is the new money?
- If fiat, then which one...buy it now because it will appreciate...for a while. (Remember, fiats are for bloodsucking. Bloodsucking is how we got here.)
- If physical...same...but a longer period of prosperity is possible.
Great explanation, thank you!
Well described GC. My take on it is that the Fed will just "retire" the debt that they have "bought" with printed money. That will bring the relationship between issued, non interest bearing fiat and issued debt. I think that has been their plan all along, however they were hopin that maybe the global economies would grow faster increasing velocity and thereby creating wenough assets for the excess fiat to absorb. No such luck.
If the Fed had taken the little bit of pain after QE1 or QE2, they would not now be trapped and might still have some control. Today, the only choices are between really bad and worse.
This is a smoke screen to pass off Harvard institutionalized education programs. They want to deny responsibility to another globally fit organization to redefine economic new norms.
This is more smoke and mirrors from the mainstream so they can avoid blame when it all comes crashing down. "Hey, I warned everyone, therefore it is not my fault". The scope of the circular firing squad on this one will be so massive it's not even funny.
I just can't wait for Ol' Yeller to come out and more forcefully decry that this is unsustainable as opposed to just stating that stocks are overvauled or quite high.
The Harvard contingent of the Tribe ought to know.
Harvard Mafia, Andrei Shleifer and the Economic Rape of Russia: Chronicles of Harvard University Russian Economic Team Scam and Deep Corruption of Academic EconomicsEconomic analysis is far closer to religion than science. The overwhelming Jewishness of the oligarchs who came to rule Russia [as the Bolsheviks had done in more bloody fashion] and the Jewishness of their banker and economic confederates ought to suggest that this religion is not for the benefit of all the free peoples of Middle-earth.
History in the making is quite evident - ideology in play by the powers-that-be is oftentimes in conflict with the natural laws of econmics.