This page has been archived and commenting is disabled.
Getting History Right - Saving Capitalism From Monetary Mismanagement
Submitted by Doug Noland via Credit Bubble Bulletin,
October 16 – Wall Street Journal (Alan S. Blinder and Mark Zandi): “Don’t Look Back in Anger at Bailouts and Stimulus… Logic dictates that the size of any stimulus be proportional to the expected decline in economic activity—which was enormous in the Great Recession. The Recovery Act and other stimulus measures were costly to taxpayers, and thus much-maligned. But the slump would have been much deeper without them. The Federal Reserve has also come under attack for its unprecedented actions, especially its quantitative easing or bond-buying programs. Yet QE lowered long-term interest rates and boosted stock and housing prices—all to the economy’s benefit.
Yes, QE has possible negative side-effects, but for the most part they have yet to materialize. Policy makers who botched the regulatory job before the crisis and shifted to fiscal restraint prematurely in 2011 can hardly be considered flawless. Yet one major reason why the U.S. economy has outperformed the plodding European and Japanese economies is the timely, massive and unprecedented responses of U.S. policy makers in 2008-09. So let’s get the history right.”
Getting “history right” has been a CBB focal point From Day One.
In last week’s media barrage, Dr. Bernanke repeatedly stated that fiscal policy had turned contractionary – (or at best neutral) suggesting that fiscal stringency was a key factor in the Fed sticking with ultra-loose policies. In Friday’s WSJ op-ed, Blinder and Zandi write: “Policy makers who botched the regulatory job before the crisis and shifted to fiscal restraint prematurely in 2011.”
Since the end of 2007, outstanding Treasury Securities (from Fed’s Z.1) have increased $8.302 TN, or 137%. As a percentage of GDP, outstanding Treasuries almost doubled to 83% (from 42%) in seven years. By calendar year, Treasury borrowings increased $1.302 TN (8.8% of GDP) in 2008, $1.506 TN (10.4%) in 2009, $1.645 TN (11.0%) in 2010, $1.138 TN (7.3%) in 2011, $1.181 TN (7.3%) in 2012, $858 billion (5.1%) in 2013 and $736 billion (4.2%) last year.
In nominal dollars, Federal expenditures increased from 2007’s $2.933 TN, to 2008’s $3.214 TN, 2009’s $3.487 TN, 2010’s $3.772 TN, 2011’s $3.818 TN, 2012’s $3.789 TN, 2013’s $3.782 TN and 2014’s $3.897 TN.
Federal expenditures spiked during the crisis and remain about a third above 2007 levels.
“US Post Smallest Annual Budget Deficit since 2007” was a Thursday WSJ headline. “The deficit declined 9% from the prior year to $439 billion—around 2.5% of gross domestic product and below the average the U.S. has run over the past 40 years.”
I remember all too clearly the jubilation that surrounded federal budget surpluses in the late-nineties. Supposedly, a disciplined Washington had made tough choices and finally put its house in order. There was even talk of Treasury completely paying off its debts. It was, however, all a seductive Bubble Illusion. In particular, receipts were inflated by Credit excess-induced capital gains taxes (on inflating stock and asset prices) and booming incomes (especially tech and finance related!). Actually, it all seemed obvious even at the time. It didn’t make sense to me that the Fed and analysts were so prone to misinterpreting underlying dynamics.
Blinder and Zandi: “Yes, QE has possible negative side-effects, but for the most part they have yet to materialize.”
There are myriad deleterious side-effects, and anyone paying attention would agree that many have begun to materialize. One prominent consequences of Federal Reserve rate manipulation has been the loss of the markets’ ability to discipline policymaking. How does it ever make sense to allow politicians access to years of virtually free “money”? Ominously, despite Treasury paying basis points to service a large chunk of our outstanding debts, the federal government is still running significant deficits. While outstanding Treasury debt has increased almost 140% in seven years, 2014 interest payments were up only 8% from 2007 (to $440bn). Government social payments, on the other hand, were up 48% from 2007 levels to $1.897 TN.
Slashing Treasury borrowing costs is not the only way the Fed has temporarily boosted the U.S. fiscal position. Funding a nearly $4.5 TN Fed balance sheet with virtually interest-free funding is (for now) a “money”-making endeavor. Last year the Fed remitted “profits” back to Treasury to the tune of almost $100 billion. Reflationary monetary policies have also been instrumental in resurgent Fannie Mae and Freddie Mac. A hiatus in loan losses allowed Fannie and Freddie to remit almost $140 billion in “profits” back to Treasury (funds that should have remained as a capital buffer).
At this point, markets assume Treasury yields will not rise meaningfully in the foreseeable future. And, apparently, a deep recession remains out of the question. Yet Bubbles inevitably burst. Even a typical recession-induced slump in receipts and jump in spending would at this point see the almost immediate return of enormous federal deficits. Then ponder taking away Fed remittances to the Treasury and factor in another GSE bailout -and things deteriorate dramatically. A reasonable forecast would also incorporate a boost in defense spending. In a few short years federal debt would surpass GDP. Worse yet, at any time an unexpected surge in market yields would rather quickly endanger the balance sheets of the Treasury, the GSEs and the Federal Reserve – with nasty ramifications for the banking system, the economy and finance more generally.
Blinder and Zandi: “Logic dictates that the size of any stimulus be proportional to the expected decline in economic activity—which was enormous in the Great Recession.”
I am reminded of an invaluable “Austrian” insight (paraphrased): “The scope of the down cycle is proportional to the excesses of the preceding Credit boom.” From this perspective, there is major problem with conventional “logic.” These so-called “proportional” monetary and fiscal responses have over the past 25 years fueled serial Bubbles - and attendant progressively more dangerous Boom and Bust Dynamics. Especially when it comes to monetary policy, it was recognized a long time ago that the problem with giving central bankers too much discretion was that policy mistakes would invariably be followed by greater blunders.
* * *
It’s sad to see Capitalism under such attack in the national discourse. Washington seems only somewhat less despised than Wall Street. Somehow socialist ideas appeal to a growing number of Americans – especially the young. On this score, I’m content to be repetitive: Federal Reserve activism and inflationism bear primary responsibility.
In this week’s Democratic debate, Hillary Clinton stated, “Sometimes Capitalism must be saved from itself” and “It’s our job to rein in the excesses of capitalism so that it doesn’t run amok and doesn’t cause the kind of inequities that were seeing in our economic system.”
I’ll argue passionately the notion that politicians must save Capitalism from itself is the materialization of a dreadful “negative side-effect” of monetary mismanagement. If politicians are determined to get involved, they should foremost insist on sound money. Since politicians have throughout history demonstrated their proclivity for the exact opposite, Capitalism has been essentially entrusted to sound central bank principles. And while this may have not yet materialized to most, central banking has failed. It goes back to flawed doctrine where the Federal Reserve refused to address inflating Bubbles, preferring instead a policy of aggressive post-Bubble reflationary “mopping up.” It goes back to the Greenspan Fed’s tinkering with the markets to the Bernanke Fed’s crisis management QE to the Bernanke/Yellen/Kuroda/Draghi central bank non-crisis open-ended QE.
Regrettably, I fully expect to be defending Capitalism throughout the remainder of my life. I’ll try to explain how Capitalism isn’t – wasn’t – the problem. The culprit instead was unsound finance and deeply flawed monetary management. In short, Capitalism cannot function effectively within a backdrop of unfettered cheap finance. Things appear miraculous during the boom, and then the bust discombobulates.
Contemporary central bank rate administration essentially abandoned the self-adjusting and regulating market system for determining the price of finance – so fundamental to Capitalism. The results have been predictable: gross misallocation of real and financial resources, economic stagnation, financial fragility, wealth redistribution, rising social and geopolitical tension and central bankers absolutely incapable of extricating themselves from inflationism and market manipulation.
I doubt there are too many traders or hedge fund operators these days that would argue against the Monetary Disorder Thesis. While the major indices appeared more quiescent this week, there remains plenty of instability below the surface. The week saw the broader market underperformed the S&P500. The Transports dropped 2%, while the Utilities gained 2%. The Biotechs were again notable for their inability to sustain a rally.
...
The thesis remains that the global Bubble has been pierced. In a world of open-ended QE, unprecedented policy activism and Trillions of trend-following and performance-chasing finance, there will be erratic ebb and flow to market activity – including EM. There were more announcements of hedge funds closing shop this week. For the industry overall, I doubt the recent market rally has relieved much pressure. Many funds were likely caught up in the powerful equities, EM and commodities short squeeze.
It seems apropos to note that shorting is not really the inverse of investing on the long side. The risk profiles are altogether different. On the long side, risk is limited. If an investor is right on the research and is willing to wait out market swings, risk is generally manageable. It’s another story on the short-side. Risk is unlimited. You can be right on the analysis but still lose money in a hurry if caught in the vortex of a powerful short squeeze dynamic.
This short squeeze dynamic has come to wield significant general market impact. With hedge fund and ETF industry assets each now at around $3.0 TN, the level of trend-following trading activity is unprecedented. In theory, one would expect such a backdrop to spur market overshooting both on the upside and down. Except that central bankers have repeatedly backstopped the markets to ensure that downside momentum does not gather pace.
In the past, the Fed and central banks used various backstop measures, including rate cuts, QE or simply talk of further policy loosening. Post-August “flash crash” market assurances have included the Fed delaying “lift off” and even chatter of negative rates. The ECB hinted at boosting QE. Chinese officials responded with a laundry list of stimulus and market controls.
By repeatedly intervening to arrest market downside momentum, the Fed and central banks nurtured a backdrop conducive to powerful short squeezes. The current exceptionally speculative marketplace plays right into this dynamic. After all, few (if any) market themes offer the quick trading profit opportunities as squeezing the shorts. And with the faltering global Bubble and elevated risk generally, short positions and bearish hedges had been mounting in recent months.
It’s worth recalling that Nasdaq went on its final speculative melt-up in early 2000, right in the face of rapidly deteriorating industry fundamentals. Short squeezes and a dislocation in equities derivatives played prominently. And there were some decent squeezes and a collapse in the VIX just prior to the 2008 fiasco. Just because the market is within striking distance of record highs does not indicate that the downside of a historic Bubble period isn’t materializing. It would be much healthier if (self-adjusting) markets were capable of letting some air out gradually.
»
- 6388 reads
- Printer-friendly version
- Send to friend
- advertisements -
An Optimism posting on ZH? We truly are in End Times.
Capitalism, the concept as we thougt we had it, went the way of the American Dream, if it ever really existed. We will never move toward capitalism again.
The problem with economics is that any economic system is deeply flawed when the system is based on fiat money. Until we get back on a sound money standard there will be no real economy, only unicorns and pixie dust for the rich and shit and shovels for the poor.
"It’s sad to see Capitalism under such attack in the national discourse. Washington seems only somewhat less despised than Wall Street. Somehow socialist ideas appeal to a growing number of Americans – especially the young. On this score, I’m content to be repetitive: Federal Reserve activism and inflationism bear primary responsibility."
The Ten Planks of the
Communist Manifesto
1848 by Karl Heinrich Marx
5. Centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly.
But, but Barnie Sanders said he was going to go after the big banks?
I still see Walmart employees buying new cars.
I buy
Gold Bitchez.....I pick up pennies
Speaking of bubbles, where is the weekend contributions from Marc to Market?
"Budget surpluses of the late '90s". The national debt has declined one month since 1980, I believe, that was Federal accounting.
There can be no defense of any attempt to manage the economy in any way, as there is no technology to manage open, evolving, complex systems. Handwaving while speaking politically-persuasively is not a management system for the economy, contrary to opinion in DC.
https://thinkpatriot.wordpress.com/2015/02/26/complex-systems-and-the-hu...
The sooner we abolish the Fed, the sooner the recovery can begin.
Capitalism isn't the problem, bad money is. With bad money, an investor lives in a world of mirrors. Capital misallocation risks everywhere.
What BS! QE was an outright theft of over $1.7T.
The scariest statement in context is the Blinder Zandi surreal utterance
In other words, blinding the markets ability to discover the price of the future discounted rate of capital, a critical piece of information prior to investing, spending, or saving, can be expected to be painless.
This is so outrageous and contrary to the economic historical record that I can't figure out where on the "Is it stupidity or malice" continuum it falls. I tend to go with the idea that Blinder and Zandi know better, and are simply echoing what will keep them their sinecured jobs.
"Saving Capitalism."?
Capitalism died March 10th 2008 around 11:00am Bear Stearns time New York shitty.
The end.
We dont have capitalism in murikkka nothing to save........
Any time someone says the problem is due to something being "unfettered", you know you are hearing from the control freak perspective.
No, in all it's the constant fraud.
It's not the people's fault at all unless you take the lack of revolt into account.
The only way to solve all this crap is to hang the 100 most corrupt politicians next to the 100 most corrupt ceo's.
The world belongs to the people, and not just a few of them.
When the total value and volume of derivatives contracts dwarfs the value of the goods they are based on you can never have a true market. Saving capitalism is a silly notion, it died 44 years ago, though some here would argue it was 102 years ago.
FACT: Either those individuals who cause disaster bear the consequences... or someone else does.
Sadly, the number one skill, activity and practice of the predators-that-be (government, central banks, huge corporations) is consequences shifting.
Those entities produce NOTHING, but cause endless destruction, and suck the life out of everyone who is productive.
-----
The bottom line is... when predators-that-be cause a bubble, which then pops (as it absolutely must)... the predators-that-be must suffer the consequences. Otherwise the producers will leave or collapse.
And that has happened. Which means... game over.
Trying to defend capitalism, eh? Hey, i don't have any problem with it. U-ASS isn't my country. Bwahahaha..
Capitalism.
https://en.m.wikipedia.org/wiki/Capitalism
Quote:
"Capitalism is an economic system in which trade, industry, and the means of production are privately owned and operated via profit and loss calculation (price signals) through the price system."
Does that includes "People wellfare" in its description?? Only PROFITS & LOSS CALCULATIONS.
If it's MORE PROFITS to make factories ELSEWHERE? Then by executing THE TRUE CAPITALISM. You WILL HAVE TO MOVES elsewhere.
Isn't YOU assmerreeekkaaa people that wants this system? I still remember the propganda film of "capitalism is BETTER than Commmunism" (not that communism does any better, as envisioned by lenin/stalin/mao/kim-il-sung).
So, enjoyed the fruits of your choice.
No, i don't feels any pity for you. Not even the smallest Quark's. You have made choice. Face it like a man. Don't cry baby to others...
“I am reminded of an invaluable “Austrian” insight (paraphrased): “The scope of the down cycle is proportional to the excesses of the preceding Credit boom.” From this perspective, there is major problem with conventional “logic.” These so-called “proportional” monetary and fiscal responses have over the past 25 years fueled serial Bubbles - and attendant progressively more dangerous Boom and Bust Dynamics. Especially when it comes to monetary policy, it was recognized a long time ago that the problem with giving central bankers too much discretion was that policy mistakes would invariably be followed by greater blunders.”
Does Austrian junk economics even acknowledge why property boom occurred? It was unwanted positive feedback induced by credit creation. The credit was aimed and channeled incorrectly.
70% of money supply is hypothecated by bankers against Fire. Finance Insurance and real estate. 97% of supply is bank credit created, with 70% of that related to FIRE. The property value of New York State exceeds all industry in the U.S.
Yet, people work for industry and to create goods and services. The money supply is mismatched to the real needs of industry and production, and instead reduces standard of living through higher costs.
This new banker credit against FIRE, then pushes land prices, which makes people seem richer, and then they go out and take out new credit loans, which push prices yet again in positive feedback. This is a non damping system, and is built in as a defect in credit money system design. This heat and waste, of just swapping and flipping homes is not real GDP activity, but is counted as such in NIPA accounts (national income and product accounts). Insurers like AIG cosigned on double entry ledger to make loans/debts appear better than they were. The output of this system is a sawtooth, with a slow ramp of credit creation, then a sudden drop off going into depression. Depression is when bubble pops, and bankers refuse new loans, yet credit money continues to drain into ledger upon loan payoff.
All money is law, and law needs to prevent unwanted positive feedback. This law needs to be coded into BOTH fiscal policy and monetary policy. Mises monks would never agree to this notion, especially because they think that markets are magick. Mises monks also think that money is metal. They do not have the answers – their economics is junk.
For example, properties prices cannot be pushed if there are rent taxes on land. Taxes dampen housing bubble prices. Texas did not get whacked as bad as other states, because they are a property tax state with available land. Bubbling was somewhat dampened with property taxes, or new supply coming on line, to thus suppress prices. Land locked states suffered the most with prices being pushed.
Texas economy is doing better than other states. Why? Because Texas land taxes and land availability prevented many Texas markets from excessively overheating. Housing prices weren’t pushed excessively with too much credit money as demand aimed at that sector. Fast forward to future, and Texans don’t have an overhang of private debts to burden them.
(Some Texas areas had pushed housing prices, but those were always exclusive desired areas fully built out and land locked, where supply was limited. The exception doesn’t make the rule.)
So, the bubble was not a central bank creating credit. It was individual banks making new loans against property.
Central bank and BIS rules had lower Capital controls on credit formation, thus making it easier to have ninja loans. Private Banks, especially TBTF banks, created SPV's in order to re-hypothecate mortgages with MBS vehicles.
This then shifted risk from indivdual banks to TBTF banks. A new loan would be on-sold to TBTF almost immediately, to then be converted to a MBS.
Government was complicit in anti red-lining provisions in CRA act. Breaking of Glass Steagall with GLB broke firewalls, especially with insurance co-signing.
Criminogenic banks broke legal lines of law that forbid mortgages from tranched, hence robosigning scandal.
It was private credit as money and private markets that malfunctioned. TBTF banks created credit and FED then made reserves available. Credit comes first then reserves are found later.
The FED was not the primary actor, it was a follow on actor helping their banks find reserves after the fact.
I'm sorry if this reality does not comport with false Austrian hypnosis. But, the truth matters, and lies cannot be allowed to propagate.
The resultant depression is a rapid sawtooth decline OUT OF PROPORTION to the previous credit misallocation. The entire economy freezes up as credit money has dominoes of counter parties.
Joe doesn't pay Maria, who doesn't pay Sam, and hence all loans become non performing. Hence no new credit formation suddenly, and hence rapid decline in economic activity as money disappears or goes into hiding.
Brooksley Born warned Alan Greenspan (J), Robert Rubin (Sayanim) and Larry Summers (J).
http://www.businessinsider.com/the-warning-brooksley-borns-battle-with-alan-greenspan-robert-rubin-and-larry-summers-2009-10
Funny how money power agents have connections to Austrianism? Turn over a financial rock of malfeasance and rent takings, and you will find our tribal in-group friends. Everytime.
They spread lies, so they can take usurious rents against society.
Stop funding your own slavery and dispossession.
www.sovereignmoney.eu