Bernanke led economy proving critics clueless

[EdwardBaiamonte]

Leaving food and energy out of inflation is like leaving the assassination out of Lincoln's trip to Ford Theater; do people take that number seriously?

leaving housing out was perhaps the biggest sin of all!

 

[DSGE]

Again, it depends. Most of the time, that happens, but sometimes it does not.

But to me, what matters is that it is priced correctly. I can give example after example of when it doesn't happen correctly, but I'll give you one example. In January 1998, I was at a Credit Suisse technology conference in Phoenix. The CEO of Telabs (if I recall the company correctly) was scheduled to speak at the conference. However, word spread that he wouldn't be arriving, and given that the company was subject to takeover rumours, investors assumed that perhaps an announcement was about to be made that the company was about to be bought and the stock jumped something like $15 in a few minutes. Less than an hour later, word circulated that the reason why the CEO wasn't showing was because he was in upstate NY and his plane had been snowed in. Do you know what the stock did? It did nothing. It just sat there. I think it ticked down a few points over the next few days but it basically held its gains.

Of course, the retort would be "that's just one example." Well, the problem is this irrationality happened over and over and over again. Companies with $10 million in revenues were being valued at $2 billion overnight. Companies getting their tickers mixed up in Barrons were up 500% the next day. AOL buying TimeWarner. It was staggering. Yes, within a few years, all that was wiped out, but that's my point. It took a few years. Often, the market gets it right. Over the long-run, the market is right. But sometimes it gets it wrong, particularly in the near and medium term, and sometime spectacularly.

Oh I don't disagree that the market gets it wrong. I just don't think that the market ignores vital information. The very example you gave was of the market quickly and violently reacting to a new piece of information. Albeit the information was used to produce a speculation which turned out to be incorrect, it wasn't ignored. So if the likes of Ron Paul can "know" that a bubble exists, if people can demonstrate with certainty that the price of housing will crash in the near future, rather than simply making a speculation which turns out to be correct ex post, why is this information widely ignored by the market?

Any psychologist or sociologist knows why - because people aren't always rational. The investors shorting dotcom stocks in 1998 were eventually proven right, but very few people made money doing it, and many were taken out. There are also structural barriers too, but the reasons are primarily because people are overcome by greed and fear. I majored in economics, and after spending nearly 20 years investing and trading, I would require every economics major to take 15-18 credit hours of psychology and sociology (which I did not formally study) so they can better understand how humans behave.

That requires that everybody suddenly becomes irrational at the same time. Even if we see a spurt of "irrational exuberance" or herd behaviour, aren't there a bunch of people remaining who haven't gone crazy? Why aren't they making shitloads in riskless return and laughing at everybody else for ignoring something so obvious? If it's the case that absolutely everybody has gone off the rails, what are you gonna do? There's no way to prevent or control this shit because nobody is behaving rationally anymore. Incentives/disincentives don't work for irrational agents.

And what do you think the central bank can do about it? If they tighten to try to prevent out of control spending in one sector then A) they're going to fuck over the rest of the economy that isn't behaving badly anyway, and B) they likely won't be able to stop it anyway since broad money and credit grows endogenously and the Fed has little control over it.

If we entertain the possibility that somehow the Fed will be able to spot a bubble and nobody else does, the best thing they can do is just announce their findings and let it be incorporated into the market. But since the market is behaving irrationally, that's not guaranteed to do anything.

So what should the Fed do? Exactly what they did. Keep nominal spending growing smoothly and let some semblance of rationality return to the market on its own. Of course they let nominal spending collapse in 2008 and turned a financial crisis into the shit it is now, so... you can blame them for that.

 

[DSGE]

Leaving food and energy out of inflation is like leaving the assassination out of Lincoln's trip to Ford Theater; do people take that number seriously?

It's so that monetary policy doesn't react in the short run to volatile swings which are out of its control. You don't want to base monetary policy decisions on transitory shocks to relative prices, especially since monetary policy acts with a lag, so the shock would have gone by the time the tightening takes effect. Looking at measures of underlying inflation like trimmed mean, weighted median and "core" inflation tell you about the trend in the general level of prices. Over here in Australia we had a nasty cyclone about a year ago. Headline inflation spiked but underlying inflation was on target. The correct response was not to tighten policy, since the inflation wasn't due to easy money but temporary supply shocks from the cyclone.

Of course over the long run, we care about headline inflation. Most of what we consumers buy is food and energy. But that doesn't mean you shit yourself everytime headline inflation jumps above 3%.

 

[CrusaderFrank]

Leaving food and energy out of inflation is like leaving the assassination out of Lincoln's trip to Ford Theater; do people take that number seriously?

leaving housing out was perhaps the biggest sin of all!

Overall, housing is a fucking depression, Fannie and Freddie need to be liquidated

 

[EdwardBaiamonte]

Leaving food and energy out of inflation is like leaving the assassination out of Lincoln's trip to Ford Theater; do people take that number seriously?

leaving housing out was perhaps the biggest sin of all!

Overall, housing is a fucking depression, Fannie and Freddie need to be liquidated

yes they were at the heart of the crisis but still the liberals won't sign on to privatize them so they can only survive by buying good loans from people who can actually afford to live in homes.

Oh well, Red Chinese liberals turned to free markets eventually and perhaps our liberals will too.

 

[Toro]

That requires that everybody suddenly becomes irrational at the same time. Even if we see a spurt of "irrational exuberance" or herd behaviour, aren't there a bunch of people remaining who haven't gone crazy? Why aren't they making shitloads in riskless return and laughing at everybody else for ignoring something so obvious? If it's the case that absolutely everybody has gone off the rails, what are you gonna do? There's no way to prevent or control this shit because nobody is behaving rationally anymore. Incentives/disincentives don't work for irrational agents.

Everybody doesn't have to go crazy. Just a lot of people do. And everyone else just has to get out of the way.

The reason why people don't make riskless arbitrage profits is, again, because of our psychological make-up. Individuals aren't hyper-rational automatrons calculating infinite probability distributions. We are complex, emotional beings. Empirical research has demonstrated that the pain of loss is 2-3x greater than the pleasure of gain. It's not symmetrical, as implied in the EMH. If a bubble is occurring, it takes a brave individual to short it. You can lose more than 100% of your investment shorting, and people often did in the 90s as dotcoms went nuts. So people simply don't.

And what do you think the central bank can do about it? If they tighten to try to prevent out of control spending in one sector then A) they're going to fuck over the rest of the economy that isn't behaving badly anyway, and B) they likely won't be able to stop it anyway since broad money and credit grows endogenously and the Fed has little control over it.

I am sympathetic towards this argument. But I guess one response would be "We have the worst economy since The Depression because of the collapse of the Housing Bubble." So perhaps if the Fed ran tighter policy - and not say "The housing market reflects strong fundamentals" like Bernanke did at Humphrey-Hawkins in 2006 - then we wouldn't be in as bad a shape today as we are.

The other serious problem is that whereas the Fed has been willing to say "You can't identify bubbles, so we aren't going to interfere because the medicine might be worse than the disease" is that even though the Fed isn't attempting to limit asset prices on the upside, they sure as hell have no problem supporting asset markets on the downside. Bernanke has made that clear for some time. The Fed has been running monetary policy with an eye on asset markets since 1987 when Greenspan bailed out the stock market after the crash. I'll give him a pass on that, but the Greenspan Put certainly was evident when they egregiously cut rates in 1998 to support the aftermath of LTCM. To me, that was a seminal event and IMHO marked the turn of monetary policy responding not only to the credit/inventory cycles prevalent since WWII, but also to asset markets.

If we entertain the possibility that somehow the Fed will be able to spot a bubble and nobody else does, the best thing they can do is just announce their findings and let it be incorporated into the market. But since the market is behaving irrationally, that's not guaranteed to do anything.

Well, again, it is not true that "nobody else" spotted these bubbles. I had many conversations with people who knew they were bubbles. I would say that economists had problems spotting them, but many investors did not. I also knew many investors who were playing the bubble knowing full well it was a bubble, which partly answers your question above. (As an aside, there was a paper published about a year or so ago which looked at the composition of economists' beliefs about the Housing Bubble before the Financial Crisis. It concluded that economists employed in private practice were generally more likely to at least entertain the possibility of a Housing Bubble whereas those employed in academia where much more likely to dismiss it, an interesting psychological finding unto itself.)

To answer your question, I think the Fed should announce clearly they think its a bubble and be willing to tighten policy if need be. Of course, Bernanke said housing looked fine in 2006 and Greenspan was cheering on the Internet bubble in 1999.

So what should the Fed do? Exactly what they did. Keep nominal spending growing smoothly and let some semblance of rationality return to the market on its own. Of course they let nominal spending collapse in 2008 and turned a financial crisis into the shit it is now, so... you can blame them for that.

Cutting interest rates to zero quickly and unleashing massive QE would not have staved off the collapse. It would not have kept nominal spending growing smoothly. I do think their actions helped us avoid The Great Depression 2.0, but the Fed's inability to spot bubbles and their responses have merely fed the cycles which create asset bubbles in the first place. We have to stop it and allow markets to clear.

 

[FireFly]

As I said in a previous post.

The Fed could raise interest rates, reserve requirements & taxes to combat the coming inflation, but they have always proven themselves to be irresponsible at the wrong times in the past, so plan for the currency to blow up in the future.

I think the Fed has lost one of those bullets. They will no longer be able to raise interest rates because the Treasury will lose it's ability to make it's debt payment. Get ready for higher taxes & increased reserve requirements.

The tax raise will be very, very unpopular so congress won't do that so we will be down to higher reserve requirements & that may cause banks to fail, raise fees or get bailed-out. Rinse & repeat.

The economy is going to suck!

 

[itfitzme]

I think I'm gonna start rationing my responses to your ravings. Replying to every profoundly ignorant thing you say is probably bad for my health.

But it's so much better for mine. I depend on other people to be looking at other stuff and reporting it accurately. I just hate it when they flat out lie or make it up. And your comments save me the trouble of having to go research it.

 

[itfitzme]

I think I'm gonna start rationing my responses to your ravings. Replying to every profoundly ignorant thing you say is probably bad for my health.

translation: I lack the IQ to respond rationally

Edward, If I thought for a second that you could respond to my posts with rational, intelligent thought, I'd be happy to engage in conversation with you. But time and time again you've shown yourself to be incapable of that. I no longer have any interest in humouring your impermeable ignorance.

If you don't then the unaware will believe the only thing they have to read.

 

[itfitzme]

we should be on Gold Standard so we have stable prices and an increasing standard of living; not on a ... inflation employment fiat standard that produces boom and bust cycles with a lower standard of living.

There are actually two statements of when the gold standard ended.

The gold standard effectively came to an end in 1933 when President Franklin D. Roosevelt outlawed private gold ownership.

The Bretton Woods System, enacted in 1946 created a system of fixed exchange rates that allowed governments to sell their gold to the United States treasury at the price of $35/ounce. "The Bretton Woods system ended on August 15, 1971, when President Richard Nixon ended trading of gold at the fixed price of $35/ounce.

So now we have two definitions. Rather, I think, a gold standard exists as long as the dollar and the price of gold are fixed together.

I suppose, all it takes is to show that business cycles existed even with the dollar and gold pegged. And, comparing the CPI and the price of gold since 1913, they are pegged all the way to 1971 when Nixon ended the gold standard.

Now, going to the list of recessions, there are recessions recorded all the way back to 1857.

So, at least the gold standard is considered solidly in place according to both statements, before 1933. And, there were recessions all the way up through 1933. There were 20 of them.

And, for that matter, business cycles have continued throughout the entire period between 1933 through 1946. Then 1946 through 1971. Then 1971 through present.

So, it doesn't seem to be true.

 

[itfitzme]

Leaving food and energy out of inflation is like leaving the assassination out of Lincoln's trip to Ford Theater; do people take that number seriously?

So you don't actually know what the Bureau of Economic Analysis, the CPI-U, CPI-W, gasoline index, energy index, food index, index for food at home, indexes for shelter, recreation, medical care, tobacco, used cars and trucks, new vehicles, and apparel, or the CPI less food and energy are.

I suppose not.

 

[itfitzme]

"They will no longer be able to raise interest rates because the Treasury will lose it's ability to make it's debt payment."

If someone could explain how this is suppose to work, I'd appreciate it as last time I saw it, t-bills are fixed rate.

 

[samjones]

So, it doesn't seem to be true.

That hasn't seemed to even slow Ed down.

 

[EdwardBaiamonte]

So, it doesn't seem to be true.

Being on a gold standard but not following the rules of the gold standard in place at the time caused the Great Depression. When libertarians say they want a gold standard they presumably mean one in which the rules are followed.

 

[itfitzme]

So, it doesn't seem to be true.

Being on a gold standard but not following the rules of the gold standard in place at the time caused the Great Depression. When libertarians say they want a gold standard they presumably mean one in which the rules are followed.

A gold standard is, "A monetary standard under which the basic unit of currency is equal in value to and exchangeable for a specified amount of gold."

This statement is one of what the effect is, not what the rules are. It doesn't matter what the rules are, as long as the two pegged together. Any rules that were not followed were then not required.

I find the idea of there being a rule that was not followed as inconsistent with what I understood to be the Libertarian platform.

Isn't the Libertarian position that there should be no rules? "As Libertarians, we seek a world of liberty; a world in which all individuals are sovereign over their own lives and no one is forced to sacrifice his or her values for ..."

Of course, that is just an ideal, absolute individual freedom is not possible when two people share the same resources. But, it seems that having rules regarding the value of a dollar and the value of gold imposed by "the cult of the omnipotent state" a bit inconsistent. But then, maybe that's just my problem because I am imposing some rules of logic which is also contrary to the Libertarian position of there being rules. Then again, having a common definition of what "a gold standard" means imposes some rules and restricts personal freedom to have one's own personal definitions. And given that there are no rules for definitions of words or logic of reason, then the only viable Libertarian position is that everything is a matter of opinion. As such, both opinions are true and correct. So, in fact, there was a gold standard and there was not a gold standard. As well, the gold standard that was and was not in effect did and did not cause business cycles which, in my option didn't even exist while at the same time there was a non -existent gold standard which in fact didn't cause the non-existent business cycles.


I am so confused.

Can someone please open up Schrodinger's box and kill that cat because it's simultaneous existence as both alive and dead it keeping me up at night.

 

[starcraftzzz]

So, it doesn't seem to be true.

Being on a gold standard but not following the rules of the gold standard in place at the time caused the Great Depression. When libertarians say they want a gold standard they presumably mean one in which the rules are followed.

What the hell are you talking about?

 

[itfitzme]

So, it doesn't seem to be true.

Being on a gold standard but not following the rules of the gold standard in place at the time caused the Great Depression. When libertarians say they want a gold standard they presumably mean one in which the rules are followed.

What the hell are you talking about?

Anyone can do a stock market report. I find them amuzing. You see what the stock market did that day. You also look for a prominent news report.

Then you say,

"The stock market was [bulish/bearish] today as investors reacted to news that {insert news headline here}".

If you want to get tricky, you can switch it up with,

"{insert news headline here} made investors [confident/skittish] resulting in a [number of points] [climb/drop] in the market"

 

[KissMy]

"They will no longer be able to raise interest rates because the Treasury will lose it's ability to make it's debt payment."

If someone could explain how this is suppose to work, I'd appreciate it as last time I saw it, t-bills are fixed rate.

Most of the government debt is short to medium term & being rolled over and added to at increasing rates. Operation twist is trying to move some of this debt out 10 years in order to prevent a rate hike shock. This may put the rate hike bullet back into the feds gun.

 

[itfitzme]

"They will no longer be able to raise interest rates because the Treasury will lose it's ability to make it's debt payment."

If someone could explain how this is suppose to work, I'd appreciate it as last time I saw it, t-bills are fixed rate.

Most of the government debt is short to medium term & being rolled over and added to at increasing rates. Operation twist is trying to move some of this debt out 10 years in order to prevent a rate hike shock. This may put the rate hike bullet back into the feds gun.

Excellent. This was my thought. I don't like to assume anything.

So, the hypothesis goes that, as the debt is X at time zero, the next month time = 1, some portion of X is cashed in, payed off, as the bills are due and payable. In turn, to cover that payment, the Treasure offers the T bills at a new rate that the market demand. This new market driven rate is, in part, affected by the discount rate. Given that the potential buyer of t-bills has a choice of other investment possibilities, like loaning to consumer credit, which is paying at a higher rate, the t-bill rate has to rise to be competitive.

So the other option is to move from short term to long term t-bills.

Still, the fundamental reference for T-bill and other low risk investments is the COLA. The idea being that money value does depreciate, like most things is represents. T-bills should be paying near that rate.

Just as a side note, back in the 70's, savings accounts were paying 5.25%. Something seems a bit amiss. Savings accounts should be the primary source of funds for capital investment. Local banks make local business loans and local savers are part of that growth.

It just seems to me that the balance of the system is out of whack.

The rate of inflation is pegged. T-bills and saving should pay near that. During high growth periods, the spread between the base rate and other interest rates is driven down because risk is low and up because return is high. During low growth periods, the spread between the base and interest rates in driven up because risk is high, and down because return is low. Somewhere it finds a balance.

Then, of course, being that government should be printing money and hasn't, this is always an option.

Thanks, that moves me a step further. I have to hold at the last unconfined or unvalidated step. One wrong turn and the trip ends up at in the middle of nowhere.

 

[KissMy]

"They will no longer be able to raise interest rates because the Treasury will lose it's ability to make it's debt payment."

If someone could explain how this is suppose to work, I'd appreciate it as last time I saw it, t-bills are fixed rate.

Most of the government debt is short to medium term & being rolled over and added to at increasing rates. Operation twist is trying to move some of this debt out 10 years in order to prevent a rate hike shock. This may put the rate hike bullet back into the feds gun.

Excellent. This was my thought. I don't like to assume anything.

So, the hypothesis goes that, as the debt is X at time zero, the next month time = 1, some portion of X is cashed in, payed off, as the bills are due and payable. In turn, to cover that payment, the Treasure offers the T bills at a new rate that the market demand. This new market driven rate is, in part, affected by the discount rate. Given that the potential buyer of t-bills has a choice of other investment possibilities, like loaning to consumer credit, which is paying at a higher rate, the t-bill rate has to rise to be competitive.

So the other option is to move from short term to long term t-bills.

Still, the fundamental reference for T-bill and other low risk investments is the COLA. The idea being that money value does depreciate, like most things is represents. T-bills should be paying near that rate.

Just as a side note, back in the 70's, savings accounts were paying 5.25%. Something seems a bit amiss. Savings accounts should be the primary source of funds for capital investment. Local banks make local business loans and local savers are part of that growth.

It just seems to me that the balance of the system is out of whack.

The rate of inflation is pegged. T-bills and saving should pay near that. During high growth periods, the spread between the base rate and other interest rates is driven down because risk is low and up because return is high. During low growth periods, the spread between the base and interest rates in driven up because risk is high, and down because return is low. Somewhere it finds a balance.

Then, of course, being that government should be printing money and hasn't, this is always an option.

Thanks, that moves me a step further. I have to hold at the last unconfined or unvalidated step. One wrong turn and the trip ends up at in the middle of nowhere.

From 2001 to 2006 the U.S. Treasury’s issued no long bonds. At the end of 2009, 36% of government debt was due within a year. This means up until operation twist most of the government debt was short to medium term being rolled over rapidly. Now that the rates are very low, Bernanke is pushing this debt out to 10 year treasuries. This is the secret sauce in "Operation Twist" in order to make room to allow for a potential short term rate hike to stave off hyper-inflation if necessary. Bernanke thinks he can keep the "Gold Bugs" at bay with this scheme while not bankrupting the treasury with unfordable interest rates. If they push enough low interest debt into long term, a rate hike will hit the main street economy very hard & keep unemployment high. Government dependents, workers & contractors will reap the benefits again. Bernanke believes he can keep the dollar & government in tact with this scheme.