This weekend was the annual trek of policy-makers and pundits to Jackson Hole, Wyoming. That is the Jackson Hole economic symposium sponsored by the Kansas City Fed. The centerpiece was the highly anticipated presentation by Ben Bernanke, who demonstrated he knows exactly what is expected of the nation’s central banker. A suit and tie. In all weather. In all venues, in all circumstances. It wasn’t too bad, so long as he was the only one in the frame. More than two or three, though, and it looked odd.
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Bernanke gave a speech entitled “Monetary Policy since the Onset of the Crisis.” Highly anticipated, as I said, mostly from over-amped analysts looking for signs of Fed policy to come, specifically, Will there be more Fed easing. To us it demonstrated the vacuity of the Fed’s thinking. We’ll take a closer look in just a moment.
Easing is what force-feeding the financial sector cheap money is called. Now you’ve got banks with eyes bulging they’ve got so much in reserve, and financial markets literally floating on the liquidity.
The most celebrated critic who presented at the conference was Columbia University professor Michael Woodford. The Wall Street Journal called, “a stinging critique of the policies of the Federal Reserve and other central banks in the wake of the financial crisis, accusing them of “wishful thinking” and saying that some of the steps the Fed has taken have backfired.”
I guess. Compared to us, it was a compliment.
Okay, the consensus reaction was that Ben would be in favor of further Fed action. Hard to find that in the speech, but since it was the only issue of interest to the consensus, it had to be either yea or nay. And since the economy is plainly not doing well and Bernanke had to say that, the consensus brought away yea, more easing in view.
What did he actually say?
Although it was titled "A review of the economy since 2007," it entailed a detailed defense of the banks first policy. At the same time, beginning on page two, Ben began to note that it didn’t really work. After the initial easing of monetary policy, “dysfunction in credit markets continued to worsen,” he said, prompting the one hundred and one special facilities designed to keep the web of financing from coming unraveled around the world.
“Although it is likely that even worse outcomes had been averted, [by these policies], the damage to the economy was severe,” says Bernanke. But from what? Not noted is the Ponzi debt bubble that had come apart. At the time, Bernanke characterized this as a “complex chain of causality." Certainly the structure of too big to fail and the domination of the real economy by the parasitic financial sector was not averted, since it was in fact, increased.
On page three, the Fed Chairman notes that he and the Fed were guided by some general principles, unfortunately derived primarily from Milton Friedman, but only limited historical experience. He mentions the Japanese case, but omits the 1929 credit bubble. The Fed, thus, “has been in the process of learning by doing.”
Again, there is plenty of doing, but very little learning.
Under the heading "Balance Sheet Tools," we have a discussion of the portfolio balance channel. We are not going there today. We simply note that the massive purchases of MBS’s did not reflate the housing bubble, as we believe Barnanke intended. And the purchases of Treasuries have depressed returns to bondholders without really producing any investment to speak of by pushing investors into risk, as the portfolio balance scheme suggests.
Page four continues the focus on financial assets of investors and the laborious passing through of cheap money to investment that is supposedly the conduit to job creation. Missed by Ben and most of his monetarist colleagues is that investment is not stimulated by the availability or cheapness of money, but by the prospect for profit. This prospect is burdened today with current excess capacity. The investment in real assets we have seen has come not so much from cheap Fed sponsored funds, but from tax advantages and the opportunity to replace labor with capital. Again, there is no prospect for profit without demand, and there is no demand, because there is no effective investment or jobs program.
The long exposition on the pricing of assets we see in Ben’s paper is thus not relevant.
Demand Side’s view is not improved with his liberal citations of Milton Friedman, the PT Barnum of economics, nor Allan Meltzer, who is doing a version of Clint Eastwood’s convention ramble every time we hear him. Although we noted the citation from Meltzer is 1973. What? 40 years ago.
So, Ben and the Fed succeeded in forcing the interest rates lower. Granted. Hard to argue. Interest rates went lower. Great. I guess. But investment higher? No. Employment improved? No. No prospect for profit.
Or as Bernanke says here on page seven, “obtaining precise estimates of the effects of these operations on the broader economy is inherently difficult.”
If I can digress, it is interesting to see the Fed here asking for the fiscal side to come up with something better than austerity and a gold standard. The Humphrey Hawkins bill of the Carter years came about because of a divergence of monetary policy from fiscal policy. In that case, however, it was the fiscal policy of the Congress being frustrated by the monetary policy of the Fed. The Keynesian response to the high unemployment of the 1970s was partly undone by harsh monetary restrictions. Congress reasoned, these guys are not elected and yet they are conducting half of economic policy. Thus the dual mandate arrived. Maximum employment. Price stability. Humphrey Hawkins was also the beginning of the Fed Chair's trips to Capitol Hill. Prior to that there was virtually no consultation.
One of my favorite economists, see Chapter 5 in Demand Side the book at Demand Side Books dot com, Leon Keyserling, slammed the Fed at every opportunity for keeping rates too high, costing the Treasury and others in excess interest and lost jobs.
Now the shoe is on the other foot. Bond holders can’t get squat in terms of return. The federal government is doing next to nothing in effective Keynesian stimulus. And it is the Fed calling for coordinated fiscal and monetary policy.
Also interesting to note is that the Obama stimulus, as badly designed as it was, had an effect and now that it is nearly spent, the economy is returning to negative territory, according to Demand Side, and now some others. The general consensus is that the ARRA didn’t work. In fact, if you control for the massive deficits it did work. The problem is that some projections were made that were not met. I call it the Larry Summers pontificating knothead (although use another part of the anatomy in private conversation) effect. On the other hand, the Fed was going to do whatever it took. The fed did tens of trillions. Nothing. Now whatever it takes is not in the Fed’s toolbox and we are supposed to retire into a quiescent state of “Ah well, it is the turning of the stars.” Bull. Monetary policy did not work because it cannot work.
Its effectiveness is entirely in the imagination. Why no effect?
Page eight. “It is likely that the crisis and the recession have attenuated some of the normal transmission channels of monetary policy relative to what is assumed in the models, for example, restrictive mortgage underwriting standards have reduced the effects of lower mortgage rates.”
So Balance Sheet tools. Big cost. Little result. Little positive result.
I sound flip, perhaps. This is serious. The Fed would do whatever it took, we were told at the time. The Fed did whatever and we got took. Still too flip.
On to page 9 and "Communication tools." In particular “forward guidance.” “the Federal Reserve has made considerable use of forward guidance as a policy tool.” And to amplify the effect of forward guidance, Ben always wears a suit and tie.
“Has the forward guidance been effective?” Ben asks rhetorically. Well, interest rates are lower. But I don’t see that here in the mandates of price stability and maximum employment. No. Not here. Lower interest rates. Good for banks, or at least until they got their refis in order. Now not so good. But in any event, lower interest rates is not a mandate.
In a section beginning on page 11, Bernanke notes “making monetary policy with nontraditional tools is challenging." Making policy has not been so difficult. Getting results from that policy is hard, because it is operating in a fantasy land. It is not working because it cannot work. What can work is hiring people to do things that need to be done.
Quite a bit less costly than supply side monetarism. Obvisouly with direct hiring, employment would go up. We can design it so deficits don't grow. There would be a hit to inflation, because demand will increase. And you can bet Ben will be there in the front lines raising rates as fast as possible.
Price stability is not now possible. Real assets have deflated substantially over the past five years. Commodity prices, thanks in part to speculation sponsored by cheap Fed money, have stayed strong, as former investors in assets have moved into funds that give them control of physical quantities of food and metals. Labor, the core of core inflation, not moving.
Nontraditional monetary policy has an acronym. LSAPs Large Scale Asset Purchases. An appropriate term for a policy that drains vitality from the economy. El Saps. Reminds one of the IMF program of Structural Adjustment Policies. SAPs. Successfully rendered many Third World nations impoverished for decades. We love this supply side humor. El SAPs
Are there problems with the LSAPs? Bernanke does not mention their ineffectiveness, but sees some other problems. One, these operations could impair the functioning of securities markets. A big buyer could depress the price, forcing investors to take more risk than is reasonable to get the return they need. We saw this in “reaching for yield.”
Another, “substantial further expansions of the balance sheet could reduce public confidence in teh Fed’s ability to exit smoothly from its accommodative policies t the appropriate time. Even if unjustified, such a reduction in confidence might increase the risk of a costly unanchoring of inflation expectations, leading in turn to financial and economic instability.”
Any confidence is misplaced. Inflation expectations are a relative of the confidence fairy. Often mentioned, never seen.
A third cost? Ooops. Here is the financial instability from driving yields lower and pushing investors into imprudent reach for yield. What was one? Impair securities markets?
Hmmm.
“Trading among private agents could dry up, degrading liquidity and price discovery.” Not likely, since everybody wants the Treasuries for their safety. Nobody wants the MBS’s, or at least did when the Fed was buying them.
A fourth cost? The Fed might actually lose money on its purchases. Not to worry, says Ben. “The odds are strong that the Fed’s asset purchases will make money...” Oh, and “to the extent that monetary policy helps strengthen the economy and raise incomes, the benefits for the U.S. fiscal position would be substantial.” Sorry. The odds are the Fed is going to lose money, at least in real terms on many of its financial assets. Most instructive is we are talking about "odds." Gambles.
Under Economic Prospects, beginning on page 15, there is a fundamental ignoring of the role of deficits in floating the economy along. During the Depression, the government in toto amounted to less than the deficit of the federal government does today as a proportion of GDP. Yet the only notice is taken with the jargon, fiscal cliff.
Ben notes, “the economic situation is far from satisfactory. No net improvement in the unemployment rate since January.
“In light of the policy actions the FOMC has taken to date, as well as the economy’s natural recovery mechanisms, we might have hoped for greater progress by now in returning to maximum employment,” says Ben. Repeating that the stability in the economy is a function of the federal deficits and the New Deal institutions of social security and unemployment insurance creating a floor of demand, we must note that the Fed’s remembering of “maximum employment” belies its silly belief in NAIRU, the non accelerating inflation rate of unemployment. We should expect any return toward true maximum employment to be met by a recollection of this silliness and a return to the anti-employment policies.
Best would be low, stable interest rates, and control of credit by means other than the interest rate button. You cannot point to an example of when it has worked.
But here,
Page 16, “Rather than attributing the slow recovery to longer-term structural factors, I see growth being held back currently by a number of headwinds,”says Bernanke. First housing. Second fiscal policy. By which he means declining state and local employment and uncertainties about the so-called (if you’re squeamish, please close your ears) "fiscal cliff.” Third tight credit and stress in financial markets.
Now we come to the part I have to concur with , Last page.
“The stagnation of the labor market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”
Yes, five years of no effect except to lower incomes. The damage is serious. Debt is being forced on our young people as they look for work they cannot find and turn to the promise of college or for-profit schools.
Repairing the damage of the past five years, or the past dozen years, if you take the whole of the Bernanke influence, is going to likely be more than we will be able to get by a radical Right Congress. These are sad times for economics, and for our country. The only policies that work are demand side policies. They have the only history of working. There is no example of thise supply side monetarism working. It doesn't work. It ends badly. Borrowing at zero percent is still borrowing. Still has to be paid back. If things go south, you're just as insolvent as if you'd borrowed at ten percent.
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