A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Thursday, September 27, 2012

Transcript: 520 Relay Bill White

Rarely do we approve of bankers here at Demand Side. As close as we come is William White, former chief of the Monetary and Economics Department at the Bank for International Settlements, currently a key adviser to the OECD. We promised a couple of weeks ago we'd have him on, and today's relay is fulfillment.

White wrote the paper "Ultra-Easy Monetary Policy and the Law of Unintended Consequences" just prior to the Jackson Hole Conference, which basically upstaged all the discussion there. We've linked to the paper on the blog. Or just Google "Ultra-Easy Monetary Policy."

William R. White
"Ultra-Easy Monetary Policy and the Law of Unintended Consequences"
(Revised September 2012)

We don't agree with White completely, surprise. In particular, his fear of inflation absent a recovery is Friedmanesque. But we do see a clear and direct look, and what is seen by him is pretty close to what others have seen who indulge in such an exercise: An unsustainable debt, the vulnerability of banks, and the need for creditors to take a hit, among other things.

A couple of terminology notes. When White talks about "macro instruments" he is talking about central bank efforts to increase private spending and borrowing. And "risible," the word "risible," means arousing or provoking laughter. "Laughable."

This is courtesy of Bloomberg on the Economy. Edited but not distorted.

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Sunday, September 23, 2012

Transcript: 519 Housing Diverted


The housing question is really a matter of investment.

The Treasury under Tim Geithner whiffed on effective help to homeowners. There is no longer even a pretense that the various half-hearted programs succeeded. There is just convenient silence.
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The Fed's massive aid in the form of buying mortgage-backed securities and forcing interest rates ever lower has not helped the homeowner, but it has kept a securities industry going. This is Bernanke's all-in play. Refloating the sunken market.

Blowing air into a popped balloon, Ben is amazed that no matter how big the compressor or how high the flow, the balloon stays flat. Maybe it makes a fluttering sound like escaping gas. We'll spare you that sound effect. We can refloat the boat, he says, if we just gun the motor harder.

The Treasury and Fed have conspired to keep the bad loans, including at least one-third of second mortgages and home equity loans from being accounted for at their true value – zero. To save the banks. I say they have conspired, but it would be more accurate to say they have followed the direction of the private banks.

Housing prices have bottomed, it is said. And in a narrow sense that is true. The price has hit somewhere near its floor. On the other hand, who can afford one? Twenty percent down is now the norm. Figure that out on a net present value scale. It doesn't pencil out as a lower price.

But as we said, the real question is one of investment. The very tepid growth of the first part of the 2000's was fueled by a massive Ponzi bubble, but it was investment, Ponzi investment. It has come a cropper. Prior to that, we had an Internet bubble. Investment, but still Ponzi investment.

For thirty years now government stimulus has come in the form of tax breaks to business investment on the front end. I won't call the breaks for capital gains and dividends stimulus, because it didn't stimulate anything. The rise of that kind of supply side scheme has corresponded not with increased investment, but with declining investment.

In any event, we have created an overcapacity that is clearly visible in the statistics, and now seems immune to any further give-aways.

Where is investment opportunity? Technology? Apple and the others have no need for outside funding. They're sitting on tens of billions of dollars.

Health care? The huge profits here are not based on product – healthier lives for more people – but on monopolies and corporate control through the government of markets. As we've said, if you counted health care's contribution to GDP the way every other private sector is accounted for – by product – instead of by cost – you'd need to knock off 8 percent in the U.S.

The real opportunity for investment lies in the other major segment of GDP accounted for by cost not product – that would be government, public goods.

Here I'm not talking about the pass-throughs, or transfer payments. Social Security, for example, is not government spending. It is private spending. Spending on consumer goods made by private individuals. They are funded by contributions to the Trust Funds, some by themselves, but most by current workers. Similarly unemployment insurance, Medicare and other social safety net programs are typically spending on consumer goods and services by private individuals. As such, they are very important to consumer goods providers, the corporations that dominate the airwaves and legislative processes throughout the nation.

What we are talking about in terms of government investment is investment in public goods – the social capital of education, legal institutions, public safety, and importantly investments in infrastructure. Any cost-benefit analysis would find enormous returns to education, K-12 and otherwise. A society without legal institutions and public safety is not a working society. And the great value of constructing and maintaining physical infrastructure, particularly that which builds toward an environmentally sound future. Immense new investment is needed beginning now and continuing for two or three decades.

This, of course, is witchcraft to the Tea Partyers and those who worship at the feet of a largely imaginary Adam Smith. You have the mob with pitchforks, but they're storming their own villages, torching their own houses, turning their own parents and children into the streets, egged on by a Frankenstein they've come to trust.

We are led to believe a healthy economy has to smoke 250 million plus American cars a day and make the toxic fuel ever cheaper by the implicit subsidy of denying its effects on the future. A financial sector has to be kept in comfort even after it has blown up the world's economy. A corporate propaganda machine can sell the wisdom of perpetual war and the need for ever more sophisticated killing machines, but deny that there is money to take care of the human casualties it creates.

Wouldn't it be nice if that propaganda machine could be engaged to sell the wisdom of the survival of the natural systems we all depend on.

Here in Seattle, until our blessed rains came these past two nights, we were socked in by smoke from wildfires to the EAST of us. Tremendous drought, terrific heat, melting ice, dead zones in the oceans. No, by God, the real danger is socialized health care and mooching old people. I have an idea, let's bring the National Guard home from Afghanistan and have them reconstruct some levies and put out some fires. Ah, no, probably too expensive.

Or so says a well-paid, high profile cadre of windbags, red-baiting in a manner we've become familiar with since the First World War. They look no more sincere to us, nor any less the liars, than Joe McCarthy.

As long as I'm on this digression, I have to note one of the great public relations events of the past week. The announcement by Mitt Romney that 47 percent of Americans are Obama voters because they're dependent on government programs of one kind of another. First, it forced the media to reveal that EVERYBODY pays taxes, so contrary to the FoxNews facts. EVERYBODY. In the form of payroll taxes, property taxes, sales taxes, excise taxes. And if you listened even half-heartedly, you'd find out that most of those on the bottom actually pay a bigger fraction of their incomes than the Mitt Romneys of the world. Second, it was revealed that about half of the 47 percent who are supposedly locked in to Obama, including a whole host of seniors, are actually voting for Romney. I guess it won't hurt him. People have already chosen sides, they know their team's colors. Doesn't really matter what is said.

Gee, that WAS a bit of a digression. Back to housing. We note here that we called in 2008 for the US to follow the successful salvage operation of the New Deal, where the Home Owners Loan Corporation sponsored the renegotiation of loans, kept those who didn't qualify (that is, couldn't make payments on mortgages even at their true values) on as renters until the property could be sold, and set the simple 30-year fixed rate on the map as the benchmark.

I'm sorry. Let's go back. Please indulge me.

Whether or not it is the design of some grand conspiracy or just the accidental company of a dozen selfish ends, the political parties have both become grafted to Wall Street.

The Libertarian wing of Ron Paul and the free market fundamentalists, who seem to think all they need is their own four wheels and they can go anywhere, damn the public roads, are lined up with the hedge fund capitalists and corporate tycoons who depend on government to bail them out, who depend on the Greenspan-Bernanke-Draghi put, whose operations are kept alive by special arrangement with the Fed and Treasury. Frankenstein may be behind the mob, but it is Mitt Romney out in front wearing a tricorner hat that fits like a beanie.

The Democrats took the White House with the help of Wall Street. Or rather Wall Street took the White House with the help of Democrats. The progressive energy lined up behind a compelling message and messenger only to find he caved even before negotiations began. Wall Street didn't have to move out of the Treasury. They just put in new carpet. And of course big banks have owned the Fed since Eisenhower took office.

It has never been more plain that there are two Democratic parties, the party of the president and the party of Congress. So the Democrats got energized, but now look like Wobblies led by Andrew Melon.

Trying to find the humor in this is like putting a party hat on a starving baby. Putting a for rent sign on Saddam Husseins hidey-hole.

It's just not funny.

I guess we'll talk about housing another time.

Sunday, September 16, 2012

Transcript: 518 Banking with Ben

It may be boring to hear us saying the same thing, but at least it's confirmation of the forecast.

Today, before we get to our predictable reaction to the news of a new QE, we have a relay of Tom Keene and Jonathan Weil of Bloomberg and top banking analyst Chris Whalen of Tangent Capital. Talking about the banks. American and European. Do they have enough capital? Has bailing them out stabilized them or led to more instability as they reach for yield? Is pushing investors into risk a good plan for recovery? It inflates the value of stocks, so the financial sector is happy. But the American people are backstopping the whole mess, or at least they are below them and unable to get out of the way when they fall again. Foaming the runway.
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The immediate news event which begins the discussion is the announcement of downsizing – "restructuring" – at Deutschebank.


Bouncing along the bottom with downside risks. It's amusing that the consensus is catching up, but discouraging to realize this is seen as the new normal, not a condition to be remedied as fast as possible, not a refutation of the supply side monetarism.

We've been saying, too, that Europe is all about the banks. The ECB is trying to do what the Fed is trying to do, reflate a credit bubble, a bubble it fomented itself. Europe had housing overbuilding in Spain, Ireland, and elsewhere, but it also had the sovereign bond bubble. The ECB encouraged this second bubble explicitly, just as the Fed under Alan Greenspan encouraged and abetted the housing bubble. Low rates. Low risk. Pile in. Same message.

Now, in the same way Bernanke is trying to reflate housing at tremendous cost and no prospect of success, the ECB is trying to reflate the bond values. Just as the Fed is now and probably in perpetuity the owner of massive amounts of mortgage backed securities, the ECB is becoming the holder of tremendous amounts of sovereign bonds.

What is the effect? In trying to make mortgages and bonds attractive, the central banks are killing the future of those who depend on some return on savings. That would be boomer retirees and pension funds. These are the sources of security and potential demand.

The ECB has taken it one step further, and is promoting depression in the affected countries by mandating austerity in those countries to which it proposes to lend. We heard this week that those nations, Spain and Italy, are not eager to follow Greece and Ireland into ruin. Or at least they're not going to obey the ECB.

These nations know it is not they who are most vulnerable to bond defaults. It is the banks. As we heard here with Whalen, Weil and Keene, the banks are extremely vulnerable. The ECB will fund the nations on the front end with bond purchases, and it will fund the banks on the back end by covering the capital flight with loans against collateral. What they will not do, and cannot do, is turn the flows back to the positive side. The Germans will not allow themselves to a deficit trading nation.

There are answers, financial answers, economic answers, but there is no political answer to the power of the entrenched interests of the banks, nor to the institutions such as the ECB and IMF who are in thrall to the completely discredited supply side Neoliberal ideology.

That is a good segue to this last week's announcement of more QE. Yikes. It didn't work so far, it costs trillions, but we have to do something, so let's do more of the same.

Ben Bernanke is not a bad person, he is not insincere, he is not particularly dumb, but he is wedded to a save the banks first theory. This is why he is where he is. He is the choice of a politically powerful financial sector. It is sad to think that he will be the scapegoat for the next crisis.

What is QE 3?. Quoting from the Fed's statement:
To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month. The Committee also will continue through the end of the year its program to extend the average maturity of its holdings of securities as announced in June, and it is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. These actions, which together will increase the Committee’s holdings of longer-term securities by about $85 billion each month through the end of the year, should put downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.
So, yes, it is trying to reflate the housing market. They have apparently given up on the idea of corporations expanding and hiring or banks actually lending to business.

What if we were to offer 4% interest on infrastructure bonds? That is, government guarantees on specified long-term projects in roads, bridges, rail, electrical transmission and other infrastructure that would improve or even maintain current transportation and energy infrastructure. Big advantage is that it creates the value which can be monetized to repay the bonds. Residential investment is overbuilt, and it is purely a financial game to increase its price.

What will be the real effect of QE 3? Higher stock prices, higher commodity prices (see inflation), and nothing in terms of jobs. There are still those who argue "Great. Higher stocks. More wealth for stock holders. They will spend." Phooey. Double phooey.

Most interesting is to speculate on the political fallout.

I am most uncomfortable being in the please don't shoot again, Ben, camp, because it seems to be littered with pamphlets from Ron Paul and the Republican Right. I say don't do it because it doesn't work and in fact reduces incomes. They say don't do it because it means inflation. But we both say don't do it.

We're going to get another intelligent argument in front of you soon. From Bill White, formerly of the BIS, Bank for International Settlements, the one international institution with some sense. White is going to go over some of the unintended consequences.

But lastly, if I could add, it is amazing and disgusting that the people who predicted the crisis – the Steve Keens of the world and the Nouriel Roubinis – are ignored when their analysis proves out. The People and banks who caused and fomented the crisis are still in charge and their increasingly absurd analysis is that which gets the air time, and the results will be hard.

Sunday, September 9, 2012

Transcript: 517 Stagnant economy, ineffective monetary policy, "stay the course"

Today on the podcast, a data point, or disappoint with August employment numbers, some thoughts on the insight of central bankers, and James K. Galbraith with some direct, emphatic historical context for the banking crisis.
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Friday's employment report did little to support recovery bulls. The employment recession continues. Private sector job gains were 103,000 minus government sector job losses, at 9,000, leaving a total gain of 96,000. July's robust 163,000 was revised down to 141,000. June was revised down from 64,000 to 45,000.

The unemployment rate decreased to 8.1% because the participation rate declined to 63.5%. The U-6 measure was down to 14.7%.

Average hourly earnings actually declined. One cent.

On the blog we reproduce Calculated Risk's famous percent of job loss during recovery. Look at it closely and you will remember our suggestion that the current Great Recession will see more months of job loss than all other post-war recessions combined.

Long-term 26 weeks or more is dancing around at Depression levels

The political business cycle is no doubt in action. This is the phenomenon where the president in power jinns up as much spending in election year as possible. It has been done by every president since Richard Nixon, except Jimmy Carter. Which means the weak numbers are weaker than they look.

2012 is looking weaker than 2011 in terms of jobs.

The first eight months have added 800,000 and change in terms of jobs. Roughly the same number was lost in the single month of November 2008, and January 2009, and March 2009, and April 2009. So we're not getting back anywhere close to full employment

The level of doofus-ness in monetary policy is remarkable. They may have three piece suits and speak in fervent voices or measured tones, with brows knitted in thought, but they might as well be wearing overalls. Here in the U.S. we have Ben Bernanke throwing trillions of dollars into financial assets and being sugar daddy to the banking system. When it doesn't work, saying, as we heard last week, "Well, it kinda worked."

His competition among the monetary policy muck-a-mucks are hysterical about inflation. Never mind we haven't had any significant inflation in twenty years, they have their degrees and they learned what they learned, and damned the evidence. Not unlike somebody who thinks it might get cold, so we better light a fire. Never mind it's eighty degrees out, the window is open, and we learned what happens when the window is open. So a fire it is. Sure, it's on the living room floor, but at least there are sticks of furniture around to stoke it with.

Higher interest rates work on inflation because they slow down the economy. The success of the Volcker experiment was the massive unemployment of the early part of the Reagan years. There is no real example of lower interest rates leading to a self-sustaining recovery, but there are plenty of examples of higher interest rates leading to a slowdown.

Now the economy is already slow, so the interest rate fire may burn the house down, but its hard to see how it could have a negative effect on inflation.

And in Europe, monetary policy is led by Mario Draghi, Super Mario, head of the ECB. Draghi promised to do whatever it takes to save the euro experiment. His idea of what it takes is to extend more credit, buy more sovereign bonds, in exchange for more promises of austerity, to lure the confidence fairy out of hiding.

How much more evidence do we need that neither more debt nor more austerity is what those countries need?

They need less debt and more employment. That means a write-down of current debt now owed plus a reorganization of economies that looks either like a euro break-up with exchange rates that allow full employment in the deficit countries, or it looks like a transfer of capital to the debtor countries, either by a transfer of capital and investment in those countries, or a stimulation of consumption in the surplus countries like Germany.

This slavish devotion to a euro that is the servant of the surplus countries is a one-way journey to perpetual recession and inevitable failure

The ECB spent most of the first decade of the euro's existence telling banks to load up on sovereign debt. It was counted as tier one capital, I believe, basically without risk. Now they're stuck.

And who is stuck? It is these banks. And the ECB is stuck with the legacy of bad advice and the implicit responsibility to the banks.

The doofus-ness is not any less because these guys wear nice suits. But it changes the conversation. If they were in overalls and straw hats, people would understand. As it is, after years of pronouncements and predictions and policies and only deterioration of economies to show for it, they still get respect.

Here in our local paper, actually from the AP and an article by Bernard Condon and Paul Wiseman: Under the headline "ECB boss outweighs Bernanke right now"
"Move over, Ben Bernanke. this is Mario Draghi's moment.

"The European Central Bank president is overtaking the Federal Reserve chairman – at least for now – as the central banker with the most influence on the global economy and markets. Faced with a growing recession and a possible breakup of the 17-country euro alliance, Draghi has bigger problems than Bernanke, who's overseeing an economy in recovery.

"As head of the ECB .. Draghi also has more ammunition left than Bernanke does."

Thus, after engineering a collapse of the European economy and a crisis of the member states with its austerity demands, Draghi's and the ECB's power is not diminished, but expanded, according to at least this account.

And it is repeated in truly disheartening terms by the Peterson Institute's Jacob Kirkegaard, who greeted Draghi's announcement of unlimited (subject to limitations) purchases of bonds.


The IMF, you will remember, has engineered the collapse of many economies with it's structural adjustment policies. The prospect of its being in charge of Europe is terrifying to some of us.

Turning quickly to a more coherent voice, here is James K. Galbraith, putting the current banking mess in the U.S. in historical context.


James K. Galbraith. One of those who was right. Now marginalized. Only those who were wrong, such as Ben Bernanke and Mario Draghi, seem to have influence these days.


Monday, September 3, 2012

Transcript: 516 Bernanke's Jackson Hole

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?


“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.