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, December 19, 2013

Transcript: Here, Janet, You Take It: Bernanke bails out with QE blunder still running

Today, QE, tapering, how the Fed spent trillions betting a blind alley was the road to recovery... with audio from hizzoner Ben Bernanke, from David Rosenberg, and from Steve Keen.
Listen to this episode

David Rosenberg.

These comments are obviously from before the Fed's announcement that it would be cutting back its purchases all the way from $1 trillion to $900 billion annualized. But what does Rosenberg mean when he says "priced in" to the market? And how could the Fed be so foolish as to do something that wasn't priced in?

"Priced in," of course, means the current prices of stocks and bonds assume whatever action is contemplated actually takes place. That is, the Fed does what the markets wants. While we're at it, What does "unwind" mean? The Fed's purchases under the QE's of trillions of dollars of mortgage backed securities and Treasuries have to be sold, right? That is what the conventional wisdom has told us, maybe with a wink, but that is the story. We'll connect with Steve Keen later to discover what the effects of winding and unwinding actually are, but before that I want to introduce another definition of "unwind." Which is actually to slow down the purchases, not sell the stuff it bought back. This announcement of so-called "taper" would be the first step. At present, we are still driving up the blind alley, only we've cut the speed by ten miles per hour, from 100 to 90. Actually, that's not quite the case. We've reached the end of the alley, and are revving the engine against a brick wall. Revving the engine makes it sound like we're going somewhere, but not the case. The front bumper is hard against it and we're just burning the tires. No real investment is taking place, but a great deal of asset purchases are fouling the air like a bubble.

There was a time when the Fed did what it thought was right -- even though more often than not it was wrong. Then there was a time when you couldn't understand what it was saying, so you had to watch what it did and impute some motive or rationale for the actions. Call that the Greenspan era. Now it does pretty much what the market wants, because if it doesn't, the market will throw a fit and the hysterical matrons will call their Congressman, secretaries of the Treasury, or Fed governors, not to mention punish the offending office with the withdrawal of their endowment funds.

Ben Bernanke, looking quite relieved for getting out of town before his ideas reached their full potential, his last press conference at the Fed, gave us these comments. I don't think it should have been a surprise that Bernanke's last meeting was the venue for tapering. Continuity is a proxy for coherence at the Fed.


QE is, of course, Baffled Ben's baby. The entire Fed response to the crisis, abetted by the Geithner Treasury, was premised on Ben's hypothesis that bailing out the banks, providing liquidity to the frozen and sometimes bogus markets, would avoid the Depression that followed the crash of '29. This was the theme of his academic work, for which he has been so often praised. Bernanke pushed trillions of dollars in on the red in the belief that his unproven hypothesis would indeed prove out. Too bad for us.

Pushing interest rates down by buying hundreds and now thousands of billions of dollars of mortgage backed securities and Treasuries was also in line with Ben's focus on restarting the housing market, or more precisely, making the CDOs good again.

We can only suspect surprise at the Fed with the discovery that it was not the housing market, nor the labor market, that boomed, but the stock and bond markets. Real investment was not affected, and even declined. But financial investment, or trading, boomed.

Parenthetically, we suspect at Demand Side, that once the payment system was saved, the rest of the recovery had more to do with the floor of demand from government stabilizers and social security slash medicare than the focused intervention on behalf the 1%.

So now Janet Yellen, as the incoming Fed chair, has the QE lever. That lever has already been pulled enough times to produce a massive, historically unprecedented, transfer of wealth to the already wealthy, even as the share of national income going to labor declines year after year, and once again, real investment has not been tickled. What the QE's have done and continue to do is create a financial market hooked on government infusions of money. Tapering is a form of avoiding cold turkey. Unfortunately, as when applied to other addictions, it rarely works.

The markets actually bumped up after the announcement, perhaps from the notion that tapering means confidence in the future direction of the economy, perhaps from an appreciation that the Fed is at least looking at the reality of the situation. Perhaps from the rosier projections for things like unemployment that emerged. This last should be cause for panic, actually, since the Fed's projections are always wrong. They come from the same economics that produces things like QE.

A good example of the current state of that economics comes from Olivier Blanchard, IMF chief economist. At the risk of losing some of the audience, I quote.

Monetary Policy Will Never Be the Same
Olivier Blanchard
On the liquidity trap: We have discovered, unfortunately at great cost, that the zero lower bound can indeed be binding, and be binding for a long time — five years at this point. We have also discovered that, even then, there is still some room for monetary policy. The bulk of the evidence is that unconventional policy can systematically affect the term premia, and thus bend the yield curve through portfolio effects. But it remains a fact that compared to conventional policy, the effects of unconventional monetary policy are very limited and uncertain.
Which is to say, in spite of the cost, the benefit is hard to see. To demonstrate that Mr. Blanchard has no clue, I continue...
There is therefore much to be said for avoiding the trap in the first place in the future, and this raises again the question of the inflation rate. There is wide agreement that in most advanced countries, it would be good if inflation was higher today. 
Presumably, if it had been higher pre-crisis, it would be higher today. To be more concrete, if inflation had been 2 percentage points higher before the crisis, the best guess is that it would be 2 percentage points higher today, the real rate would be 2 percentage points lower, and we would probably be close in the US to an exit from zero nominal rates today. 
We should not dismiss the possibility, raised by Larry Summers that we may need negative real rates for a long time. Countries could in principle achieve negative real rates through low nominal rates and moderate inflation. Instead, we are still facing today the danger of an adverse feedback loop, in which depressed demand leads to lower inflation, lower inflation leads to higher real rates, and higher real rates lead in turn to even more depressed demand.

Phooey. These folks have not learned the liquidity trap. The liquidity trap is not drained by finding a way to get interest rates to new lows, defeating the so-called zero lower bound. It is defeated by investment and demand. When the private sector does not invest, the public sector must. Here I am talking about real investment in real stuff that is productive, in the near or long term. Yes, inflation -- were it to appear -- would reduce the problem of debt, which is THE problem for the real economy. It has not appeared because the stimulus is stuck in the financial sector. Were needed investment the target, rather than the savings instruments of the wealthy, we would have all the inflation we could handle. Plus a few million more jobs, a healthier revenue stream for government at all levels, AND returns to private investment that would spur real growth. Remember, overcapacity is also under-demand. As to Mr. Blanchard's idea that if inflation were higher before it would be higher after. This gives inflation a kind of independence from actual events that it does not have.
Later, Blanchard continues as the dutiful deacon of Neoliberal nonsense:
Finally, turning to capital flows. In emerging markets (and, more generally, in small advanced economies, although these were not explicitly covered at the conference), the evidence suggests the best way to deal with volatile capital flows is by letting the exchange rate absorb most — but not necessarily all — of the adjustment.
This is, of course, the problem Brazil and China are experiencing. Where the QE cheap money actually went to invest, causing unwanted exchange rate problems and bubbles.

So the Fed is meekly trying to reverse course, not yet backing out of the alley, but revving the engine at ten percent less RPM's. They have reasserted the zero interest rate policy, and have followed our recent analysis regarding the unemployment rate, realizing that a 7 percent unemployment with a radically reduced workforce in 2013 does not equate to a 7 percent workforce in 2007. We showed last week, I think, that controlled for participation, today's headline unemployment rate would be about 11.7 percent in 2007 terms. So I would say they are listening to the critics who say QE is not workable, or at least they are looking at the data that demonstrates the same fact.

They are probably not listening to the more politically visible group, some members on the Fed's board, who have said and repeated that QE was dangerous because it was inflationary. Let's quote from Lee Adler of the Wall Street Examiner, with a pungent view.

ZIRP and QE are Deflationary 
The Fed has been doing QE and ZIRP (Zero Interest Rate Policy) for nearly 5 years and for the past year and a half, there’s been no “inflation.” Zero. Zilch. Nada. And Japan has been doing some form of QE and ZIRP for over 20 years, and they’ve been stuck with deflation the whole time.
The headline Producer Price Index for November was down 0.1%, in line with the consensus guess of economists. 
Get the picture? QE and ZIRP are deflationary. Apparently, central bankers don’t get it because it’s against their religion-the mystical belief that their policy of printing money and holding interest rates at zero will stimulate inflation if they just do it for long enough. There’s no basis for it in fact, but they go on believing. Faith is a critical element of central banking. Central banking represents all of the world’s great religions-Christianity, Islam, Buddhism, Shintoism, Judaism, Zoroastrianism, Witchcraft, Devil Worship, and Economics, the last three especially so. 
Fed Policy and Producer Price Index -

The Fed started ZIRP in late 2008 and began printing money hand over fist with QE1 in early 2009. Producer prices had collapsed in 2008 after the commodity bubble blow-off earlier in 2008 that was an echo of the housing and credit bubble that grew out of years of easy central bank policy and lax regulation. We know how that ended. After the Fed cut rates to zero on the heels of the 2008 crash and started printing money, prices rebounded through QE 1 and 2, but only to their previous level. But look what happened with QE3 and 4 which began late in 2012. No inflation. 
Here’s the problem. Money printing and ZIRP are great for asset inflation-bubbles, if you will. But economists do not count asset inflation as inflation. That’s right. Asset prices don’t count. Even though the link between money printing and asset inflation is clear, direct, and incontrovertible, economists and central bankers, being the mystical jackass charlatan frauds that they are, simply DO NOT count it. They even manage to ignore house price inflation by using something called “owner’s equivalent rent” in the CPI, as opposed to actual house prices, which have been rising at about 15% a year for the past year. 
ZIRP and QE, as opposed to stimulating inflation as the economists define it, actually suppresses it. QE and ZIRP cause overpricing of assets, malinvestment, and as a result, excess capacity in many sectors of the economy. That contributes directly to the suppression of labor rates. Capital becomes overvalued because there’s too much cash for speculators to play with, while labor income is under constant downward pressure because the plutocrats make more money from speculation than from production. The incentive is to invest in processes and structure that eliminate troublesome labor. The purchasing power of labor declines. Workers’ standard of living and ability to purchase goods and services declines. Because of overcapacity, excess production, and falling real personal income for the majority, the prices of many goods and services remain under downward pressure. They are typically mostly the goods counted in the PPI and CPI. 
This creates a vicious cycle. The price indexes that economists watch remain under downward pressure. In their religious delusions, the central bankers and their economic disciples spread the doctrine that we only must print more money for longer and keep interest rates lower for longer, maybe even turn them negative, to get those inflation numbers up. But it does not work. 5 years of US policy and over 20 years in Japan have provided overwhelming evidence that it does not work. In spite of that the central bankers and economists go right on ignoring it. They continue their policies of robbing from the middle class, stealing their savings and devaluing their work, to give the spoils to the plutocrats and speculators. They get richer and the rest of the population sinks ever further into an economic abyss.
That is Lee Adler. Pungent. Not precisely our take, but close enough.

They key on inflation is that money doesn't get into the real economy unless lending is for real stuff. So not only is the real economy getting no inflation, it is getting no lift. I've embedded the Steve Keen video that goes through the details. The key point is that the Fed cannot create broad money, and QE does not create broad money. Only lending for legitimate purposes creates broad money. The very term "trading" should tell you it is not investment.

I have appended to the transcript some examples of the Wall Street spin from before the taper announcement as well as the entirety of the FOMC statement.

Let's go out with a little Steve Keen.


Link to Keen's YouTube Talk on QE

FOMC Statement:

Information received since the Federal Open Market Committee met in October indicates that economic activity is expanding at a moderate pace. Labor market conditions have shown further improvement; the unemployment rate has declined but remains elevated. Household spending and business fixed investment advanced, while the recovery in the housing sector slowed somewhat in recent months. Fiscal policy is restraining economic growth, although the extent of restraint may be diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable. 
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will pick up from its recent pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as having become more nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term. 
Taking into account the extent of federal fiscal retrenchment since the inception of its current asset purchase program, the Committee sees the improvement in economic activity and labor market conditions over that period as consistent with growing underlying strength in the broader economy. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions, the Committee decided to modestly reduce the pace of its asset purchases. Beginning in January, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month. The Committee 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 and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate 
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. 
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. The Committee also reaffirmed its expectation that the current exceptionally low target range for the federal funds rate of 0 to 1/4 percent will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee now anticipates, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. 
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Charles L. Evans; Esther L. George; Jerome H. Powell; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Eric S. Rosengren, who believes that, with the unemployment rate still elevated and the inflation rate well below the federal funds rate target, changes in the purchase program are premature until incoming data more clearly indicate that economic growth is likely to be sustained above its potential rate.

Here is some analysis, first from Merrill Lynch:

Once again, market anticipation is rising ahead of a Fed meeting. In our view, this meeting will be defined by what the Fed doesn’t do: we see a low chance of the start to tapering or meaningful changes to forward guidance. Rather, we look to Chairman Bernanke’s final press conference for a broad discussion of Fed policy options into next year. He is likely to signal both that tapering could start early next year — conditional on the data — and that the Fed will be patient and gradual as it winds down its purchase program. We also expect him to indicate that the Fed will strengthen its forward guidance if needed, but keep his options open. The overall tone should be modestly dovish, especially relative to market expectations of potential start to tapering. We expect him to reiterate that the Fed intends to keep policy accommodative well into the future in order to support a broader and more sustained recovery.

And from economist David Mericle at Goldman Sachs:

Fed officials face a more difficult decision at their meeting next week, as the employment and growth data have picked up since the October meeting. But our central forecast for the first tapering move remains March, with January possible as well. We see a decision to taper next week as unlikely for three reasons.

First, the case for tapering on the basis of the data since October is mixed at best. The strongest argument in favor is the improvement in the trend rate of payroll growth to the 200k level. However, we expect that Fed officials will also put considerable weight on inflation, which has fallen further in recent months. At current spot and projected inflation rates, a tightening move would be quite unusual by historical standards.

Second, we continue to expect that tapering will be offset by a strengthening of the forward guidance, but we doubt the FOMC is ready to take this step. While some eventual strengthening or clarifying of the forward guidance is now a consensus expectation, the October minutes and recent Fed commentary suggest little agreement on what form this should take.

Third, while consensus expectations now place greater probability on a December taper, it remains a minority view. We suspect that this makes a move less likely, as Fed officials will be reluctant to deliver a hawkish surprise that could tighten financial conditions and raise doubts about their commitment to the inflation target.

No comments:

Post a Comment