Transcript: 383 Congress looks into the Fed, plus the forecast

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Today on the podcast:  The Fed, the forecast,

SANDERS

If we hear the invocation "we must maintain the independence of the Fed" one more time...  It is like saying "we must maintain the independence of the moon."  The Fed orbits the needs of the banking sector, completely within its gravitational pull, completely oblivious to the ramifications of its actions on the real economy.  The Fed is not independent.  It is owned by -- literally as well as figuratively -- the banking system.  As you can get a hint of in Sanders description of the secretive and lucrative meetings between the Fed and its owner banks.

As Sanders says, this is the most powerful federal agency.  Amen.  It is, in fact, the fourth branch of government.  Completely in charge of half of economic policy -- monetary policy.   But you won't find it in the Constitution.
As we've said before, Bernanke was chosen for his position on the basis of unproven and increasingly doubtful academic work claiming the Great Depression could have been avoided by saving the large banking institutions.  Now -- $8.7 trillion later -- the banks are bigger, the casino is on its feet, the economies of the world are stumbling and still in crisis.

"We have to fix the banking system first," we were told, "then borrowing and investment can proceed."  Whether you doubted it at the time this premise was put forward or not, you must doubt it now.  The panic is abated, but -- again as we predicted -- crises lie in waiting in soveign debt, where the credit default swap is the tool of choice, and in the commercial real estate collapse, where smaller and regional banks stand to fall without huge government bailouts.

We hope the GAO's audit of the Fed will produce enough outrage to bring that agency under the control of the representative government instead of the banks which are running it for their own benefit.

Well, here is Henry Blodget of Tech Ticker directing our attention to the back door bailout we've highlighted here before.

BLODGET

Henry Blodget.

Indepenence of the Fed, indeed.

Now to the Forecast.

Nouriel Roubini ...

Well, let's get Roubini's take on the strategy of the Fed and Treasury with regard to the banks.  He is calling for -- as we have here from the beginning of the crisis -- for a return to Glass Steagall.

ROUBINI ONE

Now Roubini on the forecast:

ROUBINI TWO

Oops.  It turns out the economic future is clouded in potential bubbles for Roubini.  Indeed, our take is that the inflated value of stocks, commodities and bonds is a function of this wall of money.  It is not going into investment.  It is going into the casino.

With respect to the continuing concern in Europe.  There is a real prospect of systemic breakdown there.  The Central bank is running monetary policy for the benefit of the whole, that is Germany, but there is no central fiscal authority.  This was the fatal flaw when the EU was set up and without radical conversion, it will be the cause of its collapse.

Getting the house in order does not mean getting the kitchen in order.
Greece, Europe, the US should get its fiscal house in order.  You hear it everywhere.  But what is meant is that the governments of these countries should cut back to their revenues.

If a country is going to be compared to a household, however, you have to deal with the bedrooms, the living room, the garage, the bathrooms.  You have to not only talk about the housewife, but the students and the drunken husband.  That is, the one who manages the infrastructure, social insurance and public safety is not the only one in the house.  There is the overindebted consumer/worker, the private employer who is cutting positions and wages, the financial sector content to get its bailout back to the casino, the corporations with pricing power who are pricing the corporations without pricing power into the ditch, and the rest.

After all, it is the revenue from the private sector that are lagging, it is the promise of prosperity from the low-tax free marketeers that cut up the safety nets that has been the betrayal, and it is the debt of the private sector that enormously outweighs that of the public sector.

Now consider that the deficits of the public sector are exactly the source of what profit there is in the private sector.  This follows from Michal Kalecki's elegant algebra which identifies investment plus deficits equal profits.  No investment?  Deficits equal profits.  

We'd like to touch on a couple of more prescient forecasters:  Anonymous Americans polled in consumer confidence surveys and drivers using gasoline.  This is a bit dated, but we're into useful information, not news.  From mid-April, again via Calculated Risk,
Consumer mood unexpectedly worse in early April

U.S. consumer sentiment took a surprise negative turn in early April due to a persistently grim outlook on income and jobs, a private survey released on Friday showed.

...

The surveys' overall index on consumer sentiments slipped to 69.5 in early April -- the lowest in five months. This was below the 73.6 reading seen at the end of March and the 75.0 median forecast of analysts polled by Reuters.

The article says "consumer sentiment is seen as a proxy for consumer spending", but I'm not sure.

NOTE: On the following graphs, the unemployment rate and gasoline prices are inverted since they are inversely correlated to confidence.
Click on graph for larger image in new window.
The first graph shows consumer confidence and the unemployment rate (inverted).

There is a strong correlation, although it appears confidence leads the unemployment rate (probably because layoffs stop before the unemployment rate starts falling). Maybe a better graph would be monthly changes in employment vs. confidence (I'll look at that later).

The second graph shows consumer confidence and real gasoline prices (CPI adjusted).

Although there are periods when confidence doesn't track gasoline prices, it does appear there is a relationship.

So my guess is the weak confidence reading tells us wha
t we already know - unemployment is high and gasoline prices are rising.

http://www.calculatedriskblog.com/2010/04/consumer-confidence-unemployment-rate.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29