An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
Every time they lower by a point they foment a recession
Are you sure you have the direction of causality right?
When the economy is overheating and inflation (wage inflation) is rising, then the Fed policy is to hike the rate to cool the economy, which under NAIRU, involves choking demand enough to result in unplanned inventory buildup that leads to layoffs. This results in a recession that supposedly purges the system of excess and prepares for a fresh round of growth.
When the Fed decides that they need to cut the economy is already cooling. But if the Fed has hiked too long, then there is overshoot to the downside (recession) instead of just a dampening of inflationary pressure.
The chart supports this view of causality.
The reality that is that chart patterns support a number of explanations (stories) and unless one can be shown to the the best explanation based on theory tested against evidence, these are just different stories.
Also the 2000 recession wasn't as long in time as the GFC one as they didn't do the QE and thus force a bank asset liquidation to add insult to injury...
I find your reasoning too simplistic, Matt. Richard Koo does a better job of explaining what the shoals are: https://www.youtube.com/watch?v=iAORiJxeTeo (I don't understand the title. He doesn't even mention Peter Schiff.)
OT. Tom, I thought Hatzius was supposed to be such a smart guy. Go to Goldman Sachs' twitter account @goldmansachs, and scroll down to May 5th and May 6th, and watch the 1:43 min video. Please? I don't know how to link to it. I'd be really interested in your take on his statements about cutting growth now because he claims we are at full employment.
Tom, another OT. Read this article that was published yesterday: "Be Wary of the Orwellian "Enlightened" Class" by Robin Koerner. https://fee.org/articles/be-wary-of-the-orwellian-enlightened-class/ I think it's fabulous because it says exactly--but waaay better--what I was trying to say about Progressives a few posts back.
Matt, now I am really confused what you are talking about. This chart is the Fed Funds Rate.
In the post below you were talking about the risk free rate.
Investopedia describes the risk free rate as:
The risk-free rate of return is the theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.
In theory, the risk-free rate is the minimum return an investor expects for any investment because he will not accept additional risk unless the potential rate of return is greater than the risk-free rate.
In practice, however, the risk-free rate does not exist because even the safest investments carry a very small amount of risk. Thus, the interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate for U.S.-based investors.”
The theoretical rate of return of an investment with zero risk is not the Fed Funds Rate (which is definitely not theoretical).
They cut rates slightly ahead of recessions. That's what they are supposed to do, if they are forward-looking. In both cases, it was clear that the economy was slowing ahead of the recession, so cuts were not a major surprise.
I would suggest everyone here take an extremely skeptical view of Franko's new QE\ZIRP causes recessions schitck. The main reason for this is the time that Franko told me that higher interests rates arent bad for real estate biz.
I buy foreclosed houses and fix them up to be rented, usually costs around $150 K for the house and the material and work to fix it. and a 1000sq ft ranch with no Basement 3 BRs and 1 Bath rents for about $1500 a month near me.
My current interest carrying costs is only about $5000 per year, property taxes and insurance are about $4000 per year.
When I described this above scenario to Franko previously and showed him how increasing my interest carrying costs to $10K per year by doubling rates to 6.5% would force me to either A) no longer be profitable or B) raise rents.
In what world is forcing up rents for the working class in order to pass more money along to banks and lending institutions "stimulative"? Franko has repeatedly told me that while he writes ad nauseum about how higher interest rates provide more fiscal flows from the Govt thereby helping the economy, he has repeatedly told me that there is no negative downside to raising interest rates. Even after I described the real estate scenario above, he still said it doesnt matter and that workers will just be earning more money when interest rates increase and so theyll be able to afford the higher rents.
People's analysis that cannot, does not, or will take into account all the considerations both pro and con in order to come to some net benefit caluclus, is not to be taken seriously.
Please take note that not once did I ever say that low interest rates are good for the economy because they are good for real estate. That would be dishonest and stupid analysis. Which is what Im complaing about YOU doing. YOU say that raising interest rates is good for the economy because it increases Govt spending and incomes for financial wealth holders. YOU are the one that ignores the downsides in your "analysis". Im simply being honest with everyone here. Your interest rate talks should be taken with a grain of salt because you manifestly ignore the negative effects of higher interest rates while only ever talking about the bennefits.
I'm saying economic activity (and rate of growth) will increase from current as they increase the rate in the area of the level we are in... that is all... iow the govt people are all saying they want to get back to 3-4% growth (GDP) ... well if they keep raising the rate back up to the same 3-4% and normalize CB asset levels then we will get there and maybe more...
What people do for a living is a separate matter... you're the one who brought in the personal real estate anecdotes...
Exactly what I wrote. They "forecast" the slowing; that's their job.
The recession dating is somewhat arbitrary; a lot of data rolled over ahead of the 2008 recession (Dec 2007, technically), and finance related to real estate was already in trouble by early 2007. Therefore, the fact that they cut a couple months ahead of the recession date is not a big deal; the recession was baked in the cake by then.
"In economics, a recession is a business cycle contraction which results in a general slowdown in economic activity.[1][2] Macroeconomic indicators such as GDP (gross domestic product), investment spending, capacity utilization, household income, business profits, and inflation FALL, while bankruptcies and the unemployment rate rise...."
We would not have had a recession if they didn't aggressively lower... look at the oil price reductions in 2015 not leading to recession there was all gloom and doom into early 2016 and we came right back as rates were stable...
As long as leading flows are sustained the economy (GDP) quickly stabilizes...
The parameters are too few. This is an issue with ISLM also, as well as everything else that takes the policy rate as a key economic variable useful as a tool in policy.
This to some of the major points of MMT.
1. The policy rate doesn't do what is assumed.
2. Fiscal policy is more useful than monetary policy in achieving economic objectives like harmonizing growth, employment and price stability.
Are you saying Warren Buffet and people like him don't exist???
Low interest rates drive up the price of financial and real assets. Assets are said only to appreciate but not inflate, while prices and wages inflate.
The financial cycle begins with low rates that drive up asset prices, increasing the wealth effect. This leads eventually to higher goods prices, and finally to increasing wages as workers demand higher wages to keep up with prices and to be able to afford higher real estate prices, which also affect rents. (Obviously, I have oversimplified this to keep it short.)
This is a big objection to the proposal to set the policy rate to zero. MMT economists counter that this can be addressed through fiscal policy.
Well you can't refute that via conceptual argument..
There is an extensively documented MMT argument on using the policy rate and the unemployment rate (buffer stock of unemployed) as tools to target the inflation rate iaw NAIRU and a Taylor rule.
Matt, at May 16, 2017 at 8:10 AM. I'll check out your two links. Just saw them. "I'll be back." Seriously, I am now 100% confused how you can equate the risk free rate with the Fed Funds Rate. They are not synonymous to me, although the risk free rate can adopt the Fed Funds Rate yield.
Matt, at May 16, 2017 at 9:08 AM, and May 16, 2017 at 9:14 AM. Watch the damn Richard Koo video I link to. It’s only nine minutes.
He describes how the same thing that hit us in 2008 hit Japan for 15 years, and how it wasn't a textbook recession definition, as your description above. Ditto your reference to bankruptcy.
He makes the cogent claim that there were no analogies or instructions in business schools or textbooks to help them unless they went back to the Great Depression, which he called another time and era, and until Japan instituted the 1933 reforms that the US did back then, nothing changed.
Koo makes the point that they applied the typical textbook remedies according to the standard economics and business school understanding at the time, and none of it worked because this was a different beast.
I didn’t know much about Koo, but I’ve been watching all his videos. He knows Fed operations having worked, as one of those worker bee economists Warren often refers to, at the NY Fed. He’s a macroeconomist.
iow the govt people are all saying they want to get back to 3-4% growth (GDP) ... well if they keep raising the rate back up to the same 3-4% and normalize CB asset levels then we will get there and maybe more...
I completely disagree. China saved itself and produced 9-11% growth by massive stimulus--I think it was 78% of GDP, but dont hold me to it--in November 2008. And they did it within a month, something we no longer know how to do. They turned on the spigots, including allowing the Bank of China to loan to the regional governments, which they had prevented up until that time to prevent inflation, etc. In fact, they ordered that credit be made readily available to stimulate growth; grant you, it produced a housing bubble they've had to watch and manage. (Which they've done.)
The deficit is too small or The stimulus is too small. They are the same thing. And our stimulus back then should have been $2T minimum (Christine Romer recommended $1.8T, but Larry Summer buried her memo and wouldm't let Obama see it.)
According to Koo in 2008 China learned from Japan's mistakes--Japan didn't figure it out until 2005--and implemented their corrective measures. Koo calls it a 'balance-sheet recession' issue.
No, Matt. This is where you are wrong, imo. Because you are not taking into consideration the actual facts surrounding the causes of the recession, and clinging instead to decades-old biz school textbook thinking.
That's not what happened in Japan. From 1990 to 2005 (when they emerged from their recession crisis) their GDP never fell below the peak of the bubble in 1989/1990, even though real estate prices fell 87% nationwide.
Because GDP was not the problem.
It was because profitable companies--who were nonetheless 'bankrupt' according to their balance sheets, debt far in excess of assets—were using their profits to pay down debt.
The cumulative 1990-2005 GDP from 1990-2005 supported by government action was ~2,000 trillion yen.
The cumulative loss of wealth from 1990-2005 on shares and real estate was ~1,800 trillion yen.
OK, Matt, on your Buffet links. I have zero issue with what Buffet is saying. Are you understanding what he’s saying?
In fact, in the first link, Buffett says if the government did kept the interest rate (FED FUNDS RATE) at 0% for 50 years, the Dow could hit 100K.
In the second link you cite, Buffet says for stock market investors, the most important metric to watch is found in the bond market.
He says, “The most important thing is future interest rates,” Buffett said. “And people frequently plug in the current interest rate saying that’s the best they can do. After all, it does reflect the market’s judgment.
The bond yield, which the risk free rate can reflect (3-month Treasury bill yield), is set by the market at auction.
BECAUSE HE ISN'T TALKING ABOUT THE RISK FREE RATE, which is reflected in the market-controlled bond yield, HE'S TALKING ABOUT THE FED FUNDS RATE.
He's saying the same thing that Warren says here: The Natural Rate of Interest Is Zero. http://moslereconomics.com/wp-content/graphs/2009/07/natural-rate-is-zero.PDF
The Dealers are certainly not going to base their bid on a rate that is LESS than what they are being charged by the Fed in repo to obtain the reserves to buy the bonds in the first place ... they would lose munnie...
Then the US Treasury issues treasury securities in the amount of that government spending to balance the money supply within the real economy.Only then are those treasury securities sent to auction.
The Fed Funds Rate have absolutely nothing to do with it. It's the interbank overnight lending rate.
What is a 'Recession' A recession is a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP), although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession.
Clearer: The Fed Funds Rate is the interbank overnight lending rate. It has absolutely nothing to do with the public auction of treasury securities, which anyone can participate in including foreign investors and governments.
two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP).
Point: Except that Japan didn't experience negative economic growth because of GDP. It was because no one was borrowing with their automobile, TV, and electronics profits. They were using them to pay down debt from their boom days. So their economy shrank because no one was spending.
Not according to the former Deputy Secretary of the Treasury Frank Newman, Matt. The "reserve add" is the government spending which shows up as reserves in the real economy It's Congress' payments to the vendors. It's in his book Freedom from National Debt. Only the US Treasury via Congressional appropriations can produce those interest-free new USD (treasury securities).
"How I Learned to Stop Worrying and Love the National Debt" - A Conversation with Frank Newman https://www.youtube.com/watch?v=Ae7PO-j7TIc
I agree with Tom Hickey’s skepticism about monetary policy (interest rate adjustments in particular), and his support for fiscal policy. Reasons:
1. There is no obvious reason why, given a recession, the cause is inadequate lending and investment rather than a deficiency in one of the other constituents of demand, e.g. consumer spending on non-durables, or exports.
2. The basic purpose of the economy is to produce what people want: both the stuff they normally purchase out of disposable income and the stuff they get from public spending. So in line with that point, the logical cure for recessions is helicopter drops for households (e.g. tax cuts) and increased public spending (i.e. fiscal policy).
3. Interest rate adjustments do not work particularly quickly: up to a year according to a Bank of England article.
4. Interest rates seem to be sensitive to market forces: witness the big fall in interest rates over the last 20 years. To that extent, it is illogical to assume that given a recession, and in that interest rate falls are part of the solution, interest rates will not have fallen all of their own accord. I.e. further and artificial interest rate cuts are highly questionable.
For more on the deficiencies of interest rate adjustments, see sections 10 & 11 here: https://mpra.ub.uni-muenchen.de/78896/1/MPRA_paper_78896.pdf
What comes before that? A reserve add. We're agreed.
You're trying to say that a Fed-generated repo (done with Dealers) is the reserve add? And that it precedes the issuance of treasury securities?
Then who the hell needs a Congressional appropriation? Who needs the US Treasury?
You're claiming that the Fed controls this issuance of new money, treasury securities by issuing repos to the primary dealers? On what planet?
A repo is a loan. It occurs in the after market AFTER the treasury securities have been issued by the US Treasury and are ready to be bought (or sold).
"You're claiming that the Fed controls this issuance of new money,"
That's not what I am saying I don't use the word "money" it is a figure of speech and thus not a technical term... in technical matters it's best to avoid figures of speech...
The appropriation may create the requirement to do the auction... so the appropriation is the source of the activity which is what we want in representative govt...
If there are insufficient reserves to do the auction then the Dealers can use previously issued USTs in their possession as the assets in a repo with the Fed at the policy rate and exchange the UST for Fed issued reserves (temporarily, i.e. the duration of the repo) in order to buy the NEW USTs... THEN dealers will deal those to their clients as Treasury later withdraws from the TGA to pay vendors, etc,.., then the repo will be consummated and the Fed will return the securities to the Dealers...
So the Dealers price their bid rate as a function of what the Fed charges them to do the repo and it is a proportional relationship...
So you go back and look at the 1 yrUST (i.e. risk free 1 yr rate) in 2014 it was about .1% today it is about 1% as the Fed is up 0.75% since then and threatening more increases...
It's a Dealer market and the Fed sets the (risk free) rate...
And don't now try to break my balls and tell me Pi doesn't equal 3.1416 or some shit...
The Fed and Treasury work in tandem to conduct fiscal and monetary policy. The Fed always ensures there are sufficient rb for auctions to clear.
According to the operations people, the temporal sequence is immaterial operationally. Everything is adjusted intraday so that all books balance at the close.
If there are insufficient reserves to do the auction then the Dealers can use previously issued USTs in their possession as the assets in a repo with the Fed
The amount of reserves (after an appropriation) is determined by what landed in the US Treasury's General Account and were distributed by the Fed to the vendors' bank accounts at the Fed for onward forwarding to the vendors' accounts. RESERVE ADD.
(No one forces those vendors to buy (or sell) treasury securities through the dealers. They could just as easily buy corporate bonds to protect their money, although riskier, or keep their $10 million appropriation for janitor services at an army base at their local credit union. Up the vendors. Not the dealers.)
According to Newman, the vendors are paid first through the US Treasury's General account. Again it's a RESERVE ADD. Then, according to Newman, "two weeks to a month later," the US Treasury issues treasury securities to mop up those reserves ("reserve drain") via auction. Sometimes, the US Treasury issues treasury securities in the full amount of the appropriation. Other times, because of a multitude of things, the US Treasury only has to issue a portion of the appropriation to match the appropriation amount. But the concept always is that the treasury securities amount issued in response to Congressional appropriation = appropriation amount.
Best to be specific. The cb issues the currency, either as rb or cash, as the government's bank. The non-bank private sector decides the balance of bank deposits and cash they wish to hold. Banks decide the balance of tsys and rb they hold.
Only the fiscal authority, in the US, the legislature, can increase or decrease $NFA. It does this directly through the budge and tax policy and indirectly by delegation. For example, now the Fed has been delegated the power to pay interest on rb, which increases $NFA. The Fed also has the power to conduct OMO and POMO, which decreases $NFA that would have been paid as interest to bondholders.
Here is Frank Newman's email address: he uses earthlink.net. The handle before the ampersand is fnnewman. [I hope he doesn't hate me for this.]
I've bugged him enough. Some of you can try. Newman says that the payment to vendors from the General Account is a reserve add. And yes, he does refer to them as Net Financial Assets (NFA) because they are new USD introduced into the real economy. In his book, in a footnote, he says that Warren Mosler, Scott Fullwiler, and Randy Wray, have the transactions sequence correct.
Obviously if you support Matt Franko's argument Geoff Tily was wasting his time writing a book on this subject "Keynes Betrayed" in which his central argument was Keynes was betrayed by economists because his central concern was the management of money at a low long-term rate of interest. The UK Radcliffe Committee argued that base rate manipulation was a crude tool and I believe Hyman Minksy had some thoughts on the matter of high interest rate outcomes. Personally I believe government has a role to play protecting savings up to a limited quantity value from the ravages of inflation.
Has to do with the overall accounting so that Treasury doesn't run an overdraft at the Fed, which is against US law.
Treasury and Fed work it out so that this doesn't happen.
The only fly in the ointment is the debt ceiling that prevents the Fed and Treasury cooperatively bringing everything in to balance through mutually coordinated operations.
To test Newman you could just look at the TGA and if the TGA ever increases faster than taxes then I don't see how Newman could be correct.
It's the difference between fiscal and monetary policy, fercrissake.
Fiscal policy creates/destroys $NFA: "More spending out of more income." CONGRESS APPROPRIATES THAT SPENDING; US Treasury handles the transaction by telling the Fed to mark up the General Account. "Out of thin air," etc. Taxes have nothing to do with it, as the DTS (Daily Treasury Statement) shows you.
Monetary policy has no change in $NFA: "More spending out of existing income" The universe the primary dealers exist in, and the world of taxes. Neither adds new $NFA.
Treasury keeps a fairly constant balance of about 6B in the TGA. Funds in the TGA don't count as bank reserves (rb).
The TGA is used for spending. Treasury directs the Fed as its fiscal agent to credit bank accounts with rb. IN the process, the Fed debits the TGA.
Taxes go into TT&L accounts. This counts as rb for the banks at which TT&L accts are held.
Treasury then uses the TT&Ls to keep the TGA topped up by moving tax receipts from the TT&L's to the TGA. This decreases banks' rb.
When spending exceeds taxation and the TT&L accounts won't be sufficient to replenish the TGA at the desire level, then Treasury and the Fed coordinate in the auctioning newly issued tsys.
That is to say, there are buffers in the system. Exactly. The Inny-Outy confuses many. Describing this makes the average person's eyes glaze over, and in my view, should be avoided to get the average person to understand the dual nature of the Fed, and the difference between fiscal and monetary policy effects and purposes.
Go back and look at the H8 back in late 2008 when they started the asset purchases bank reserve assets went up by more than TGA withdrawals... checkmate...
Newman is a lawyer... you need to talk to an accountant...
Go back and look at the H8 back in late 2008 when they started the asset purchases bank reserve assets went up by more than TGA withdrawals... checkmate...
The purpose of POMO aka QE as a monetary operation (not fiscal) was to increase the monetary base by adding to the Fed balance sheet in order to resolve the liquidity crisis in the interbank market. Usually, the Fed only buys tys but owing to the extreme conditions it also purchased MBS from the banks. IIRC, this was only during Q1.
I don't understand your point. The Treasury was not involved there.
They created the he liquidity crisis by forcing 1T+ reserve assets on to bank balance sheets and the banks had to liquidate other assets to accommodate the new reserve assets in order to comply with the target Leverage Ratio ...
They created the he liquidity crisis by forcing 1T+ reserve assets on to bank balance sheets and the banks had to liquidate other assets to accommodate the new reserve assets in order to comply with the target Leverage Ratio ...|
Why did the Fed decide to do QE in the first place. Is your story it just happened, but was not in reaction to events unfolding in the money markets when TPTB decided to put Lehman under?
But the back story is that liquidity froze up when Lehman went under because no one knew who was solvent or who would be next. The short term commercial paper market freeze threatened to spread the financial crisis to the real economy, because firms use short term commercial paper to manage cash flow. Hank the Hammer was so freaked he barfed.
The Fed was actually late to the party. TPTB didn't know what to do and Bernanke refused to go out on a limb with emergency powers. Finally a deal was arrived at that combined monetary and fiscal with Congress on board.
They were not ready for this and thought the market would just absorbed the Lehman bankruptcy. Didn't happen as planned.
Let's hypothesize that the Fed did know what was going on for the sake of the argument. Even if they knew and most of the players involved did not, then the Fed would still have to have taken action. Sure, the Fed could have explained the reality but when conditions are in extremis that might not be the best choice of action.
The signal the Fed was sending was that it would do what it takes to ensure that markets clear.
But the other aspect of the Fed's strategy that only unfolded later was to manage the yield curve to keep rates low for two reasons, first, to support the housing market which was crashing, and secondly to raise assets values across the board to create a wealth effect to spur spending.
So I would say that the Fed likely partially knew what it was doing and partially not, but even then most of the players believed that bank lending is reserve-constrained.
But real problem was not liquidity, which was solved pretty quickly once TPTB regained poise. The problem
They couldn't provide liquidity to Lehman because the Fed was flooding their balance sheets with reserve assets and they not only couldn't expand loan assets to Lehman they had to reduce loan assets by 100s of $B..... Lehman had to go BK in September when they started the large scale asset purchases not before...
Tom, if these m-fers aren't stupid, then how is this scripture true:
Does not God make stupid the wisdom of this world? 26 for there are not many wise according to the flesh; not many powerful, not many noble, 27 but the stupidity of the world God chooses, that He may be disgracing the wise, and the weakness of the world God chooses, that He may be disgracing the strong," 1 Cor 1
If these m-fers are not stupid, then this scripture simply CANNOT be true.... it.... can't....
These people are disgraced elite human garbage....
The problem was solvency. Remember how the government took all sorts of steps to create confidence that the big banks were solvent and that Lehman would not happen again anytime soon. First there were the extend and pretend "stress tests." But iIt was not until the mark to market rule was changed to mark to model, in May IIRC, that equities started to recover.
But I agree that the Fed got on the wrong side by choosing quantity rather than price. The Fed could have just set the price and let quantity adjust without doing massive POMO, which transferred the interest payments to government. That was either due to ignorance or the Fed thought it would be too much for economic liberals to bear if they set the price along the yield curve in addition to setting the target rate in the Fed funds market. The way they did it, the bond vigilantes could still think they were in charge. We have to remember that policy is political (ideological) in addition to be financial and economic.
Newman is a lawyer... you need to talk to an accountant...
Which Newman are you talking about? If Frank Newman, you're incorrect. He got his BA in Economics from Harvard, then became a manager for Peat Marwick, the accounting firm (aka today: KPeatMarwickG).
I got the terms vertical and horizontal from Warren Mosler. He used them to describe the activities the Federal Reserve undertakes for the US Treasury (vertical) vs the activities the Federal Reserve undertakes for the banking and payments systems (horizontal).
I agree that often the jargon is an obstacle in many cases, but that's in every field. It is shorthand that increases efficiency. It needs a glossary so others can decipher it simply and readily.
The horizontal-vertical metaphor is used in many contexts. In fact, it is my "one big idea" in education.
Horizontal knowledge is of the gross world of ordinary human awareness. Vertical knowledge distinguishes among the gross, subtle, causal, that is, the three aspects of the relative, changing, manifest, and the absolute, unchanging, unmanifest.
Similar, a foundational distinction in theory of money is the difference between the issuer and the user. It is a vertical relationship with the issuer being foundational. The horizontal relationships are interactions among users.
Failure to grasp such distinctions results in ignorance, leads to confusion, and usually results in less than optimal outcomes.
This is basic systems thinking that begins with the whole and views elements and systems in terms of relationship to each other and to the whole. This type of thinking brings everything together and is therefore synthetic, and it also allows for breaking everything down into core constituents and relations, which is analytic.
99 comments:
Every time they lower by a point they foment a recession
Are you sure you have the direction of causality right?
When the economy is overheating and inflation (wage inflation) is rising, then the Fed policy is to hike the rate to cool the economy, which under NAIRU, involves choking demand enough to result in unplanned inventory buildup that leads to layoffs. This results in a recession that supposedly purges the system of excess and prepares for a fresh round of growth.
When the Fed decides that they need to cut the economy is already cooling. But if the Fed has hiked too long, then there is overshoot to the downside (recession) instead of just a dampening of inflationary pressure.
The chart supports this view of causality.
The reality that is that chart patterns support a number of explanations (stories) and unless one can be shown to the the best explanation based on theory tested against evidence, these are just different stories.
When they lowered here they are working their way down the left slope of the function diagram posted downthread....
Also the 2000 recession wasn't as long in time as the GFC one as they didn't do the QE and thus force a bank asset liquidation to add insult to injury...
I find your reasoning too simplistic, Matt. Richard Koo does a better job of explaining what the shoals are: https://www.youtube.com/watch?v=iAORiJxeTeo (I don't understand the title. He doesn't even mention Peter Schiff.)
OT. Tom, I thought Hatzius was supposed to be such a smart guy. Go to Goldman Sachs' twitter account @goldmansachs, and scroll down to May 5th and May 6th, and watch the 1:43 min video. Please? I don't know how to link to it. I'd be really interested in your take on his statements about cutting growth now because he claims we are at full employment.
Tom, another OT. Read this article that was published yesterday: "Be Wary of the Orwellian "Enlightened" Class" by Robin Koerner. https://fee.org/articles/be-wary-of-the-orwellian-enlightened-class/ I think it's fabulous because it says exactly--but waaay better--what I was trying to say about Progressives a few posts back.
Matt, now I am really confused what you are talking about. This chart is the Fed Funds Rate.
In the post below you were talking about the risk free rate.
Investopedia describes the risk free rate as:
The risk-free rate of return is the theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.
In theory, the risk-free rate is the minimum return an investor expects for any investment because he will not accept additional risk unless the potential rate of return is greater than the risk-free rate.
In practice, however, the risk-free rate does not exist because even the safest investments carry a very small amount of risk. Thus, the interest rate on a three-month U.S. Treasury bill is often used as the risk-free rate for U.S.-based investors.”
The theoretical rate of return of an investment with zero risk is not the Fed Funds Rate (which is definitely not theoretical).
So what are you talking about? I'm confused.
Be Wary of the Orwellian "Enlightened" Class
Be wary of righteousness and its tendency towards authoritarianism.
Isn't a sample size of two units too small?
And what else was changing simultaneously with the interest rate?
It's quite difficult to "prove" things. It's quite difficult to not make the same mistakes that the usual mainstream economists do...
They cut rates slightly ahead of recessions. That's what they are supposed to do, if they are forward-looking. In both cases, it was clear that the economy was slowing ahead of the recession, so cuts were not a major surprise.
MRW, everything is "in theory", everything....r
Tom has explained what a theory is many times...
"however, the risk-free rate does not exist because even the safest investments carry a very small amount of risk. "
LOL, what are you going to tell me next that we can't have automobiles because we can't solve Pi????
Brian the grey areas indicate the recessions so you can see that the rate cuts lead the recessions (slowing)...
Growth of 3% vs growth of 6% is not "slowing"...
"explaining what the shoals are: "
MRW, I'm not interested in any more metaphors thanks....
Here
http://mikenormaneconomics.blogspot.com/2017/03/reduced-acceleration.html
I would suggest everyone here take an extremely skeptical view of Franko's new QE\ZIRP causes recessions schitck. The main reason for this is the time that Franko told me that higher interests rates arent bad for real estate biz.
I buy foreclosed houses and fix them up to be rented, usually costs around $150 K for the house and the material and work to fix it. and a 1000sq ft ranch with no Basement 3 BRs and 1 Bath rents for about $1500 a month near me.
My current interest carrying costs is only about $5000 per year, property taxes and insurance are about $4000 per year.
When I described this above scenario to Franko previously and showed him how increasing my interest carrying costs to $10K per year by doubling rates to 6.5% would force me to either
A) no longer be profitable
or B) raise rents.
In what world is forcing up rents for the working class in order to pass more money along to banks and lending institutions "stimulative"? Franko has repeatedly told me that while he writes ad nauseum about how higher interest rates provide more fiscal flows from the Govt thereby helping the economy, he has repeatedly told me that there is no negative downside to raising interest rates. Even after I described the real estate scenario above, he still said it doesnt matter and that workers will just be earning more money when interest rates increase and so theyll be able to afford the higher rents.
People's analysis that cannot, does not, or will take into account all the considerations both pro and con in order to come to some net benefit caluclus, is not to be taken seriously.
Well maybe there are endeavors whereby you can make more munnie when rates go up?
There is more to the world than real estate.... Your problems aren't everybody's...
And btw your problems are caused by the variation in not the level of the rate...
MRW,
If there is no such thing as the risk free rate then why does Buffet say this:
http://www.cnbc.com/2016/05/02/buffett-says-if-the-government-did-this-the-dow-could-hit-100k.html
And this:
https://finance.yahoo.com/news/warren-buffett-everything-valuation-gets-back-interest-rates-140328844.html
Are you saying Warren Buffet and people like him don't exist???
Franko
Please take note that not once did I ever say that low interest rates are good for the economy because they are good for real estate. That would be dishonest and stupid analysis. Which is what Im complaing about YOU doing. YOU say that raising interest rates is good for the economy because it increases Govt spending and incomes for financial wealth holders. YOU are the one that ignores the downsides in your "analysis". Im simply being honest with everyone here. Your interest rate talks should be taken with a grain of salt because you manifestly ignore the negative effects of higher interest rates while only ever talking about the bennefits.
This is lazy high school level thinking
I'm saying economic activity (and rate of growth) will increase from current as they increase the rate in the area of the level we are in... that is all... iow the govt people are all saying they want to get back to 3-4% growth (GDP) ... well if they keep raising the rate back up to the same 3-4% and normalize CB asset levels then we will get there and maybe more...
What people do for a living is a separate matter... you're the one who brought in the personal real estate anecdotes...
Matt,
Exactly what I wrote. They "forecast" the slowing; that's their job.
The recession dating is somewhat arbitrary; a lot of data rolled over ahead of the 2008 recession (Dec 2007, technically), and finance related to real estate was already in trouble by early 2007. Therefore, the fact that they cut a couple months ahead of the recession date is not a big deal; the recession was baked in the cake by then.
https://en.m.wikipedia.org/wiki/Recession
"In economics, a recession is a business cycle contraction which results in a general slowdown in economic activity.[1][2] Macroeconomic indicators such as GDP (gross domestic product), investment spending, capacity utilization, household income, business profits, and inflation FALL, while bankruptcies and the unemployment rate rise...."
GDP has to go DOWN for a recession....
We would not have had a recession if they didn't aggressively lower... look at the oil price reductions in 2015 not leading to recession there was all gloom and doom into early 2016 and we came right back as rates were stable...
As long as leading flows are sustained the economy (GDP) quickly stabilizes...
2007 still 4%+ GDP growth...
http://www.multpl.com/us-gdp-growth-rate/table/by-quarter
Isn't a sample size of two units too small?
The parameters are too few. This is an issue with ISLM also, as well as everything else that takes the policy rate as a key economic variable useful as a tool in policy.
This to some of the major points of MMT.
1. The policy rate doesn't do what is assumed.
2. Fiscal policy is more useful than monetary policy in achieving economic objectives like harmonizing growth, employment and price stability.
"1. The policy rate doesn't do what is assumed."
Well you can't refute that via conceptual argument...
If there is no such thing as the risk free rate then why does Buffet say this:
http://www.cnbc.com/2016/05/02/buffett-says-if-the-government-did-this-the-dow-could-hit-100k.html
And this:
https://finance.yahoo.com/news/warren-buffett-everything-valuation-gets-back-interest-rates-140328844.html
Are you saying Warren Buffet and people like him don't exist???
Low interest rates drive up the price of financial and real assets. Assets are said only to appreciate but not inflate, while prices and wages inflate.
The financial cycle begins with low rates that drive up asset prices, increasing the wealth effect. This leads eventually to higher goods prices, and finally to increasing wages as workers demand higher wages to keep up with prices and to be able to afford higher real estate prices, which also affect rents. (Obviously, I have oversimplified this to keep it short.)
This is a big objection to the proposal to set the policy rate to zero. MMT economists counter that this can be addressed through fiscal policy.
"1. The policy rate doesn't do what is assumed."
Well you can't refute that via conceptual argument..
There is an extensively documented MMT argument on using the policy rate and the unemployment rate (buffer stock of unemployed) as tools to target the inflation rate iaw NAIRU and a Taylor rule.
Yeah and nobody listens to it....
Matt, at May 16, 2017 at 8:10 AM. I'll check out your two links. Just saw them. "I'll be back." Seriously, I am now 100% confused how you can equate the risk free rate with the Fed Funds Rate. They are not synonymous to me, although the risk free rate can adopt the Fed Funds Rate yield.
Matt, at May 16, 2017 at 9:08 AM, and May 16, 2017 at 9:14 AM. Watch the damn Richard Koo video I link to. It’s only nine minutes.
He describes how the same thing that hit us in 2008 hit Japan for 15 years, and how it wasn't a textbook recession definition, as your description above. Ditto your reference to bankruptcy.
He makes the cogent claim that there were no analogies or instructions in business schools or textbooks to help them unless they went back to the Great Depression, which he called another time and era, and until Japan instituted the 1933 reforms that the US did back then, nothing changed.
Koo makes the point that they applied the typical textbook remedies according to the standard economics and business school understanding at the time, and none of it worked because this was a different beast.
I didn’t know much about Koo, but I’ve been watching all his videos. He knows Fed operations having worked, as one of those worker bee economists Warren often refers to, at the NY Fed. He’s a macroeconomist.
Matt,
iow the govt people are all saying they want to get back to 3-4% growth (GDP) ... well if they keep raising the rate back up to the same 3-4% and normalize CB asset levels then we will get there and maybe more...
I completely disagree. China saved itself and produced 9-11% growth by massive stimulus--I think it was 78% of GDP, but dont hold me to it--in November 2008. And they did it within a month, something we no longer know how to do. They turned on the spigots, including allowing the Bank of China to loan to the regional governments, which they had prevented up until that time to prevent inflation, etc. In fact, they ordered that credit be made readily available to stimulate growth; grant you, it produced a housing bubble they've had to watch and manage. (Which they've done.)
The deficit is too small or The stimulus is too small. They are the same thing. And our stimulus back then should have been $2T minimum (Christine Romer recommended $1.8T, but Larry Summer buried her memo and wouldm't let Obama see it.)
According to Koo in 2008 China learned from Japan's mistakes--Japan didn't figure it out until 2005--and implemented their corrective measures. Koo calls it a 'balance-sheet recession' issue.
MRW,
Here I'll save you a few $$$ on healthcare:
"An apple a day keeps the doctor away!"
There you go no need to thank me....
GDP has to go DOWN for a recession....
No, Matt. This is where you are wrong, imo. Because you are not taking into consideration the actual facts surrounding the causes of the recession, and clinging instead to decades-old biz school textbook thinking.
That's not what happened in Japan. From 1990 to 2005 (when they emerged from their recession crisis) their GDP never fell below the peak of the bubble in 1989/1990, even though real estate prices fell 87% nationwide.
Because GDP was not the problem.
It was because profitable companies--who were nonetheless 'bankrupt' according to their balance sheets, debt far in excess of assets—were using their profits to pay down debt.
The cumulative 1990-2005 GDP from 1990-2005 supported by government action was ~2,000 trillion yen.
The cumulative loss of wealth from 1990-2005 on shares and real estate was ~1,800 trillion yen.
OK, Matt, on your Buffet links. I have zero issue with what Buffet is saying. Are you understanding what he’s saying?
In fact, in the first link, Buffett says if the government did kept the interest rate (FED FUNDS RATE) at 0% for 50 years, the Dow could hit 100K.
In the second link you cite, Buffet says for stock market investors, the most important metric to watch is found in the bond market.
He says, “The most important thing is future interest rates,” Buffett said. “And people frequently plug in the current interest rate saying that’s the best they can do. After all, it does reflect the market’s judgment.
The bond yield, which the risk free rate can reflect (3-month Treasury bill yield), is set by the market at auction.
The Fed has nothing to do with it.
You’re mixing apples and oranges, imo.
So you are believing in the "bond vigilantes!" now????
Matt,
If there is no such thing as the risk free rate then why does Buffet say this:
http://www.cnbc.com/2016/05/02/buffett-says-if-the-government-did-this-the-dow-could-hit-100k.html
BECAUSE HE ISN'T TALKING ABOUT THE RISK FREE RATE, which is reflected in the market-controlled bond yield, HE'S TALKING ABOUT THE FED FUNDS RATE.
He's saying the same thing that Warren says here: The Natural Rate of Interest Is Zero.
http://moslereconomics.com/wp-content/graphs/2009/07/natural-rate-is-zero.PDF
Matt,
So you are believing in the "bond vigilantes!" now????
Hunh?
Bond yields are set at auction, which the Fed BY LAW cannot participate in.
You need to do your homework.
The Dealers are certainly not going to base their bid on a rate that is LESS than what they are being charged by the Fed in repo to obtain the reserves to buy the bonds in the first place ... they would lose munnie...
"To do a reserve drain you first have to do a reserve add..."
"If the glove doesn't fit.... you must acquit..."
"Money is debt!"
"To do a reserve drain you first have to do a reserve add..."
Yeah, and the reserve add is government spending, or "buying" as Neil describes it.
Then the US Treasury issues treasury securities in the amount of that government spending to balance the money supply within the real economy.
The dealers base the yield on what auction buyers (the market) are willing to pay. Sometimes they withdraw the auction.
So what's your point?
ADDITION:
Then the US Treasury issues treasury securities in the amount of that government spending to balance the money supply within the real economy. Only then are those treasury securities sent to auction.
The Fed Funds Rate have absolutely nothing to do with it. It's the interbank overnight lending rate.
What is a 'Recession'
A recession is a significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP), although the National Bureau of Economic Research (NBER) does not necessarily need to see this occur to call a recession.
Investopedia
Clearer: The Fed Funds Rate is the interbank overnight lending rate. It has absolutely nothing to do with the public auction of treasury securities, which anyone can participate in including foreign investors and governments.
two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP).
Point: Except that Japan didn't experience negative economic growth because of GDP. It was because no one was borrowing with their automobile, TV, and electronics profits. They were using them to pay down debt from their boom days. So their economy shrank because no one was spending.
The Fed Funds Rate
http://www.investopedia.com/terms/f/federalfundsrate.asp
Tom, did you ever look at that Hatzius clip I directed you to in an OT comment above?
"the reserve add is government spending,"
Not by the Treasury... the reserve add is via a repo that the Fed does with the Dealers...
What if Treasury wants to do a 100b auction and there are only 60b reserves?
Not according to the former Deputy Secretary of the Treasury Frank Newman, Matt. The "reserve add" is the government spending which shows up as reserves in the real economy It's Congress' payments to the vendors. It's in his book Freedom from National Debt. Only the US Treasury via Congressional appropriations can produce those interest-free new USD (treasury securities).
"How I Learned to Stop Worrying and Love the National Debt" - A Conversation with Frank Newman
https://www.youtube.com/watch?v=Ae7PO-j7TIc
I agree with Tom Hickey’s skepticism about monetary policy (interest rate adjustments in particular), and his support for fiscal policy. Reasons:
1. There is no obvious reason why, given a recession, the cause is inadequate lending and investment rather than a deficiency in one of the other constituents of demand, e.g. consumer spending on non-durables, or exports.
2. The basic purpose of the economy is to produce what people want: both the stuff they normally purchase out of disposable income and the stuff they get from public spending. So in line with that point, the logical cure for recessions is helicopter drops for households (e.g. tax cuts) and increased public spending (i.e. fiscal policy).
3. Interest rate adjustments do not work particularly quickly: up to a year according to a Bank of England article.
4. Interest rates seem to be sensitive to market forces: witness the big fall in interest rates over the last 20 years. To that extent, it is illogical to assume that given a recession, and in that interest rate falls are part of the solution, interest rates will not have fallen all of their own accord. I.e. further and artificial interest rate cuts are highly questionable.
For more on the deficiencies of interest rate adjustments, see sections 10 & 11 here:
https://mpra.ub.uni-muenchen.de/78896/1/MPRA_paper_78896.pdf
The reserve drain is treasury securities.
What comes before that? A reserve add. We're agreed.
You're trying to say that a Fed-generated repo (done with Dealers) is the reserve add? And that it precedes the issuance of treasury securities?
Then who the hell needs a Congressional appropriation? Who needs the US Treasury?
You're claiming that the Fed controls this issuance of new money, treasury securities by issuing repos to the primary dealers? On what planet?
A repo is a loan. It occurs in the after market AFTER the treasury securities have been issued by the US Treasury and are ready to be bought (or sold).
My last comment was for Matt. (May 16, 2017 at 5:08 PM)
"You're claiming that the Fed controls this issuance of new money,"
That's not what I am saying I don't use the word "money" it is a figure of speech and thus not a technical term... in technical matters it's best to avoid figures of speech...
The appropriation may create the requirement to do the auction... so the appropriation is the source of the activity which is what we want in representative govt...
If there are insufficient reserves to do the auction then the Dealers can use previously issued USTs in their possession as the assets in a repo with the Fed at the policy rate and exchange the UST for Fed issued reserves (temporarily, i.e. the duration of the repo) in order to buy the NEW USTs... THEN dealers will deal those to their clients as Treasury later withdraws from the TGA to pay vendors, etc,.., then the repo will be consummated and the Fed will return the securities to the Dealers...
So the Dealers price their bid rate as a function of what the Fed charges them to do the repo and it is a proportional relationship...
So you go back and look at the 1 yrUST (i.e. risk free 1 yr rate) in 2014 it was about .1% today it is about 1% as the Fed is up 0.75% since then and threatening more increases...
It's a Dealer market and the Fed sets the (risk free) rate...
And don't now try to break my balls and tell me Pi doesn't equal 3.1416 or some shit...
@ MRW
Tom, did you ever look at that Hatzius clip I directed you to in an OT comment above?
Yes.
Hatzius is saying that he believes the Fed will raise the rate in June and again in Sep owing to the employment figures.
I would agree that this is what is likely.
The Fed has a bias toward raising rates now with rates so low for so long by historical comparison.
Nothing new here. This is SOP for the Fed.
"Reserve add" as it is used by financial people is an add to $NFA.
The Fed adjusts the level of reserves using OMO by using repo and reverse repo, which increases (decreases) rb but doesn't affect $NFA.
Failure to understand this difference has led and still leads to huge confusion.
The Fed and Treasury work in tandem to conduct fiscal and monetary policy. The Fed always ensures there are sufficient rb for auctions to clear.
According to the operations people, the temporal sequence is immaterial operationally. Everything is adjusted intraday so that all books balance at the close.
If there are insufficient reserves to do the auction then the Dealers can use previously issued USTs in their possession as the assets in a repo with the Fed
The amount of reserves (after an appropriation) is determined by what landed in the US Treasury's General Account and were distributed by the Fed to the vendors' bank accounts at the Fed for onward forwarding to the vendors' accounts. RESERVE ADD.
(No one forces those vendors to buy (or sell) treasury securities through the dealers. They could just as easily buy corporate bonds to protect their money, although riskier, or keep their $10 million appropriation for janitor services at an army base at their local credit union. Up the vendors. Not the dealers.)
According to Newman, the vendors are paid first through the US Treasury's General account. Again it's a RESERVE ADD. Then, according to Newman, "two weeks to a month later," the US Treasury issues treasury securities to mop up those reserves ("reserve drain") via auction. Sometimes, the US Treasury issues treasury securities in the full amount of the appropriation. Other times, because of a multitude of things, the US Treasury only has to issue a portion of the appropriation to match the appropriation amount. But the concept always is that the treasury securities amount issued in response to Congressional appropriation = appropriation amount.
Best to be specific. The cb issues the currency, either as rb or cash, as the government's bank. The non-bank private sector decides the balance of bank deposits and cash they wish to hold. Banks decide the balance of tsys and rb they hold.
Only the fiscal authority, in the US, the legislature, can increase or decrease $NFA. It does this directly through the budge and tax policy and indirectly by delegation. For example, now the Fed has been delegated the power to pay interest on rb, which increases $NFA. The Fed also has the power to conduct OMO and POMO, which decreases $NFA that would have been paid as interest to bondholders.
But the concept always is that the treasury securities amount issued in response to Congressional appropriation = appropriation amount.
Tsys issued is identical with the fiscal deficit as an accounting identity.
Here is Frank Newman's email address: he uses earthlink.net. The handle before the ampersand is fnnewman. [I hope he doesn't hate me for this.]
I've bugged him enough. Some of you can try. Newman says that the payment to vendors from the General Account is a reserve add. And yes, he does refer to them as Net Financial Assets (NFA) because they are new USD introduced into the real economy. In his book, in a footnote, he says that Warren Mosler, Scott Fullwiler, and Randy Wray, have the transactions sequence correct.
Tsys issued is identical with the fiscal deficit as an accounting identity.
Right, and the accumulation YOY minus taxes is the National Debt.
Obviously if you support Matt Franko's argument Geoff Tily was wasting his time writing a book on this subject "Keynes Betrayed" in which his central argument was Keynes was betrayed by economists because his central concern was the management of money at a low long-term rate of interest. The UK Radcliffe Committee argued that base rate manipulation was a crude tool and I believe Hyman Minksy had some thoughts on the matter of high interest rate outcomes. Personally I believe government has a role to play protecting savings up to a limited quantity value from the ravages of inflation.
Here at MNE was use the following abbreviation:
$NFA = aggregate nongovernment net financial assets
General newbies don't know that on first reading.
To test Newman you could just look at the TGA and if the TGA ever increases faster than taxes then I don't see how Newman could be correct.
"payment to vendors from the General Account is a reserve add"
It's an add to member bank 'reserve assets' but from the CB perspective the 'reserve balances' already existed....
Has to do with the overall accounting so that Treasury doesn't run an overdraft at the Fed, which is against US law.
Treasury and Fed work it out so that this doesn't happen.
The only fly in the ointment is the debt ceiling that prevents the Fed and Treasury cooperatively bringing everything in to balance through mutually coordinated operations.
"writing a book on this subject "Keynes Betrayed"
Keynes schmaines....
MATT,
To test Newman you could just look at the TGA and if the TGA ever increases faster than taxes then I don't see how Newman could be correct.
It's the difference between fiscal and monetary policy, fercrissake.
Fiscal policy creates/destroys $NFA: "More spending out of more income." CONGRESS APPROPRIATES THAT SPENDING; US Treasury handles the transaction by telling the Fed to mark up the General Account. "Out of thin air," etc. Taxes have nothing to do with it, as the DTS (Daily Treasury Statement) shows you.
Monetary policy has no change in $NFA: "More spending out of existing income" The universe the primary dealers exist in, and the world of taxes. Neither adds new $NFA.
You're confusing the vertical and the horizontal.
It's an add to member bank 'reserve assets' but from the CB perspective the 'reserve balances' already existed....
Bullshit. Not if it was a fiscal policy action.
Treasury keeps a fairly constant balance of about 6B in the TGA. Funds in the TGA don't count as bank reserves (rb).
The TGA is used for spending. Treasury directs the Fed as its fiscal agent to credit bank accounts with rb. IN the process, the Fed debits the TGA.
Taxes go into TT&L accounts. This counts as rb for the banks at which TT&L accts are held.
Treasury then uses the TT&Ls to keep the TGA topped up by moving tax receipts from the TT&L's to the TGA. This decreases banks' rb.
When spending exceeds taxation and the TT&L accounts won't be sufficient to replenish the TGA at the desire level, then Treasury and the Fed coordinate in the auctioning newly issued tsys.
That is to say, there are buffers in the system.
TGA has recently been 400b and as low as 15b within a very short period...
That is to say, there are buffers in the system. Exactly. The Inny-Outy confuses many. Describing this makes the average person's eyes glaze over, and in my view, should be avoided to get the average person to understand the dual nature of the Fed, and the difference between fiscal and monetary policy effects and purposes.
"Vertical and horizontal"
When do the metaphors ever stop?
Tom there has been a zero balance in the TTL accounts since late 2008...
Go back and look at the H8 back in late 2008 when they started the asset purchases bank reserve assets went up by more than TGA withdrawals... checkmate...
Newman is a lawyer... you need to talk to an accountant...
MRW,
If I take a dollar bill and I am looking at it in landscape orientation and I rotate it 90 degrees, does it then become "vertical money" ?
"Treasury keeps a fairly constant balance of about 6B in the TGA."
https://fred.stlouisfed.org/graph/?g=dLlb
Very volatile not constant...
Go back and look at the H8 back in late 2008 when they started the asset purchases bank reserve assets went up by more than TGA withdrawals... checkmate...
The purpose of POMO aka QE as a monetary operation (not fiscal) was to increase the monetary base by adding to the Fed balance sheet in order to resolve the liquidity crisis in the interbank market. Usually, the Fed only buys tys but owing to the extreme conditions it also purchased MBS from the banks. IIRC, this was only during Q1.
I don't understand your point. The Treasury was not involved there.
They created the he liquidity crisis by forcing 1T+ reserve assets on to bank balance sheets and the banks had to liquidate other assets to accommodate the new reserve assets in order to comply with the target Leverage Ratio ...
Tom, you're a bank, a guy walks in and deposits a govt check.... what are you going to tell them "sorry we can't accept that...."
C'mon...
They created the he liquidity crisis by forcing 1T+ reserve assets on to bank balance sheets and the banks had to liquidate other assets to accommodate the new reserve assets in order to comply with the target Leverage Ratio ...|
Why did the Fed decide to do QE in the first place. Is your story it just happened, but was not in reaction to events unfolding in the money markets when TPTB decided to put Lehman under?
They did it so the banks would have more reserves to lend out c'mon Tom go back and look at the transcripts...
Tom this is textbook MMT 101 banks don't lend out the reserves... that's not the way it works...
Tom why do you continue to keep thinking these people know what is going on??
They have NEVER exhibited correct understanding...
Are you trying to be nice????
That is only partially true.
But the back story is that liquidity froze up when Lehman went under because no one knew who was solvent or who would be next. The short term commercial paper market freeze threatened to spread the financial crisis to the real economy, because firms use short term commercial paper to manage cash flow. Hank the Hammer was so freaked he barfed.
The Fed was actually late to the party. TPTB didn't know what to do and Bernanke refused to go out on a limb with emergency powers. Finally a deal was arrived at that combined monetary and fiscal with Congress on board.
They were not ready for this and thought the market would just absorbed the Lehman bankruptcy. Didn't happen as planned.
Let's hypothesize that the Fed did know what was going on for the sake of the argument. Even if they knew and most of the players involved did not, then the Fed would still have to have taken action. Sure, the Fed could have explained the reality but when conditions are in extremis that might not be the best choice of action.
The signal the Fed was sending was that it would do what it takes to ensure that markets clear.
But the other aspect of the Fed's strategy that only unfolded later was to manage the yield curve to keep rates low for two reasons, first, to support the housing market which was crashing, and secondly to raise assets values across the board to create a wealth effect to spur spending.
So I would say that the Fed likely partially knew what it was doing and partially not, but even then most of the players believed that bank lending is reserve-constrained.
But real problem was not liquidity, which was solved pretty quickly once TPTB regained poise. The problem
They couldn't provide liquidity to Lehman because the Fed was flooding their balance sheets with reserve assets and they not only couldn't expand loan assets to Lehman they had to reduce loan assets by 100s of $B..... Lehman had to go BK in September when they started the large scale asset purchases not before...
Tom, if these m-fers aren't stupid, then how is this scripture true:
Does not God make stupid the wisdom of this world?
26 for there are not many wise according to the flesh; not many powerful, not many noble,
27 but the stupidity of the world God chooses, that He may be disgracing the wise, and the weakness of the world God chooses, that He may be disgracing the strong," 1 Cor 1
If these m-fers are not stupid, then this scripture simply CANNOT be true.... it.... can't....
These people are disgraced elite human garbage....
The problem was solvency. Remember how the government took all sorts of steps to create confidence that the big banks were solvent and that Lehman would not happen again anytime soon. First there were the extend and pretend "stress tests." But iIt was not until the mark to market rule was changed to mark to model, in May IIRC, that equities started to recover.
But I agree that the Fed got on the wrong side by choosing quantity rather than price. The Fed could have just set the price and let quantity adjust without doing massive POMO, which transferred the interest payments to government. That was either due to ignorance or the Fed thought it would be too much for economic liberals to bear if they set the price along the yield curve in addition to setting the target rate in the Fed funds market. The way they did it, the bond vigilantes could still think they were in charge. We have to remember that policy is political (ideological) in addition to be financial and economic.
They're stupid sorry....
What could better demonstrate this truth:
"Does not God make stupid the wisdom of this world?" 1 Cor 1
Then these disgraced elite stupid m-fers going all around saying "were out of money!" ?
What could?
Matt,
Newman is a lawyer... you need to talk to an accountant...
Which Newman are you talking about? If Frank Newman, you're incorrect. He got his BA in Economics from Harvard, then became a manager for Peat Marwick, the accounting firm (aka today: KPeatMarwickG).
Marr,
I got the terms vertical and horizontal from Warren Mosler. He used them to describe the activities the Federal Reserve undertakes for the US Treasury (vertical) vs the activities the Federal Reserve undertakes for the banking and payments systems (horizontal).
Dont like it? Go bitch to him.
"He got BA in economics "
Ok sorry even worse....
"Vertical and horizontal "
Conceptual explanations and metaphors are not only inadequate and inappropriate here they manifestly DONT WORK... put a clock on it already...
I agree that often the jargon is an obstacle in many cases, but that's in every field. It is shorthand that increases efficiency. It needs a glossary so others can decipher it simply and readily.
The horizontal-vertical metaphor is used in many contexts. In fact, it is my "one big idea" in education.
Horizontal knowledge is of the gross world of ordinary human awareness. Vertical knowledge distinguishes among the gross, subtle, causal, that is, the three aspects of the relative, changing, manifest, and the absolute, unchanging, unmanifest.
Similar, a foundational distinction in theory of money is the difference between the issuer and the user. It is a vertical relationship with the issuer being foundational. The horizontal relationships are interactions among users.
Failure to grasp such distinctions results in ignorance, leads to confusion, and usually results in less than optimal outcomes.
This is basic systems thinking that begins with the whole and views elements and systems in terms of relationship to each other and to the whole. This type of thinking brings everything together and is therefore synthetic, and it also allows for breaking everything down into core constituents and relations, which is analytic.
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