(Hat Tip to mortgage angel for data)
Somebody needs to tell Fed Chairman Bernanke. From his speech this week in Jackson Hole:
Fiscal policy--including stimulus packages, expansions of the social safety net, and the countercyclical spending and tax policies known collectively as automatic stabilizers--also helped to arrest the global decline. Once demand began to stabilize, firms gained sufficient confidence to increase production and slow the rapid liquidation of inventories that they had begun during the contraction. Expansionary fiscal policies and a powerful inventory cycle, helped by a recovery in international trade and improved financial conditions, fueled a significant pickup in growth.
At best, though, fiscal impetus and the inventory cycle can drive recovery only temporarily......
How's that? If not Fiscal Policy, then how can Monetary Policy help at the 0% bound? The only "tools" he has left rely on the "Quantity Theory" of money (increasing the so-called "Money Supply"), and this theory has been laid bare as another economic fraud in recent events that have seen money "measures" increase asymptotically while output, employment and indeed many prices have fallen.
It's over Mr. Chairman, the 30-year "Golden Age of Monetary Policy" that started when a former Fed raised the Policy Rate to 20% and ushered in a 30 year era where the Fed could consistently reduce policy rates over this time is now at the zero bound and has ended. Fiscal Policy is all we've got now...as Mike has said "somebody has got to spend".
The sooner our policy makers realize this the better.
How does the Federal Reserve calculate or estimate the incremental effect a change in fed funds rate will have on the private sector?
ReplyDeleteTB,
ReplyDeleteI dont know what they (Fed) do exactly but it probably misguided in some way. Its always looked to me like they just "wing it" and make sure they lower rates a bit below the previous cycle low and wait til it bites, then level off and eventually raise.
Years ago, if you had a 9% mortgage of say 200k, that would be 18k per year of interest. If the Fed lowered rates so you could refi into a 7%, instead of 18k you would then pay 14k so this would save about $350/mo in household expenses, providing some increasse in household cashflow that could be spent to revive AD in a downturn. Weve had this available to us for about the last 30 years.
This does not seem to me to be available now at the zero bound. If they did a FICA tax holiday, that would (now thru fiscal) provide the additional household net income necessary to restore demand and hence domestic employment.
I would add though that mortgageangel sees a potential for some additional drop in mortgage rates here down well below 4% (see her comments in the previous thread)...if this were to happen (collapse in mortgage rates from here) many mortgage holders could again refinance and improve their household cashflows...this could be the "handoff" that Bernanke is looking for....although it still would not be as robust as it could be if govt embraced a fiscal policy that provided for full employment....
ReplyDeleteResp,
Matt- Precisely! An anology comes to mind - Trying to fix the economy by allowing rates to drop is like running your car on fumes when you have a gas card in your wallet that would serve you much better if you just used it to fill up the tank.
ReplyDeleteKarl Denninger- There are people in the economics world who "get it"....(Keen)
ReplyDelete"Debt reduction is now the real story of the American economy, just as real story behind the apparent free lunch of the last two decades was rising debt. The secret that has completely eluded Bernanke is that aggregate demand is the sum of GDP plus the change in debt. So when debt is rising demand exceeds what it could be on the basis of earned incomes alone, and when debt is falling the opposite happens."
Ding ding ding ding.
The entire mantra of "private debt doesn't matter" is of course idiotic, but it forms the premise upon which Krugman, Bernanke and many others try to labor. Worse, some of them go a step further and say that government debt doesn't matter.
....there are those who argue "but one man's debt is another man's asset", and I'd agree with this - if all debt was paid. But defaulted debt (private) is another matter, isn't it? Now what's that "asset" worth? Oops.
The other issue, which none of these people (except Keen!) seems to appreciate is that when you're up to your eyeballs in debt your production is inevitably shifted away from productive and saving pursuits. The first is a problem. The second is corrosive to industry, as it is savings that form the predicate for Capital Formation and it is Capital Formation that is the seed from which new businesses, and thus employment, grows.
Brantley,
ReplyDelete"Worse, some of them go a step further and say that government debt doesn't matter."
i'll have a go at this.....Govt "debt" (I prefer Treasury Security issuance) only matters when it exceeds a level where the fiscal deficit it represents creates Net Financial Assets in excess of the non-govt sectors savings desires, and demand conditions in excess of what the domestic and foreign non-govt sectors can provide to the govt sector (price instabilty).
Further creation of Govt 'debt' is not a problem at all (in fact is indeed called for) if we are not at full employment and output.
Resp,