Seizing the Commanding Heights

by Jerry O’Driscoll  On the Opinion page of yesterday’s Wall Street Journal, George Melloan spells out how government stimulus is stifling lending, crowding out private investment and impeding economic recovery.  He writes that “the credit market has been tilted to favor a single borrower with a huge appetite for money, Washington.” It has done so in a number of ways.   First, the Fed announced that it will evaluate bankers’ pay on the basis of how well they manage risk.  How better to be a good risk manger in a bureaucrat’s eyes than to take no risk?  Purchasing Treasury obligations and federal agency paper is the sure way to avoid risk.  The Fed has a second policy to make that strategy profitable: zero interest-rate borrowing to finance Treasury and agency debt yielding 3%.or more.  The Fed continues to signal it will keep rates low, diminishing interest-rate risk.   These policies are choking off the supply of credit to the private sector, espcially small business.

Avoiding Deflation Without Bailouts

by Mario Rizzo  

I have not posted in a while since I have been on vacation. During that time an interesting dispute has arisen among friends Tyler Cowen, David Henderson, Arnold Kling, Peter Boettke, Bob Murphy, Steve Horwitz and others over whether Ben Bernanke was right to bail out specific banks. (Some of this has gotten mixed up with the issue of what Brian Boitano would have done — oops, I should say Milton Friedman.)  

I think the question could be simply stated in two parts. First, is it possible to prevent general deflation and not bail out big banks? Second, if so, what would be the effect on the economy of bringing the banks to bankruptcy court while preventing outright deflation?  

Ben Bernanke: Ipse Dixit

by Mario Rizzo

Today’s Wall Street Journal has an opinion piece by Fed Chairman Ben Bernanke. He assures us that the Fed has the tools and the willingness to restrain inflation when that is appropriate (not now). He recognizes it is all about timing. But everything is under control:

“Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period. We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability.”

How good are Bernanke’s abilities as a forecaster? Thanks to YouTube we have evidence (HT: Bob Murphy).

Monetary Policy At War With Itself

by Mario Rizzo  

It is well-known that John Maynard Keynes favored permanently low interest rates in order to foster adequate and stable investment demand. Let us first focus on stability and then we’ll see a connection to adequacy.

 What happens when counter-cyclical policy (aka Lerner’s “functional finance”) is practiced?  

The Wall Street Journal ran an excellent small article by Richard Barley, focused mainly on the UK, that makes interesting general points. Investors must try to figure out when the current policies of quantitative easing will be reversed. Those who are long (or plan to be long) in the securities which central banks have bought are quite interested in timing. 

The Next Bubble

by Jerry O’Driscoll  

Since September, 2008 the Fed has been engaged in policy of unprecedented monetary expansion.  Arthur Laffer provides the numbers in The Wall Street Journal for June 11, 2009.  “The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10.”  The stock market is booming, with the Dow Jones Industrials up 34% in three months.    Fed officials are concerned that financial markets have got ahead of themselves, apparently unable to connect their policy with its inevitable consequences. Today’s Wall Street Journal reports on its front page that there is a “bailout bubble” in the stock market.  Businesses cannot spend the trillions of dollars of bailout money fast enough, so it is going into financial markets.

What Ended The Great Recession?

by Mario Rizzo  

Some business forecasters with a not-too-bad record are predicting that the recession will be over by the end of the year.  (NBER dates the beginning to December 2007.)  

Of course, the recovery in terms of real output from the Great Depression began in the 3Q of 1933 and that did not preclude high unemployment rates and a further recession in 1937. Here. Let that pass for the moment. 

If recovery begins, the discussion about why will also begin. Let’s confine ourselves to evaluating policies designed by the government to produce recovery.

OK, it’s “later” now

by Sandy Ikeda

MSNBC reports that “Evidence mounts that recession may be ending”. At the same time, in the Wall Street Journal:

[T]he central bank has been buying mortgage-backed securities and Treasurys. Through programs announced since last fall, it has bought more than $460 billion of mortgage-backed securities and more than $125 billion of Treasury bonds. But the winds turned against the Fed in recent days, as investors worry the government’s approach could lead to inflation.

Time to start crossing that bridge already?

The Fed Against Equilibration

by Mario Rizzo

 

Reality is more complex than our models. Free-market forces are asserting themselves but the Fed is also intervening and trying to affect those forces. Real-world data is the result of both factors.

 

The Commerce Department  has issued some new data showing that house sales are rebounding (but still off their year-ago levels) and that house prices are falling. This is to be expected as supply and demand begin to equilibrate.

Reflating the Housing Bubble?

by Mario Rizzo

 

In an effort to prevent deflation, the Fed has now decided to do more quantitative easing, that is, to buy with newly created high-powered money various assets aside from short-term Treasury securities. Over the next six months it will buy up to $300 billion in long-term Treasury bonds.

 

It will also purchase additional mortgage-backed securities (MBS) in the amount of $750 billion as well as up to $100 billion in additional securities of Fannie and Freddie (to a total of $200 billion). These are the parts of the new policy that concern me most. They are bad ideas.