Category Archives: Intervention

Federal Reserve Philosophies – Then And Now

On Monday, February 13, John C. Williams, President and CEO, Federal Reserve Bank of San Francisco, gave a speech titled “The Federal Reserve’s Mandate and Best Practice Monetary Policy.”

Although I don’t agree with many aspects of the speech, I found various aspects to be notable.  I would like to highlight one excerpt in particular, as I find it highly memorable and an iconic quote of the period:

With regard to both of the Fed’s mandates, it’s vital that we keep the monetary policy throttle wide open.

I think it is interesting to compare this excerpt to a famous quote by William McChesney Martin, who was Chairman of The Federal Reserve from 1951-1970; Martin declared that the Federal Reserve’s role was “to take away the punch bowl just as the party gets going.”


Another notable excerpt from Williams’ speech of Monday I would like to highlight as highly significant, especially the second paragraph, which concludes the speech :

We have pushed the federal funds rate close to zero because of the severe recession of 2007 through 2009, and the weak recovery since. We’ve said we expect to keep the federal funds rate extremely low at least through late 2014. Meanwhile, with the fed funds rate near zero, we’ve used some unconventional monetary policy tools to try to push down longer-term interest rates further. Our policy initiatives are a major reason why interest rates across the entire yield curve are at or near record low levels for the post-World War II period.

This is truly an extraordinary time for monetary policy. I’ve talked about some of the tradeoffs central bankers face. But I don’t see such tradeoffs today. Now is one of those moments when everything points in the same direction. The Fed is committed to achieving maximum employment and price stability. And we’re doing everything in our power to move towards those goals. Thank you very much.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1358.04 as this post is written

QE3 – Various Thoughts

In the July 7 post (“Evaluating QE2“) I mentioned that “…I believe that QE3 or something very similar will be done in the future.”

There are many reasons for this belief.  Among the reasons for additional QE include the recent market tumult, visibly weakening economy, and various confidence measures that have nosedived.

My belief in further QE is an expectation, as opposed to an endorsement of the idea.  While my thoughts on the QE concept are complex, in my extensive writings on the subject I have indicated that I believe that Quantitative Easing carries substantial risks,  unintended consequences, and many complex impacts on the economy and markets.

However, QE3 would provide various markets – especially the stock market – with a significant boost.

For reference purposes, here is a recent chart from Doug Short’s blog post of August 5 (“Chart of the Day: Anticipating QE3“) depicting the movements of the S&P500, 10-Year Treasury Yields and the Fed Funds rate over the periods of QE1 and QE2:



The Special Note summarizes my overall thoughts about our economic situation

SPX at 1132.34 as this post is written

Evaluating QE2

On June 30 The Wall Street Journal published a chart titled “QE2:  A Quantitative Assessment.”  It commented on QE2 and showed how various economic and market metrics fared over the course of the program.

The question of QE2’s impact is an important one, for a variety of reasons.  This impact is especially important as I believe that QE3 or something very similar will be done in the future.

How should the impact(s) of QE2 be assessed?

I believe that such an assessment should be broader than what is commonly seen.

Among areas that should be assessed are the risks taken by performing QE2.  I have written extensively about various QE2 risks in previous posts.

Another issue that deserves greater recognition is that pertaining to the risks accompanying the “exit” from QE2.  Until such an exit is orchestrated, I don’t believe that QE2 can begin to be fully assessed.  I wrote about the risks of exit from QE2 in the December 17 post titled “Quantitative Easing Exit Issues.”

Overall, I believe that QE2 has had a complex impact on the economy and markets.


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1339.22 as this post is written

George W. Bush’s “Decision Points” Book – Chapter 9 – Notable Aspects

I think it is important to reflect back upon the events preceding and during The Financial Crisis, and the actions taken during those periods, as they have had, and will have, substantial ramifications for our future economic situation.

I have found comments made by former President George W. Bush to be interesting and notable, although I don’t agree with many of his comments or interpretations.  His interpretation of The Financial Crisis and its causes are largely “in line” with what I call the “conventional view” – i.e. that which is most commonly believed among economics and financial professionals.

In my November 29, 2010 post I highlighted some notable quotes from a George W. Bush interview concerning The Financial Crisis.

Recently, I read Chapter 14 of his Decision Points book, titled “Financial Crisis.”  While, from an overall viewpoint, nothing in this chapter is necessarily “new” or revelatory in nature, there are nonetheless various notable aspects.  Much of his writings in the chapter echo statements he made during The Financial Crisis, such as those seen in his September 28, 2008 “President’s Address to the Nation.”

Here are excerpts of some of the material I found most interesting:

On page 440, it starts with his conversation with Ben Bernanke during The Financial Crisis:

“Is this the worst crisis since the Great Depression?” I asked.

“Yes,” Ben replied.  “In terms of the financial system, we have not seen anything like this since the 1930s, and it could get worse.”

His answer clarified the decision I faced:   Did I want to be the president overseeing an economic calamity that could be worse than the Great Depression?

I was furious the situation had reached this point.  A relatively small group of people – many on Wall Street, some not – had gambled that the housing market would keep booming forever.  It didn’t.  In a normal environment, the free market would render its judgment and they could fail.  I would have been happy to let them do so.

But this was not a normal environment.  The market had ceased to function.  And as Ben had explained, the consequences of inaction would be catastrophic.  As unfair as it was to use the American people’s money to prevent a collapse for which they weren’t responsible, it would be even more unfair to do nothing and leave them to suffer the consequences.

On page 449, he talks about the unforeseen risks proliferating during the housing bubble:

But the exuberance of the moment masked the underlying risk.  Together, the global pool of cash, easy monetary policy, booming housing market, insatiable appetite for mortgage-backed assets, complexity of Wall Street engineering, and leverage of financial institutions created a house of cards.  This precarious structure was fated to collapse as soon as the underlying card – the nonstop growth in housing prices – was pulled out.  That was clear in retrospect.  But very few saw it at the time, including me.

On page 453, he briefly discusses Moral Hazard issues, in the context of the decision regarding Bear Stearns:

My first instinct was not to save Bear.  In a a free market economy, firms that fail should go out of business.  If the government stepped in, we would create a problem known as moral hazard:  Other firms would assume they would be bailed out, too, which would embolden them to take more risks.

And, near the back of the chapter:

One of the questions I’m asked most often is how to avoid another financial crisis.  My first answer is that I’m not sure we’re out of the woods on this one yet….”


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1341.33 as this post is written

Milton Friedman On The Fed’s Ability To Control Interest Rates

On February 14 I wrote a post highlighting Milton Friedman’s “Free to Choose” television series of 1980.

From time to time I plan on commenting on various material contained therein as much of it is highly relevant to issues we are currently encountering.

His following comments are particularly noteworthy given today’s economic environment and intervention activities such as QE2:

First, in his “Free to Choose” book, Chapter 9, p. 266:

“…the Fed has given its heart not to controlling the quantity of money but to controlling interest rates, something that it does not have the power to do.”

In Volume 9 of his “Free to Choose” television series, Friedman makes a variety of interesting comments from roughly the 37:22 mark to 38:13.  At roughly 37:45 he makes a comment about ideas to “finance the deficit by printing money” and then at 37:57 makes this comment:

“The Federal Reserve’s activities in trying to hold down interest rates have put us in a position where we have the highest interest rates in history.  It’s another example of how – of the difference – between the announced intentions of a policy and the actual result.”


The Special Note summarizes my overall thoughts about our economic situation

SPX at 1297.54 as this post is written

Alan Greenspan On Impact Of QE2

Recently Alan Greenspan wrote a paper titled “Activism.” (pdf)   While I don’t agree with many of its analyses and conclusions, I am finding it to be an interesting document.

On March 4, CNBC interviewed Greenspan.  I found one response by Greenspan to be especially notable.  The question happens at the 42 second mark:

interviewer:  “…isn’t QE2 some government activism that could be actually hurting the strength of the economy rather than helping it?”

Greenspan:  “I think we’re not going to know the answer to that question until after the fact – because you have to go full-cycle on these types of projects…”


A Special Note concerning our economic situation is found here

SPX at 1298.05 as this post is written


Alan Greenspan – On “The Stock Market As A Stimulus”

Alan Greenspan gave an interview to The Wall Street Journal on January 7.  I found various parts to be of interest, and in many instances I disagree (partially or fully) with what he says.  I  wrote a February 3 blog post on his comments in the interview concerning the primary purpose of a central bank.

Given the recent steep climb in the stock market, I think it is interesting to highlight his comments on the interaction between The Federal Reserve and the stock market.   While his entire thoughts on the issue are notable, I found his comment at the 16:24 mark to be, for a number of reasons, very provocative:

“…the stock market overall is the only type of stimulus that you can get in the economy which doesn’t have any debt associated with it.”


I’ll likely further comment on this, as well as other recent comments made by Federal Reserve officials on the stock market, in a future post…


A Special Note concerning our economic situation is found here

SPX at 1339.26 as this post is written

QE2’s Effectiveness

This post is an update to that of December 9, 2010, “Measuring QE2 Effectiveness.”

There are many different ways one could use to gauge whether QE2 is successful.  Of great significance, I am not aware of any official statement that specifically states the goals (and metrics of such) of QE2.

However, lowering of interest rates, especially that of the 10-Year Treasury, appears to be a/the primary goal.

Below is a chart of the 10-Year Treasury yield, starting on November 3, 2010, the date of the announcement.  The actual asset purchases began on November 12:

(click on chart to enlarge image)(chart courtesy of

As one can see, the 10-Year Treasury yield has risen substantially over this period, rising from 2.594% on the close of November 2, 2010 to 3.725% as of yesterday’s (February 8, 2011) close.

As for the goal of (modestly) increasing inflation, there are no daily CPI values available for this period.  However, if one uses values from the Billion Prices Project (which I discussed in the November 24 post) as a proxy, the index values have increased.  The index was 100.76 on November 3;  100.6679 on November 12;  and 102.0273 on February 7.

I plan on further commenting upon QE2 and its apparent effectiveness in future posts.  (all past posts on Quantitative Easing can be found here)

A Special Note concerning our economic situation is found here

SPX at 1324.57 as this post is written

Ben Bernanke’s Speech And Q&A On February 3, 2011

I could comment extensively on Ben Bernanke’s speech and Q&A at the National Press Club yesterday, as I partially and fully disagree on many of the comments he made.  I find it unfortunate that official transcripts of this and previous Q&A sessions are not available.  (speech video and transcript;  Q&A video and partial transcript)

One aspect that I would like to briefly comment upon is that of the success of QE2.   Quantitative Easing’s primary goal is to lower interest rates.  However, during QE1 and (to date) QE2, interest rates have risen, not declined, since the program was begun.  This is highly important and notable, yet doesn’t receive proper recognition.  It begs the question as to whether QE1 and QE2 are failed interventions.

Proponents of QE2 claim that it is “working” or is “effective” as the stock market is rising, GDP is rising, or use a variety of other arguments to justify the program.  However, that does nothing to change the fact that interest rates have risen, not declined, under QE2 (and QE1).

This passage from yesterday’s speech is notable with regard to the above:

“Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases. All of these developments are what one would expect to see when monetary policy becomes more accommodative, whether through conventional or less conventional means. Interestingly, these developments are also remarkably similar to those that occurred during the earlier episode of policy easing, notably in the months following our March 2009 announcement of a significant expansion in securities purchases. The fact that financial markets responded in very similar ways to each of these policy actions lends credence to the view that these actions had the expected effects on markets and are thereby providing significant support to job creation and the economy.”


A Special Note concerning our economic situation is found here

SPX at 1307.10 as this post is written

Quantitative Easing Exit Issues

During QE1 (the first round of The Federal Reserve’s Quantitative Easing) there seemed to be substantial commentary and discussion concerning the exit of such a program.

Over the last few months the discussions over the exit strategy seem to have diminished greatly – despite the start of QE2 and speculation of additional QE programs, i.e. QE3, QE4, etc.

I have discussed the various risks of Quantitative Easing in several posts.  As I stated in the August 13 post, “There are an array of risks embedded in such QE efforts.”  These risks, although very substantial, seem to (severely) lack recognition.

The (eventual) exit of Quantitative Easing is one of these risks.  This is a very complex topic of which much can be written.

While I believe it to be rather incontrovertible that The Federal Reserve does have the knowledge and tools to exit such QE programs, that is not to say that doing such will be without complications, adverse unforeseen consequences, or market disruptions.

While it is possible that the eventual exit from QE will go smoothly, I think that the possibility of adversity in doing so is high.  There is much that can go wrong in “a big way” on numerous fronts – especially if an exit is done under exigent circumstances.  As well, there are many conflicting incentives inherent in Quantitative Easing, which further complicates the “exit” issue.

One item that is particularly disconcerting is the potential for capital losses on the Fed’s growing balance sheet.  I’ve already commented about this in the November 5 post.  In a December 2 Cumberland Advisors commentary titled “Fed Exit Strategies – Technical Analysis” (pdf), there are some notable statistics on this subject in their commentary on the exit issue.

It should be very interesting to monitor this QE exit as it occurs…

A Special Note concerning our economic situation is found here

SPX at 1236.63 as this post is written