Tag Archives: Intervention

Ben Bernanke On QE2

Ben Bernanke wrote an op-ed in The Washington Post yesterday titled, “What the Fed did and why: supporting the recovery and sustaining price stability.”

I could write very extensively about this piece as it is highly notable on several fronts.  For now, I will limit my comments.

My analysis indicates that the risks of QE lack recognition.  As well, the benefits appear highly overstated.  As such, we (as a nation) appear to have a mistaken understanding of the risk-reward ratio of large-scale QE.  This is especially problematical as I expect additional large-scale QE will be done in the future.  This belief is echoed by other prominent parties.

What I find interesting about Bernanke’s (and other Fed members’) comments about QE is that they seem very limited in discussing risks of QE.  This begs the question as to whether Fed members don’t think there is much risk in QE.  From what I have seen, the main risk Fed members have discussed is money supply issues / future inflation as well as the ability to gracefully (i.e. non-disruptively) exit such QE efforts.  Bernanke briefly mentions both of these items in his above-mentioned Washington Post op-ed.

However, I view those risks as being only two among a multitude of others.  As I wrote in the August 13 post, “There are an array of risks embedded in such QE efforts.”  In that post I discuss QE risks to the U.S. Dollar and QE’s role in fostering asset bubbles.

Another risk that receives little recognition is the risks embedded in the ever-increasing size of the Fed’s portfolio.   This is a very complex potential risk, entailing both large potential capital losses (driven in large part by rising interest rates) as well as other unintended (negative) consequences.  The potential capital losses aspect is well-documented in a Wall Street Journal editorial of today titled “High Rollers at the Fed.”

Both of these risks, as well as the multitude others, will only grow in importance if, as I suspect, additional (over and above Wednesday’s $600B announcement) large QE is performed in the future.

A Special Note concerning our economic situation is found here

SPX at 1222.43 as this post is written

Political Volatility – November 2010

The results of yesterday’s elections further solidify the trend of increasing political volatility.  Survey results indicate that much of this volatility has been driven by widespread dissatisfaction concerning the economic situation.

While this volatility has been recognized, many of its implications have lacked recognition.

On January 25, 2010 I wrote a post titled “Political Volatility.” This post discusses other implications, particularly economic, of this political volatility.

Also of (increasing) relevance is an article I wrote in December 2008 titled “President Obama’s Greatest Challenge.”

A Special Note concerning our economic situation is found here

SPX at 1193.57 as this post is written

Quantitative Easing – Varied Thoughts

There has been an immense amount of material written about additional Quantitative Easing (QE2).

Here are some of the works that I have found among the most interesting (although I don’t necessarily agree with what is being said):

Guidelines for Global Economic Policymaking,” (pdf) Gregory Hess, Shadow Open Market Committee, October 12, 2010

Investment Outlook, November 2010, Bill Gross

“Night of the Living Fed,” (pdf) Jeremy Grantham, GMO, October 2010

“What’s Ahead for the Fed,” Roubini Global Economics, October 27, 2010

excerpted material, Contrary Investor, October 14, 2010 commentary

As for my own thoughts on the issue, I have written about QE2 directly in the August 13 post, and have written extensively about interventions in various posts.  As well, two articles focus on interventions, “Intervention’s Potential Blindspots” as well as “My Overall Thoughts On The Bailouts, Stimulus Measures, and Interventions.”

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A Special Note concerning our economic situation is found here

SPX at 1193.59 as this post is written

Additional Quantitative Easing – Comments

Monday’s (August 9) Barron’s had an article titled “Time to Print, Print, Print.”

The article provides an overview of the concept of Quantitative Easing (QE) in the context of our current economic situation.

I don’t agree with many of its conclusions and insinuations, however.  In particular, the article seems overly positive on the idea of Quantitative Easing and its supposed positive effects, without providing significant discussion of its risks.

Quantitative Easing is an especially important concept now as I believe additional large-scale QE will continue to occur.  There are an array of risks embedded in such QE efforts.  Perhaps chief among these risks is the risk that excess “money-printing” poses to the currency.  The Barron’s article does acknowledge this by saying “Promiscuous growth in the money supply, of course, can both fan inflation and debase the currency.”  Although there has been virtually no commentary on the vulnerability of the US Dollar to substantial declines, I believe that such vulnerability does exist, as I discussed in the July 30 post.

Another large risk to QE efforts is that should QE prove successful in driving down interest rates, such a policy foments asset bubbles.  This is especially notable as many believe the housing bubble is but one example of an asset bubble that was caused by ultra-low interest rate policies.  My numerous posts concerning asset bubbles can be found under the “Bubbles (Asset)” category.  Asset Bubbles, and their future resolution, are an epic problem.

Most people fail to acknowledge the current existence of asset bubbles.  The Barron’s article seems to imply that no bubbles exist when it says “Damn the risks of triggering a bit of inflation and some modest investment bubbles.”

I will likely comment more upon the idea of QE once it is further implemented.

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SPX at 1083.61 as this post is written

Blinder And Zandi Paper – My Comments

Alan Blinder and Mark Zandi released a paper dated July 27 titled “How The Great Recession Was Brought To An End.” (pdf)

From the report, page 1: “In this paper, we use the Moody’s Analytics model of the U.S. economy—adjusted to accommodate some recent financial-market policies—to simulate the macroeconomic effects of the government’s total policy response. We find that its effects on real GDP, jobs, and inflation are huge, and probably averted what could have been called Great Depression 2.0. For example, we estimate that, without the government’s response, GDP in 2010 would be about 11.5% lower, payroll employment would be less by some 8½ million jobs, and the nation would now be experiencing deflation.”

my comments: Needless to say, I don’t agree with many aspects of the report’s conclusions, focus and methodologies.

Much of my thoughts on intervention efforts, which includes stimulus, can be found under the “Intervention” category.

The main reason I highlight this report is for reference purposes.

I think the report will prove highly memorable, an iconic piece of the period.

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SPX at 1101.60 as this post is written

Comments On The HIRE Act

On Thursday President Obama signed the HIRE Act, a jobs stimulus.  The summary of the signing can be found here.

There is also a transcript of his remarks found here.

I could make many comments about this jobs stimulus.  However, as an intervention measure, it has many of the same characteristics of other interventions.  As such, my previous extensive comments about interventions are highly relevant.  Those posts can be found listed under the “Intervention” Category.

However, I will make two comments specific to this legislation:

First, the ARRA was supposed to be a “jobs creation” legislation.  On various levels it has not performed as intended with regard to job creation.  As I’ve pointed out before, we should be very cognizant of how previous stimulus bills have fared before enacting new ones.

Second, in President Obama’s comments he said, “I’m signing it mindful that, as I’ve said before, the solution to our economic problems will not come from government alone.  Government can’t create all the jobs we need or can it repair all the damage that’s been done by this recession.”  This entire idea of “creating” jobs or “stimulating” job creation needs to be intensely scrutinized.  Should government be attempting to “create” jobs – as seems to be the current widely accepted theory – or should job creation and job growth be an inherent feature of a strong economy?

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Here is a link to a blog series I have previously written titled “Why Aren’t Companies Hiring?” :

https://www.economicgreenfield.com/2009/07/24/why-arent-companies-hiring/

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SPX at 1159.90 as this post is written

The Effectiveness Of Stimulus

“One of the biggest economic myths since the Great Depression is that governments can ameliorate or counteract the ebbs and flows of free markets. Government spending has never worked as a trigger for sustained and vibrant economic growth. Ever. Scholarship has demonstrated that the New Deal perpetuated the Depression rather than cured it. On the eve of the Depression the U.S. had the lowest unemployment rate among developed nations. But a decade later, despite six years of FDR’s New Deal, our unemployment rate was one of the highest among developed economies. Japan’s serial stimulus programs over the past two decades have repeatedly underscored this truth.”

Steve Forbes, Forbes Magazine, March 1 2010 p. 11 (link found here)

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I have written extensively about interventions, which includes stimulus spending.   Stimulus spending and interventions are widely (and wildly) misunderstood.

I think it is very important to have a full understanding of how the ARRA, a  very large stimulus, is performing.   As I wrote in a July 9 2009 blog post in which I discussed the ARRA, “Even if one were unabashedly pro-stimulus, one would find some serious faults with the $787 Billion stimulus plan, as enacted.”  As such, it should be of little surprise that the ARRA has been, at best, such a poor performer when analyzed in a variety of manners.

Here is a recent article from Alan Reynolds concerning the effectiveness of the ARRA.   Although I don’t necessarily agree with some of his conclusions, he does present some interesting statistics and views with regard to how the ARRA has performed.

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SPX at 1102.34 as this post is written

SIGTARP Comments

I found some interesting comments in the SIGTARP January 30 2010 Report to Congress:

http://www.sigtarp.gov/reports/congress/2010/January2010_Quarterly_Report_to_Congress.pdf

From the Executive Summary, which begins on Page 5:

“Many of TARP’s stated goals, however, have simply not been met. Despite the fact that the explicit goal of the Capital Purchase Program (“CPP”) was to increase financing to U.S. businesses and consumers, lending continues to decrease, month after month, and the TARP program designed specifically to address small-business lending — announced in March 2009 — has still not been implemented by Treasury. Notwithstanding the fact that preserving homeownership and promoting jobs were explicit purposes of the Emergency Economic Stabilization Act of 2008 (“EESA”), the statute that created TARP, nearly 16 months later, home foreclosures remain at record levels, the TARP foreclosure prevention program has only permanently modified a small fraction of eligible mortgages, and unemployment is
the highest it has been in a generation. Whether these goals can effectively be met through existing TARP programs is very much an open question at this time. And to the extent that the Government had leverage through its status as a significant preferred shareholder to influence the largest TARP recipients to carry out such policy goals, it was lost with their exit from TARP.”

also:

“….The substantial costs of TARP — in money, moral hazard effects on the market, and Government credibility — will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time.  It is hard to see how any of the fundamental problems in the system have been addressed to date.

• To the extent that huge, interconnected, “too big to fail” institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.

• To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.

• To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.

• To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car.”

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SPX at 1097.28 as this post is written

Characteristics Of The Housing Bubble

Given the incredibly outsized intervention efforts in the residential real estate market, I think it is important to examine some dynamics of the real estate bubble.

Here is a chart from the 12/15/09 Contrary Investor commentary that I believe is interesting, as it depicts some underlying residential real estate fundamentals.  It shows the equity and mortgage debt situation.  The underlying data is from the Federal Reserve Flow of Funds:

http://www.contraryinvestor.com/

As far as real estate prices are concerned, I would like to show two charts, both from the CalculatedRisk blog:

http://www.calculatedriskblog.com/

The first chart was posted on 12/21/09 and is the LoanPerformance Price Index from 1976:

Next, a chart posted on 12/29/09 showing the LoanPerformance Index as well as Case-Shiller, from January 2000:

As others have commented, it appears as if the overall intervention efforts are aimed at reflating (or to re-inflate) the housing bubble.  Conventional (investment) wisdom has held that reflating a burst bubble is impossible.

However, I think given the tremendously outsized intervention efforts in housing, we are truly in a unique situation.  I don’t believe there has ever been such a large intervention effort in our country, at least in the last 150 years.  Depending upon how one would measure such intervention efforts, it might even be among the largest interventions in world economic history.

A casual observer might assume that such an outsized effort would be destined to be successful.  However, (economic) life is not that simple.

From an “all things considered” standpoint, I don’t believe the residential real estate bubble has actually burst.  It appears to me that it has somewhat deflated.  I base this view on a variety of fundamental and technical factors. 

Assuming this view is correct – that the residential real estate hasn’t popped – the implications are immense.   I think it is likely that one of two possibilities will occur from here, and each could happen in a relatively rapid fashion.  The first possibility is a “successful” reflation of the residential real estate market, with accompanying economic activity.  The second possibility is a collapse of the residential real estate market with accompanying economic repercussions.  As to the path real estate will travel from here – my previous writings on interventions, bubbles and real estate indicate my thoughts on the subject.

If a “successful” relation occurs, one is led to wonder as to the characteristics of such a “successful” reflation of the real estate bubble.  Among other critical questions is how long would such a reflation last?

I think it very important to note the quality and durability of the economic activity that occurred in the first phase of the bubble, which peaked in 2006.  Can one hope for any better outcome during a subsequent reflation?

These issues are critical to the concept of Sustainable Prosperity, of which I have previously frequently commented.

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SPX at 1137.37 as this post is written

More On The Fannie/Freddie Developments Of December 24

Here is a Wall Street Journal editorial on the December 24 developments at Fannie Mae and Freddie Mac.  This editorial provides some new perspectives on the matter:

http://online.wsj.com/article/SB10001424052748704152804574628350980043082.html

My original comments on these developments was on December 28.

I feel it is critically important to understand the extent of intervention as it pertains to the housing market.  Fannie Mae and Freddie Mac continue to play an very large role in these intervention efforts. 

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SPX at 1135.43 as this post is written