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“A significant portion of policymakers are simply clueless”

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Tim Duy, my favorite Fedwatcher, has a very good post up which combines a general reading on the state of the consumer and then segues to the Fed’s take on matters. The section I found particularly telling:

As has already been widely noted, the minutes of the most recent FOMC meeting reiterated the Fed’s eagerness to reverse, not extend, policy:

…Overall, many participants viewed the risks to their inflation outlooks over the next few quarters as being roughly balanced. Some saw the risks as tilted to the downside in the near term, reflecting the quite elevated level of economic slack and the possibility that inflation expectations could begin to decline in response to the low level of actual inflation. But others felt that risks were tilted to the upside over a longer horizon, because of the possibility that inflation expectations could rise as a result of the public’s concerns about extraordinary monetary policy stimulus and large federal budget deficits. Moreover, these participants noted that banks might seek to reduce appreciably their excess reserves as the economy improves by purchasing securities or by easing credit standards and expanding their lending substantially. Such a development, if not offset by Federal Reserve actions, could give additional impetus to spending and, potentially, to actual and expected inflation. To keep inflation expectations anchored, all participants agreed that it was important for policy to be responsive to changes in the economic outlook and for the Federal Reserve to continue to clearly communicate its ability and intent to begin withdrawing monetary policy accommodation at the appropriate time and pace.

Read that carefully and realize this: An apparently not insignificant portion of the FOMC believes that there is a terrible risk that banks loosen their credit standards and increase lending at a time when, even if the economy posts expected gain, unemployment remains at unacceptably high levels. Silly me, I thought increased lending was the whole point of the exercise to lower interest and expand the balance sheet. That whole credit channel thing. If not to expand lending during a credit crunch, then what else are they expecting?

I am in shock that this sentence made it into the minutes. One can only conclude that a significant portion of policymakers are simply clueless. Or, more disconcerting, they have lost all faith in the ability of financial institutions to channel capital into activities with any hope of financial returns. Has the Fed now embraced the view that they manage the economy through little else then fueling and extinguishing bubbles?

Yves here. If at all possible, it’s even worse than Duy’s horrified take suggests. Inflation? In an economy with slack capacity, high unemployment, consumers duly cautious about spending, and labor utterly lacking in bargaining power even when times were better? What planet is this inflation talk from? Bond market yields rising over supply fears are not the same as inflation worries. Are there any signs of consumer hoarding in anticipation of price increases, of spending their paychecks ASAP because they fear their money will be worse in a few month’s time? No. Consumers are trying to cut debt and build up their cash buffers, the polar opposite of the behavior you’d expect if any were worried about inflation.

The Fed is shockingly seeing the US as an economic island, when pretty much all investors can seek other currencies as stores of value. And the consensus is that the dollar is a really bad bet, and a dollar bear posture is not very kind to long-dated Treasury yields. How hard is that to understand?

Japan, despite massive pump-priming, still had deflation because it was unable to get its broken bank plumbing fixed. The authorities like to pat themselves on the back and say how good our emergency responses have been, but Japan-type outcomes are real possibility. We have better demographics and a less severe debt hangover, but the Fed’s refusal to see that the banking system is still a mess is breathtaking.

These statement is an indication of intellectual bankruptcy at the Fed, that they have learned nothing from the crisis. But that isn’t surprising. CEOs usually need to be fired after they have presided over a disaster. They are incapable of seeing and remedying their errors. Why should senior bureaucrats be any different?

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44 comments

  1. attempter

    It also reads as an admission that the entire bailout was fraudulently sold, that the “getting banks lending so it’ll trickle down to Main Street” was a Big Lie. That the whole bailout was by conscious design nothing but a disaster capitalist looting expedition.

    Well, we knew that already, just as we know any and all versions of trickle-down are also part of the Big Lie.

    It’s still interesting to see the Fed formally admit it.

  2. RueTheDay

    The only thing I can think of is that the Fed is in complete denial with regard to the unemployment situation.

    This was published YESTERDAY:

    http://www.bloomberg.com/apps/news?pid=20601103&sid=aFbDgcAh3l9I

    —–
    “Fed governors and regional-bank presidents predicted the unemployment rate will range from 9.3 percent to 9.7 percent in next year’s fourth quarter, down from the June projection of 9.5 percent to 9.8 percent, according to minutes of the Federal Open Market Committee’s Nov. 3-4 meeting released today.”
    —–

    “All forecasts are based on the so-called central tendency of the 17 policy makers, which excludes the three highest and three lowest projections for each indicator.

    For the current quarter, the median estimate range was 9.9 percent to 10.1 percent, little changed from June forecasts. ”
    —–

    Not only have they consistently underforecasted unemployement for the past year or so, it appears they now have taken a “see no evil” approach to the current data and are cutting forecasts for the near future even as the trendline continues to accelerate. It’s as if the Fed doesn’t really believe unemployment is currently 10.2% nor do they think it can possibly go any higher.

  3. Andrew

    Yves, do you intend to contact members of the Senate Finance Committee to suggest questions to ask Bernanke at his reappointment hearing, or otherwise brief them? They are really not very bright, and you would be doing a great service if you educated them about the wisdom of reappointing this irresponsible, clueless individual.

  4. Francois T

    “These statement is an indication of intellectual bankruptcy at the Fed, that they have learned nothing from the crisis. But that isn’t surprising. CEOs usually need to be fired after they have presided over a disaster. They are incapable of seeing and remedying their errors. Why should senior bureaucrats be any different?”

    As any spanish-speaking soccer fan would utter: GOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOL!!!!!

    You nailed it! All this hocus-pocus ethereal pseudo-philosophical hogwash about the “Fed independence must be preserved” is vaporized when we consider the simple human element; What did the deciders learned?

    Answer: Nothing, since they didn’t personally suffer the consequences of their neglect and wrongheadedness. Often times, Professor Pain is the only one who can trigger a needed change in maladapted belief systems.

    This is one of those times.

    1. DownSouth

      The same dynamic operative on Wall Street is also at work with the neocons.

      It is never the neocons, with all their posturing and chest beating, who are present in the trenches, fighting and dying. Someone else always pays the price for the neocons machismo.

  5. JKH

    I’m afraid Duy’s the one who’s looking a bit clueless here. It’s not that surprising, since he makes an error that is common in the interpretation of Fed balance sheet operations. But he looks somewhat silly as a Fed watcher as a result.

    Banks are not reserve constrained in lending. They are capital constrained. This is the standard post Keynesian interpretation and it is correct. Most neoclassical economists such as Duy don’t seem to understand this distinction. The provision of reserves was not intended to replace capital discipline. It was to provide additional liquidity to the interbank market in the initial stages, and then later to serve as the funding portion for the Fed’s own balance sheet expansion, whereby it substituted its own credit expansion for what the banks were failing to provide in their lending.

    The Fed’s concern now is a reasonable one when balancing out the possibilities for the pace of recovery. Should the economy recover more quickly than expected, banks may become more comfortable with their current and more importantly their prospective capital positions. That’s what determines their strategy, not reserves. Nevertheless, in that robust scenario they may be tempted to deploy capital more quickly, and in doing so aim to shift unwanted low risk, low interest reserves over to other competing banks as an associated balance sheet benefit. That’s a temptation that would be wrong to incorporate in lending strategy, but it’s an understandable human judgement risk to consider in a rapid recovery scenario. Moreover, it is a risk that becomes more complicated should new capital standards be slower in formulation and introduction, with the additional risk that banks underestimate the severity of future standards while in an environment of robust recovery.

    1. DownSouth

      I have not a clue what in the hell you’re talking about, and I suspect I’m not alone. That makes the following passage from George Orwell quite germane:

      The great enemy of clear language is insincerity. When there is a gap between one’s real and one’s declared aims, one turns as it were instinctively to long words and exhausted idioms, like a cuttlefish squirting out ink. In our age there is no such thing as “keeping out of politics.” All issues are political issues, and politics itself is a mess of lies, evasions, folly, hatred and schizophrenia. When the general atmosphere is bad, language must suffer.
      –George Orwell, “Politics and the English language”

  6. Mark

    The message was always clear. The Fed is lending to insolvent banks to purchase T-Bills and banks pocket the difference. A back door way to tax the public to support the banks.

    Don’t be too surprised when inflation kicks in that the Fed doesn’t go back to an implicit Regulation Q with the banks. Where the banks agree not to compete for depositors and lend out money at large spreads. Savers being paid less then the rate of inflation with no other place to park the money.

  7. Siggy

    The Fed induced artificially low interest rates, and its expanded balance sheet are intended to create a basis from which the insolvent ‘primary dealer’ banks can earn their way to solvency. The concept is morally corrupt in that it is implicit that the banks will be taking profits that might otherwise not be available.

    Now just who is getting taken? Savers!

    What is at the core of our problem? Excess debt, debt that cannot be serviced. How do you cure the problem? You extinguish that debt that cannot be serviced. When you do that what will happen to a large number of the ‘primary dealer’ banks? They will recognized as being insolvent and at that juncture the only recourse will be to nationalize them directly or move them through the FDIC resolution process.

    If you want to limit the Taxpayer’s cost, you do so by wiping out the shareholders and the unsecured creditors and the secured credotors get a significant haircut and a substantial portion of their reduced secured loan is converted into equity in the new enterprise.

    The employment problem is reflective of the forces within the economy that result when the purchasing power of the currency is in a constant state of decrease. Moreover, the labor problem is developing in response to the labor arbitrage that is being effected by our trading partners, most notably China. Don’t tell China to revalue the Renminbi/Yuan. Help China raise the living standards of its population. Their wages are extraordianrily low relative to the west. As a nation, they exploiting this labor cost differential to bring their nation to parity in the global economy.

    I that find that since the publication of the FOMC minutes have become more timely, the minutes have become more staged. The Fed is saying what it wants to spin rather than discussing what needs to be addressed.

    This admendment is off the mark in that it is looking to fix a peripheral problem. The discussion needs to move to the core of the problem. The failure of the fait currency, profligate borrowing, the abrogation of regulatory responsibility and the moral collapse of the financial community. The public is not with blame in this. The public has abrogated its responsibility by failing to demand of its representatives that they enforce the laws that exist.

    In this regard we, the public, would be wise to consider limitations on election campaign and political contributions and the amount of money that may be spent by incumbents for any purpose not directly related to legislation.

    The problem at hand is a societal problem that has been motivated by a fraudulent currency that has been contrived out of a conceptual morass of idealogue canards whose fallacy is only apparent in the longer term. We have arrived at that point where the undoing of this error will be very costly. There is no painless resolution to this problem.

    1. DownSouth

      Siggy,

      You are an extremely fast learner.

      Getting a handle on all this is a slow, painstaking process. But the rapidity with which the thoughtfulness, coherence and clarity of your comments has improved over just a few months time is really quite remarkable.

      Kudos!

    2. David

      The public is not totally without blame, but has little blame in my view. Granted the public did not stop its elected government from these bad policies. But we sure tried. The calls to Washington during the TARP debates were literally about 100 – 1 against bank bailouts, but our “elected representatives” voted for it anyway.

      What more should we have done? What could we do in the future?

  8. kievite

    When we talk about “intellectual bankruptcy” we need to distinguish elements of luck from elements of conscious actions.

    Most part of Greenspan period was the period of merciless looting of former Soviet block. That permitted Fed actions which would be disastrous otherwise be neutral or even slightly positive. And it created incentives to go too far on the slippery road of perma-deficit.

    Right now the situation is defined by existence of a “super-creditor” which is concerned about depreciation of its dollar reserves and growing dissatisfaction of European patsies over the same.

    This is much more challenging context and unsurprisingly any action might look intellectually bankrupt. In chess such position is called Zugzwang.

  9. mikkel

    Yves, I was a little confused by your post. I know in the past you’ve said that the fear of a (continuing) major dollar collapse was understated, do you still feel that way?

    I personally think that generalized inflation is very far from occurring, I mean look at the last few months with grocery stores and now Amazon/Walmart. Plus no one has any money to buy anything. However, I think that the massive liquidity problem is a huge mistake, but for non-historical reasons.

    Instead of too much money leading to inflation, there is a good chance that it will heighten deflation. This is because all the excess liquidity is flowing overseas and into commodities, which is increasing the trade deficit once again. Commodities continue to rise, not because of demand but because they are being used as an alternative store of value…and that will put even more pressure on margins.

    1. Yves Smith Post author

      mikkel,

      I have said there is a risk of a disorderly fall in the dollar, and the dollar is now being treated as one-way trade. The dollar selling now feels overdone to me (as in short term oversold), but I also thought the dot-com bubble was nuts long before it burst. So don’t look to me on timing!

      But even so, the inflationary effect of a dollar fall would occur primarily through oil prices. The US import sector is not (by global standards) that large and over time we would repatriate a lot of the manufacturing we sent abroad if dollar weaknesses persisted. And short term, pricey oil (when that occurs) is more likely to mess up corporate margins, and lead to further efforts at cost cutting to compensate, which would include headcount reductions.

      1. jdmckay

        the inflationary effect of a dollar fall would occur primarily through oil prices.

        I think you’re way wrong about that.

        Since +/- 8/’08, there’s been steady climb in food prices here (Albuquerque): produce & fruit in particular. In the big top grocery stores (Walmart/Albertons/Kroger), more & more of both those commodities is coming from across the border.

        Obviously, food cost is a biggie for the forgotten middle class.

        I fail to see why you think oil will be “primary” source of pain.

        We have mom/pop bakeries here that have closed in last 6 months or so because cost of flour is up +/- 4x.

        I’m currently in middle of building a pitched rafter structure on top of our old, flat roof home & insulating. “Common” nails (for framing/exterior) are about $1.25 p/lb. Last time I did something like this (’96), they were around $.27. And they’re lousy nails now: try and pull one, the head pops off!!!

        In Home Depot, Lowes & other building suppliers, effects are further seen: prominent on their shelves/advertising is cheaper, lower quality “stuff”: instead of seeing RU 60 insulation (recomended by everyone who recomends this stuff), they’re pushing 30. And instead of that insulation having “moisture” layer (best practice), it’s being sold w/out… eg. appealing to $$ available to those walking through their doors.

        Right on down the line, this is what I see on the street. For a fairly modest renovation (what I’m doing), nails alone are costing over $400… about 5x what I had expected. And, of course, those nails… all of ‘em in every store, coming from China.

        Same w/asphalt shingles: instead of 30 yr occupying most of shelf space, it’s shifted to 20 year. And high end tools (eg. those that don’t burn out after few days/weeks of heavy use) are dwindling, seeing more & more of no-name low end (you guessed it) Chinese brands: Ryobi, DeWalt (no longer dependable equipment), etc. etc.

        When I got to stage of scraping old tar/gravel off our roof, I put an ad that morning on local Craig’s list describing exactly what I wanted (fairly hard “grunt” work) @ $10/p-hr.

        I had 47 responses in 2 hours. Virtually all of ‘em were experienced tradesman w/the same story: layed off 1/2/6 months ago, no work out there, and falling all over me at end of the day to make +/- half what they were when last employed.

        US inflation statistics haven’t meant much for a while AFAIC. So again, w/all due respect, I think you’re very wrong about “primarily oil” thingie.

        The US import sector is not (by global standards) that large(…)

        Excuse me? There is very little left on shelves of COSTCO and fore mentioned bld supply shops that’s reallymade in USA… labelling that says so is hugely deceptive. Same w/auto interiors/electrical parts and soooo much more: the plastic/metal forging for this stuff largely done overseas (or so. of border), and assembled into final production piece here… that makes ‘em eligible for “Made in USA” tag.

        The exceptions are tiny percentage of what’s sold on shelves of US retailers.

        and over time we would repatriate a lot of the manufacturing we sent abroad if dollar weaknesses persisted.

        Is this what the econ community is telling itself?

        You’re dreaming… that bell has rung, it’s over. We can’t compete w/labor costs, period… at least not w/out a major acceptance in our population which will accept on large scale low paying blue collar wages. So if you’re talking about more or less “repatriating” all this manufacturing @ min. wage pay scales… which, if that is the concept, obviously is not going to fuel any kind of “consumer spending” other than re-energizing the mega-apartment complex housing market.

        And short term, pricey oil (when that occurs) is more likely to mess up corporate margins, and lead to further efforts at cost cutting to compensate, which would include headcount reductions.

        “headcount reductions” is increased unemployment, right?

        And “further efforts at cost cutting” really is contracting economy, right? Or is this just more “increased productivity”?

        W/all due respect Yves, everything I read from most US econ folks seems consistently myopic in that…
        a) they do not seem to understand how much the world’s changed in last decade: the 3rd world/emerging economies are no longer emerging… they’ve emerged!!! They have “clout” now, the kind US used to have. And, worse IMO, many of ‘em have built their economies w/some underpinning of moral standards while we’ve gone in the other direction (eroding ‘em).
        b) they rely on historical trends as models… “low USD means primarily pricier oil”, which again entirely ignores what I tried to describe prior… which is damn near everything. Beyond that, there has been huge retrenchment of oil (energy) contracts longterm: Venezuala and several of largest ME producers are now contractually bound to supply… CHINA. And contrary to how this is reported this side of pond, much of this has happened because economically these suppliers see China as more reliable.
        c) they (economists) seem oblivious to what we are not producing… particularly given how much things have changed (and let’s not veer into demographics: eg. larger population demanding more from dwindling resources: water, power etc.) For example (and I’ve mentioned this in prev. posts), our electric grid is held together by duct tape. We lose near 30% of energy between generation and electrical outlet in your homes. We are doing near nothing to address this, yet those “emerging economies” are!!! Huge story there that should be on front page regularly.

        I’m a techie… very capable programmer/network & DB admin.: just about everything in the field I’ve done. The same forces I’ve described above in blue collar “stuff” have happened in tech, across the board. And as I mentioned earlier as well, the whole H1B thing being pushed hard (and quietly) for increased quotas is consistent w/everything else I’ve tried to describe.

        Anyway, I’ve had my rants here in last couple weeks (been regular reader for a long time) and I’m about done w/that… like pounding sand.

        My radar has served me well for a long time now. I’m damn sure of how I see things, evidence backs it up everywhere… some of which I’ve tried to describe in this post and recently on NC. Add to this dwindling commitment/resources to secondary education w/focus on the future: eg. what is “wanted and needed”… just where is any new, elegant, advanced tech economic driver going to come from?

        The trajectory is heading in wrong direction here, period. I think the predictions you made, which I’ve tried to address, are very very off base… not gon’a happen that way Yves.

        Anyway… just my $0.162 worth (and falling fast!!!). Hope you all have a great Thanksgiving.

        buy buy.

  10. Brian

    I agree with JKH. The issue is capital, and this entire exercise by the Fed has been fattening up the capital positions of the banks through the yield curve. While the Fed (and Treasury) was clueless during the lead up to the crisis, I think in 2008 they figured out that the banks were essentially insolvent and they have been trying ever since to find ways to feed them easy profits (yield curve, AIG bailout) and to buy time and kick the can down the road (TARP, stress tests, forbearance in the valuation of loans) and hope that over time they can earn enough money preprovision, or raise enough capital to come out the other side with a functioning banking system. They know they can’t sell an more capital injection or broader recapitalization of the banks politically. They are worried about closing any of them over a billion or two in assets (other than the occaisional self-evident basket cases like Bank United or Corus) for fear of creating a wider bank run and admitting that the emperor is wearing no clothes.

    The last thing they want them to do now is go off on any lending adventures and create more dents in the capital base which is already woefully inadequate if there were candor in the valuation of loans on the books.

    Its nice to think that Fed policy was about getting capital flowing down to the little guy, but the lending experience in the small business space has often been dreadful (Advanta, BofA’s small business portfolio) and I’m sure the examiners are not enthusiastic about loan growh in these books at this point in the cycle.

    Watch what they do, not what they say.

    1. David

      Some of us would have hoped that if banks were insolvent, they would have been allowed to fail to let new banks or arrangements take their place. That’s what happens to every other failure.

      But instead we got to pay back their debts while we cannot pay our own. We are not happy about it and cannot forget it.

    2. DownSouth

      Brian,

      Thanks for translating what JKH wrote into simple, straightforward English.

      I certainly don’t agree with what the Fed is doing, or that it even has the constitutional authority to do what it is doing. It is engaged in quasi-fiscal activities, an end-run around the Congress.

      At the end of the day, by nook or cranny, somebody has to pay for all the money being lavished on the TBTF banks, whether that money lands in the banks’ coffers by a more direct route or by sleight-of-hand.

      But perhaps the greatest damage the Fed has done to the country is moral. For most Americans, at least those that live and work outside the Beltway or Wall Street, the words merit, honesty and accountability still mean something.

      The Fed is like the Terminator. It is literary trying to uproot and kill off American morality.

  11. jdmckay

    I thought increased lending was the whole point of the exercise to lower interest and expand the balance sheet.

    I am in shock that this sentence made it into the minutes. One can only conclude that a significant portion of policymakers are simply clueless.

    This is old news AFAIC… the “cluelessness” extends well beyond the FED btw.

    Well actually, maybe not clueless: they’ve got ton of ‘em. They are just (pick one):
    a) incapable
    b) corrupted
    c) ignorant
    d) too insulated
    e) blinded by entirely self seeking motives (aka Greenspand)
    … to interpret “clues” in anything resembling a cogent, meaningful manner.

    Inflation? In an economy with slack capacity, high unemployment, consumers duly cautious about spending, and labor utterly lacking in bargaining power even when times were better?

    Well, that’s a mouthful right there… sheesh.

    What planet is this inflation talk from?

    Consumers are trying to cut debt and build up their cash buffers, the polar opposite of the behavior you’d expect if any were worried about inflation.

    AFAIC this ongoing inflation thingie is remarkably short term view. What happens if real recovery occurs (not on horizon IMO)?

    Personally, I deliberately avoid predicting anything and am well prepared for just that. Just recent year or so has shown that unanticipated, massive FED/TREASURY actions can move things artificially where ever they choose (hope?) to move ‘em.

    Inflation, deflation, stagflation… all possibilities AFAIC.

  12. Brian

    Another party heard from on the issue of bank capital (losses):

    PARIS (Reuters) – Half of the losses suffered by banks could still be hidden in their balance sheets, more so in Europe than in the United States, the International Monetary Fund’s chief, Dominique Strauss-Kahn, was quoted as saying on Tuesday.

    “There are still some important losses that have not been unveiled,” Strauss-Kahn was quoted as saying in response to a question on banks, according to excerpts of the interview that were sent to media ahead of publication on Wednesday.

    “It’s possible that 50 percent (of bank losses) are still hidden in their balance sheets. The proportion is greater in Europe than in the United States,” he said.

    http://www.reuters.com/article/ousivMolt/idUSTRE5AN4QD20091124

  13. jdmckay

    Bloomberg has <a href="http://www.bloomberg.com/apps/news?pid=20601087&sid=atWoGngEpam4&pos=3"article up this morning on subject of this post. Money (SIC!!!) quote:

    Federal Reserve policy makers said for the first time that their decision to cut interest rates to zero may be fueling undue financial-market speculation even as they called the dollar’s decline “orderly.”

    The Federal Open Market Committee said its policy of keeping rates low might cause “excessive risk-taking” or an “unanchoring of inflation expectations,”

    Gee, ya think?

  14. Mannwich

    Well, that seems appropriate, since most of their constituents are “simply clueless” as well. A perfect marriage.

  15. Kay4

    I think it is clear that the Fed doesn’t always know what they are doing especially now. This article makes it clear. Yves what would you have hoped to see from the FOMC meeting?

    1. anon

      basicly, we pay people to get out of the labor gene pool. The more we want them out, the more we pay them. And that acts as a force of gravity, as the greedy follow them into the abyss. It’s both eficient and effective.

      Prior to rolling out a new economy, we distill labor as much as possible, to the end of eliminating replication, to maximize effectiveness in kernel development.

      It’s like software, or military power; build a new system and sell the old one, and provide temporary maintenance. The maintenance contract on the old economy has expired.

      As California, and silicon valley, is learning, they cannot maintain the old equipment cost effectively. And system crashes will occur with increasing frequency.

      Finance is just the tip of the iceburg. Antiquated technology will be the real main street problem.

      The software industry promised everything, gave nothing, and then charged for upgrades once they had a gun to the head of customers.

      The entire global economy is being run on faulty equipment, in a false economy that pays people to correct the symptoms of their own errors, but never the cause.

      And, of course the policy makers are clueless. They never worked a real job in their life. They were bred to say yes to non-performing capital, which primarily seeks refuge from evolution.

      Tax receipts will continue to fall and government demand will continue to increase because the majority cannot create a surplus of wealth, and is simultaneously dependent on deficit spending, with no clue as to what is going on around them.

      They actually think their jobs are real, and that government is something more than a pair of training wheels. Their economy is crashing, and the response is to build a bigger training wheel factory.

      1. anon

        capital needed a new economy in the 70s, but they didn’t want to pay for it.

        no problem. they ran deficits.

        they decided in the 80s that they would pay for it. we started the job, and half-way through they figured they could finish it themselves.

        by the 90s, they were bankrupt, sold main street to wall street, and started hunting us down with our own product.

        by 2000, the game was coming to an end, so they rolled out the same automation, leveraged by financial engineering, globally, and started hunting us down with our own code.

        now, several billion people are dependent on processes and technologies that are clearly bankrupt, liquidating long-term to pay short-term, and borrowing short-term to invest long-term, to fill immobile product channels for an increasingly mobile leading edge.

        we started rolling out components for the new economy in the 70s, which is now maturing.

        and yes, it’s a lot like sending a professor to supervise a construction crew, and the professor is getting eaten alive.

        infinite deficit spending. gotta love it.

        1. anon

          We build a system, then make it look like the book learners expect it to look, because they have spent their lives coming up with theories about what we do, so they can tell us what to do.

          it’s a dumb game, but that’s how it works, like tic-tac-toe.

          … so I’m on a job, tricking computers into doing what they should have been doing all along, and the fire service techs, with pieces of paper attesting to their authority, demand that I make their system work too. I make 3x what they make, in 1/3 the hours, with no piece of paper, and they treat me like a third class citizen, but I tell them what to do. It works, but they are not intelligent enough to write it down, and forget as soon as they are done.

          This occurs several times, and their attitude gets worse each time. Finally, I ignore their pleas. This fire service problem is occuring across the country, at a cost of millions, and I could provide a solution in a 2 page report, but why should I?

          Think about all the technology systems, and do the math.

          It’s not just the policy makers. It’s a system-wide problem.

          Certification is a political process, which eliminates both ends of the distribution. The old economy is certifiably insane. It is specifically designed to remake the world as a replication, a proof, of their theories, and their theories are invalid.

          automation works in parallel, but not in series. It cannot replace human judgment on the ground, which is what they are trying to do, to justify their positions and decisions after the fact, and with all evidence to the contrary.

          Now, everything has to be ripped out and replaced, they have liquidated all the capital, and their authority is illegitimate.

          Free riders out-smart themselves every time, and, unfortunately, they take many souls with them.

  16. Hugh

    It is completely unsurprising that the people who couldn’t see an $8 trillion housing bubble are still getting it wrong.

    I agree with Brian this is all an exercise to allow banks to steal and rip off everyone and everything in sight to pull themselves out of insolvency. It is not so much ironic as telling that the Fed sees a danger in loose lending (when the odds of even normal lending are remote) but not in risky arbitrage and speculative activities.

    It also says so much that the Fed thinks it has to worry about the economy overheating at a time when it is stone cold and getting colder. And of course by steering money to the most unproductive sector of the economy, they are doing their part to make sure this stays the case.

  17. Fed Up

    “Yves here. If at all possible, it’s even worse than Duy’s horrified take suggests. Inflation? In an economy with slack capacity, high unemployment, consumers duly cautious about spending, and labor utterly lacking in bargaining power even when times were better? What planet is this inflation talk from? Bond market yields rising over supply fears are not the same as inflation worries.”

    How about the “planet” of Latin America where the inability to make the interest payment(s) tanks the currency cutting off access to the excess foreign supply along with not enough domestic supply?

    Yes, setting bond yields based on too much debt and the ability to make the interest payment(s) is different than setting bond yields based on price inflation and real GDP growth.

    1. Yves Smith Post author

      Fed Up,

      Latin American countries are not very comparable to the US, at least in the time frame the Fed worries about. Size and composition does make a difference.

      First and foremost, they cannot borrow in their own currency. While the US will lose its reserve currency standing, pretty much everyone sees that as a minimum ten year, more like twenty year process. As much as the dollar is a long term sell, the panic now is overdone. The market right now feels very much like first half 2008, and we know how that movie turned out. The big difference now is gold and not oil is the epicenter of the commodities fixation, and more money than then is also going into foreign currency speculation. Second, their import sectors are a MUCH larger percent of their economies than is the case with the US.

  18. john c. halasz

    Lemme get this straight. Banks are afforded the opportunity to repair their capital structures through basically unproductive lending into a carry trade. But then where do those manufactured surpluses come from? Uh, isn’t it just a de facto tax on the real economy? Which promotes its recovery how? The reason they’re called “zombie banks” is not just because they’re dead and non-functional, but because they’re actually sucking capital out of their economic environment, feeding on the brains of the living.

  19. Cog

    “I that find that since the publication of the FOMC minutes have become more timely, the minutes have become more staged. The Fed is saying what it wants to spin rather than discussing what needs to be addressed.”

    Ditto. We may have actually gotten less transparency with the shortened turn around on the minutes. Where’s Volcker’s Secret Temple when we need it?

    If you want to fed watch, look at what Daniel Tarullo, Obama’s appointee to fed governorship, is doing in response to “to big to fail”. He’s preaching improvements to capital and hiding behind them as opposed to sensible TBTF remedies, such as a return to utility banks without proprietary trading. Instead of clear cut, enforsable, fixes, he’s joined the chorus that believes it can police itself into defining prudent standards. Has he said anything about what use goodwill and the present value of deferred tax assets offer as they denominate ratios in times of stress? Will we get transparency or suffer more manipulation? The banks need a draconian smack down.

  20. MyLessThanPrimeBeef

    The politicians are clueless because we citizens are clueless.

    We need well trained, well paid professional citizens who are more knowledgeable about running the government than their public servants.

    Otherwise, it would be like sending a college professor to run a construction crew. The poor idiot would be eaten alive since he would know less about the work than those he supervise.

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