By Tim Iacono, founder of the investment website Iacono Research and creator of the blog The Mess that Greenspan Made
Boy, for a group of policymakers at the nation’s central bank who, in a best case scenario, are going to just sit on their hands for at least the rest of the year, there sure has been a lot of talk about an “exit strategy”.
That is, how the Federal Reserve plans to withdrawal the trillions of dollars in asset purchases, emergency lending facilities, and liquidity measures that have been undertaken over the last year that purportedly saved us from another Great Depression.
While it’s probably a good idea to begin thinking about this sort of thing, the way Fed chief Ben Bernanke and others at the central bank have been talking lately, you’d think that the economy is about ready to fire on all cylinders again and that there’s a pressing need to begin dialing back on some of the aid they’ve been providing.
What they should probably be worried about instead is the massive wave of foreclosures now washing up onto shore and the waning inventory rebuilding cycle that, when combined, will require more assistance in the form of money printing in the year ahead, not less.
Just this morning, Philadelphia Federal Reserve Bank President Charles Plosser said that he would favor selling some of the $1.25 trillion in mortgage-backed securities that have been piling up on the Fed’s balance sheet “sooner rather than later”, as if, he really thinks that the economic recovery we’ve been experiencing over the last six months – built mostly on government bailouts and handouts – is going to last.
Last week, it was Chairman Ben Bernanke who detailed a plan to Congress that would have the central bank adjusting the interest paid on “excess reserves” – money held by member banks at the Fed – in order to keep credit from expanding too rapidly and realizing the worst of the inflation hawks’ fears – runaway inflation.
Shouldn’t the question of what will happen to the market for home loans when the Fed stops their monthly purchases of between $60 to $100 billion worth of mortgage-backed securities next month be a more pressing concern?
Sure, they now own a considerable amount of the souring mortgage debt in the U.S., but they’ll probably have to buy at least another trillion dollars or so to keep the housing market propped up, that is, unless there is some other plan in the works where, with their loss limits recently removed, wards of the state Fannie Mae and Freddie Mac can take on the job.
[The graphic above is from Standard and Poor’s report on troubled mortgages]
Goldman Sachs weighed in last week with something about the Fed not raising interest rates until 2012 and there are more than a few who think that we’ll be turning Japanese this decade in a very big way, as in, ZIRP (Zero Interest Rate Policy) for as far as the eye can see.
Maybe all this talk about “exit strategies” is simply a way for policymakers to generate confidence that might not otherwise be there.
For example, anyone looking at consumer spending, consumer confidence, or the unemployment rate could easily come to the conclusion that we’ve got a long way to go before the economy begins to grow again in any substantive sort of way.
But, if they were to listen to the Federal Reserve talking about how they’re going to get out of the business of printing money on a scale never before seen by Mankind, then maybe they’ll think that, just maybe, the Fed knows something that they don’t know.
Then again, the more likely explanation is that economists at the central bank are just as clueless about where the economy is headed today as they were a few years ago before we all experienced the worst financial market crisis and the sharpest economic contraction since the end of World War II.
In case anyone needs to be reminded, here’s what Fed chief Ben Bernanke thought about the economy and financial markets back in the middle of the last decade.
Why are we still listening to this guy?
Is there any reason to think that he’ll do any better in this decade than he did in the last one?
Isn’t this talk of the Fed’s “exit strategy” way too premature?
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Recently we have heard a lot of criticism of government stimulus, bailouts, etc. Maybe Ben, Tim, et al, imagine a situation in which the markets turn south as government asset purcases are withheld. We would have a few down days in the market similar to the day the TARP received its initial rejection from Congress. The public would then DEMAND a resumption of stimulus and asset purchases. The public needs to be reminded why the programs were put in place. Note that China is also talking about pulling back. I further amuse myself to think that a coordinated global downturn would give Goldman immense opportunities for front-running.
We dont live in disney world all the time. The government is already in so far over its head Im surprised confidence hasnt been completely lost and a tank hasnt blown a whole in the white house like in the USSR.
The government doesnt have any resources and its doing absolutely nothing to solve any of the fundamental problems. Its one bandaid after the next until the whole damn blows and nothing can fix it.
The sooner government gets out of the way the better.
Bought off by Wall Street, government got out of the way and we see the result and will be dealing with it for years. What we need is government, unbought, back in the game, fighting for us and not Wall Street. As this is not going to happen the next crash becomes a certainty.
The people at the Fed didn’t see the last crisis. What makes you think they will see the next one? They missed the housing bubble and the meltdown. They are worried now about inflation when deflation and depression should be what’s on their screens.
As for Goldman, ZIRP is what is keeping the bubbles in stocks and commodities going. So they are really just talking their book here. They want to keep the party, and those bonuses, going as long as possible. Hinting that the Fed needs to keep rates low for the next 2 years plays right into this.
“Why are we still listening to this guy?”
We aren’t but our elites are because he facilitates their looting.
“The people at the Fed didn’t see the last crisis.”
I wonder. How could they not see what so many of us commoners did see, at least with respect to the housing bubble—30% investor sales, 12% annual appreciation, spiraling appraisals, mushroom sprawl, suspension of all credit standards, etc. It was like the S&L debacle, the prior great wealth transfer, on steroids. If they did not see it, it means gross negligence or incompetence; if they did see it—and current ZIRP and accounting secrecy (more of the same) make that almost unavoidable—it means premeditation, whether “vanilla greed” (Patriot’s term) or diabolical social engineering leading to a dark, tinfoil-hat rabbit hole.
Those conclusions are hard to avoid. When I channel the Fed Mind what I do is I open my Mind Screen up and let the movie play a rush of images that appear sort of up above my head in my mind up about a foot or two and slightly to the right and I look up at them in my mind, looking up in my astral body, even though I’m staring straight ahead in my physical body. And so what I see is is lots of light blue, like a sky blue, but thin and evansescent, like the atmosphere at a high altitude and I see faces and thoughts that sort of flow through a plastic-like wall where everything is fuzzy and shallow and indistinct like you can’t quite remember something. And it all occurrs across a plane that is at an angle like a pane of glass and it occurs like the glass is an indistinct movie screen. So what that tells me is that it’s beyond incompetence, it’s actually a mind-death, thought-death, group think situation, similar to what happens in a petri dish of bacteria or when a crowd becomes one and riots. They are all there in that thin plane where thinking dies. They are sleepers of thought and this is their shallow dream, their delusion.
“So what that tells me is that it’s beyond incompetence, it’s actually a mind-death, thought-death, group think situation, similar to what happens in a petri dish of bacteria or when a crowd becomes one and riots. They are all there in that thin plane where thinking dies.”
I agree with Simon Johnson. They know exactly what they’re doing.
http://www.theatlantic.com/doc/200905/imf-advice
They shouldn’t get to plead incompetenece. They should be held responsible for crimes against the state.
Yes that was a very good article which I was glad to see when it was published last year, and Mr. Johnson is one of the few sane voices on this issue.
This entire mess recalls to my mind Book I of Plato’s Republic, where the sophist Thrasymachus argues with Socrates about the nature of justice. Thraysmachus states that justice is merely “the advantage of the stronger”, which is nihilistic beyond description. Although very, very clever.
From The Republic . . .
* * *
Thrasymachus: “And each government establishes laws with an eye to its own advantage – the democracy making democratic laws and the tyranny tyrannical ones, and so forth. And these laws, which are made by them for their advantage, are the justice which they hand down to their subjects. And whoever breaks these laws is punished as an unjust lawbreaker. And that is what I mean when I say that in all states there is the same principle of justice: namely, the advantage of the established government. And as the government must be supposed to have power, the only reasonable conclusion to be drawn is that everywhere you go there is but one principle of justice: namely, the advantage of the stronger.”
* * *
So clearly we have a situation today where the financial looters and their enablers wrote and interpreted the laws which became the embodiment of the “State”. Prosecuting them, within the structure of the same state, would be challenging indeed. There would need to be a new state — such as occurs generally in war crimes trials, when the leaders of the losing state, such as Hirohito in Japan, the Nazis, or Saddam Hussein — are tried by a new state entity that redefines justice and laws, seeking justification through transcendent values and higher laws that defy easy codification. Such an approach would be challenging indeed and unlikely to gain popular support in the case of the financial crisis.
I don’t think that the government will stop trying to prop up the big asset bubble under any circumstances. I am merely trying to say that they could give the public a taste of panic that would result from a short-term withdrawal of support in order to make that support politically palatable. And a short but volatile episode presents opportunity for gaming the market if timed correctly. Forgive me if I sound cynical.
We are not going to turn japanese big way. Japan had a gigantic trade surplus and majority of people’s pension is in government bond/Yen dominated. those giant government deficit spending are funded by Japanese people. They don’t owe anybody jack. On top of that, because of their industrial competitiveness, they can maintain yen FX at 100-90 instead of 40-60. They have enough money to fight the banksters.
US?
1. If US going to pull Japanese budget deficit spending. It has to beg china/japan to keep buying bond to keep inflation low.
2. Industrial competitiveness is zero. The higher US economy grow, the more it needs external funding for import. (contrast to Japan)
3. US cannot meaningfully play FX in relation to its debt and oil price. Printing more dollar only caused exploding oil and import price, thus crashing more of real estate value.
4. There are too many open space/land. real estate in the US really isn’t worth much. Compare this to Japan (people simply has nowhere else to go.)
5. ..and oil price is at $80. recessionary level.
US is closer to Argentina/Brazil style of crash instead of luxurious comatose ala Japan. Creditor and commodity price call the shot, not the Fed.
1. If US going to pull Japanese budget deficit spending. It has to beg china/japan to keep buying bond to keep inflation low.
-or the US consumers become savers. Its happening now.
2. Industrial competitiveness is zero. The higher US economy grow, the more it needs external funding for import. (contrast to Japan)
-What? This seems like export dependent mercantilism. Not sure what your point is.
3. US cannot meaningfully play FX in relation to its debt and oil price. Printing more dollar only caused exploding oil and import price, thus crashing more of real estate value.
-The US is the global FX market. The own the right to print the reserve currency of the world. More dollars do not equal higher oil prices. Look at the money supply in relation to oil prices in 2008 for an example.
4. There are too many open space/land. real estate in the US really isn’t worth much. Compare this to Japan (people simply has nowhere else to go.)
-Yes, we should start building canals in order to flood land and reduce suuply.
5. ..and oil price is at $80. recessionary level.
-Maybe, I believe we are still in a recession. I see no data to back up your assumption.
US is closer to Argentina/Brazil style of crash instead of luxurious comatose ala Japan. Creditor
-As has been pointed out THOUSANDS of times before here and elsewhere- The US IS NOT ANYTHING LIKE ARGENTINA OR BRAZIL, THEY WERE BORROWING IN A CURRENCY THAT THEY HAD NO CONTROL OVER. We still own the dollar, and the presses. China is coming around to this conclusion slowly.
That is assuming dollar as reserve currency will last for a long time.
It is not. a) asia now only buys dollar to keep export and oil/commodity price in control. b) If Saudi bails out of dollar peg. then there is no reason for asia to keep dollar peg to maintain competitiveness. Oil then determine everything.
Or to put it other way. Saudi selling cheaper oil to asia will sustain their competitiveness without the need for buying so much dollar.
PS. Japanese is mercentalism. (partial)
-So, the US should embrace the failed policies of mercantilism to protect the economy? Still not clear on your point.
It is not. a) asia now only buys dollar to keep export and oil/commodity price in control. b) If Saudi bails out of dollar peg. then there is no reason for asia to keep dollar peg to maintain competitiveness. Oil then determine everything.
-This is assuming that Asia is going to act as one. Look at the Euro, they have a common currency and they can’t even do that. The common currency in Asia is the dollar.
Oil determines everything? The largest user of oil in the world is US Cars, on the margin and overall. Saudi Arabia is not going to ‘bail’ on the US, its their largest market, and the only one currently that can support their export dependency.
China doesn’t even use half the oil that the US uses. Don’t know the math off the top of my head, but they would have to have at least 5 years more of record car sales before they can even begin to take over half of the US usage.
mercentalism is not a failed policy, specially if hidden and done cleverly.
US destroyed british empire using mercentalism, Japan destroy US auto industry and climb to second biggest economy using mercentalism. Entire asia is a soft mercentalism economy. Free market is only for a)clear monopoly/top player b) delusional country. (really, you ought to lay down that great depression story book.)
Asia already act as one, more or less with china determining the minimum/maximum of dollar rate. Korea, Japan, Asean are all following rmb rate. Dollar is not only pegged to RMB, but also soft paged to the rest of of pacific economy.
US printing money/changing rate? Because of china maintaining peg, they have to soak up inflation and react. Because of china price the rest of Asia have to adjust FX. It is not only on central bank of course, but every little companies compete and watch each other price in asia. Dollar price for global market is the ultimate arbiter. (this is the part I say, China and the rest of asia/saudi also determine US fiscal policy. Interest rate.)
Fed trimming interest rate and money running away to asia, Asia experiencing inflation, they have to increase interest rate. Money stays in asia, therefore nullifying Fed action.
These peg and soft peg total are bigger than US economy. US economy is too small to control its own currency.
Saudi will bail if US printing money and they have to eat 15-20% inflation or china dumping massive dollar into market that saudi banks is flooded with cheap dollar…
Saudi has been having a problem with price stability and employment. (aka, riot. and militancy) 20% inflation? they’ll unpeg.
After that oil price will go wild… and fed won’t be able to calculate jack. It’ll be argentina scenario.
One final question-
Who buys all of this, your BS or your consumer goods?
Keep lowering the price. Somebody will buy it. Why do you think vietnam devalue their currency recently?
you really buy that free market nirvana BS?
“Why are we still listening to this guy?”
THAT SAYS IT ALL!!
WE could not remove that oaf but hopefully the people will vote out the senators who voted for cloture!!
CAN’T WAIT FOR NOVEMBER! HOPEFULLY PEOPLE WILL WAKE UP BY THEN!!
First of all, the Fed is irrelevant. Monetary policy if the US is courtesy of Ali al- Naimi, the Saidi oil minister who has bestowed a hard currency on us – and the rest of the world.
Welcome to 1931. It was fun the first time! Wait ’til you experience the sequel! Oil is the ‘New Gold’. Greece is CreditAnstalt. al- Naimi is Montague Norman. Otmar Issing is Pierre Laval. The business of the world is becoming the arbitrage of various currencies against the crude- backed dollar … which stands in for Stirling. All that’s missing is ocean liners and the fox trot.
The Fed is making tightening noised because what else can they do? The Fed can print all it likes and it bloats Wall Street pockets, clogs liquidity traps or winds up back with the Fed. The dollar/crude peg is a monster. Carry trades and risk are unwinding … see the Chinese dumping Agencies, FX dumping euros, gold getting hammered.
The peg is readying its forge and hammer to do its deflationary work on the US and there isn’t anything anyone can do about it. The Eurozone will deflate or face a monumental energy crisis. China is frantic to decouple from the dollar for the same reason. Deflation ruins thousands of well- connected Communist party apparatchiks who have collectively borrowed trillions of dollar- linked yuan.
We’ve ‘longer, lower, wider’-ed ourselves into a terrible mess. The only solution is sufficient crude conservation to break the peg. That means oil consumption less than 5 million barrels per day which is current domestic production. There would have to be surplus US production to export … we use 18 mbpd right now.
Deflation is here regardless. Either the Saudis do us in via the dollar or accelerating energy shortages mediated by credit destroy the banking and finance system.
ding ding ding….
basically, the entire dollar economy now only depends on Saudi willingness/ability to manage their inflation. The minute Saudi says screw the peg. US economy is going down argentina style.
What happens when Ben decides that some of the MBS paper he is holding onto is not worth anything? He would have to write down the value of it.
This could also cause similar vintage MBS and other crap held by banks to be written down and/or off. The bank would then have to raise capital to fix the hole in their balance sheet.
Not saying that I agree with anything Ben has done or is doing. But this point is never touched on.
The Fed has to hold onto the garbage until housing prices come back.
At what mark?
The fed, it seems to me, is trying to concentrate all of the worst crap at the fed. I just wonder if that is on purpose.
For instance- Freddie and fanny, while they are also full of junk, are taking the better “legacy” credit risk away from the banks and the fed. Any mortage that can be refinanced now, even with the more lax standards,is better than what is being left behind in the MBS pools from, say, 2006.
They’ve throttled the golden goose, the middle class engine of economic dynamism, yet they still expect it to continue laying eggs. Fools and sadists.
The borrow-and-speculate party is still roaring along in China. They just raised banks reserves for a second time. The speculative frenzy is keeping their state controlled steel and concrete industry booming. Property bubbles are forming:
“One staggering example of property speculation has been in Hainan province where 500 billion yuan or $73 billion was poured into the island during January, compared to total housing sales last year of just 36 billion yuan…Average property prices rose 30 percent in January alone”
I suppose that the Fed can sound positive as long as our sugar daddy is on such a high roll.
http://www.wsws.org/articles/2010/feb2010/chin-f18.shtml
So now we’re getting a talking point that would somehow equate bankster loot with legitimate stimulus?
All the QE and asset buys in the world has not and will not trickle down to Main Street. Trickle down has been proven a thousand times to be a LIE.
Every cent of this looting has simply gone to lobbying and bribes, hoarding (I love the trick of depositing the borrowed cash right back with the Fed to receive a higher rate than they’re paying it), acquisitions, the carry trade and other criminal gambling, and of course the inevitable “bonuses”.
Meanwhile the bottomed-out interest rate has been a club beating small savers, pensioners, etc. ,i.e. the very Main Streeters the Bailout was allegedly being crafted to help, in the worst Big Lie in American history.
And meanwhile the concern here is nothing more than reflating that asset bubble:
Shouldn’t the question of what will happen to the market for home loans when the Fed stops their monthly purchases of between $60 to $100 billion worth of mortgage-backed securities next month be a more pressing concern?
At all costs, let’s keep heading in the same direction. When you’re in a hole, keep digging. Headed off a cliff? Floor it! Double down, dig in, hunker in the bunker.
It seems the author agrees with Bernanke on strategy, and is simply disputing the proposed tactics.
(But pretending you disavow the unpopular Bennie completely, while you support the same overall program, is a neat trick.)
Exit strategy reminiscent of Sartre’s Huis Clos! Bernanke and company know exactly what they are doing. Quit believing that they didn’t see it coming or that the present debacle was a failure of supply-side neoliberal economic policies. It was the very SUCCESS of the latter – not their failure – that brought US to the present point in time. Looting with a purpose – deregulation – via the transfer of the family silver to the private sector via deficit spending – privatization. What does “starving the beast” mean? The most effective way to deprive the federal government – the beast – of revenue and its subsequent ability to spend is to bankrupt it! Unable to cut expenditures or increase taxation to offset such expenditures forces the government to borrow with the result that public debt must increase over time. Isn’t this is a transfer of wealth to the holders of such debt over time? Think of it as longterm investment strategy with a predictable outcome so long as the institutions of private property and markets continue to exist. When the bill comes due, it will be paid by AUSTERITY. The monies already transferred to the holders of the debt are off limits, if not offshore, and will not be recouped via taxation. To do that would require some form of “clawback” taxation… not likely soon, if ever! Hence, increasing taxes down the road will only affect income generated down that road. What has already been “transferred” is gone! How many trillions are we talking about?
The free market utopian anarchists [FMUA] immersed in the virtue of selfishness articulated by Ayn Rand see the government as merely a structured investment vehicle [SIV] with which to loot the citizenry via deficit spending over time. The architects of this process – Greenspan, Rubin, Summers, Geithner, and professorial Ben Bernanke, all subscribe to this “groupthink” to varying degrees. Otherwise they wouldn’t be where they are today. Yet these gentlemen are merely the frontmen for the faceless thousands of adherents of this ideology who have come to hold positions of authority in both the corporate and federal bureaucracies over the course of the past 30 years or so. Ideas have consequences and this is their consequence. There will be no exit until there is nothing left to loot.