Bernanke Kills Fed Credibility and the Confidence Fairy in One Shot

How many markets are in upheaval right now? The ten year Treasury has gone from 2.18% to 2.44% in less than a day. Gold is down to $1288. Asia had a bad night with the Chinese interbank market going into even more distress than before (that can’t be laid mainly at the Fed’s doorstep but it sure didn’t help). The Nikkei was down 1.7%, which is almost a routine market move, but the Hang Seng also fell 2.9%. All major European stock markets are down over 2%. S&P future are down over 16 points, or roughly 1%.

We’ve pointed to several things that have been troubling about the Fed’s apparent view prior to the FOMC statement yesterday and the Bernanke press conference, which only rattled investors further. First was that the Fed seems to be suffering from a bad case of confirmation bias, in that it seems to be underweighing data that is inconsistent with the idea that the economy is getting better (as in on the path to decent growth, as opposed to a gear or two above stagnation). For instance, even though inflation continues to fall (a sign of weakness) the central bank is taking the view that that’s temporary, and it is also of the view that the sequester isn’t going to impose a meaningful drag.

But that may not matter. Fedwatcher Tim Duy highlights the fact that the Fed has a pattern of being too optimistic about growth, but is likely to stick to its guns on exiting QE when its unemployment thresholds are breached. And the big fail is that the Fed using the headline unemployment rate as one of its main metrics for when to wind down QE means it is choosing to stick its head in the sand as far as the severity of underemployment is concerned. This is the economic version of “peace with honor”.

Frankly, the real issue seems to be that the Fed has gotten itchy about ending QE. Who knows why. It may be 1937 redux, that they’ve gotten impatient with the length of time they’ve been engaged in extraordinary measures. It may be that they can’t face up to the fact that they might have gotten into a Japan-style QE forever (I believe Japan is now on QE 8). They might also worry about political backlash if the Fed balance sheet keeps growing, or that savers and investors are suffering in a low yield environment (more likely they are concerned about depriving banks of easy profits, like real earnings on float or easy yield curve profits). John Plender suggested in the Financial Times that Bernanke may be following the view of a recent Frederic Miskin paper, in which Miskin took the view that the Fed window for a QE exit was closing.

I’ve been musing that the impact of QE might well be asymmetrical, that it did less to goose the economy than the Fed wanted. Its main impact has been to lift asset prices. Some studies have confirmed Richard Koo’s take on a balance sheet recession, that consumers prioritize paying down debt over spending, and so the rise in the stock market and recovery in home prices hasn’t led to as much increase in spending as you’d expect. But as I speculated, while lowering interest rates doesn’t do much to stimulate demand in the real economy, raising rates will slow growth in normal times. And it could do more to choke off the nascent recovery than the Fed has anticipated.

The big problems are the Fed has no idea how to exit and this problem results from the flawed design of QE, of targeting quantities rather than rates. So the one thing Bernanke sort of made clear yesterday is the Fed will make up its mind as the data comes in. That’s not exactly the sort of guidance Mr. Market was looking for. He also raised the growth target and suggested the taper might start as early as September. Freakout! Even though Bernanke had made noises about an exit last month, and the the bond market took badly to that, the failure of Fed minions to offer any reassurance in the meantime was a warning of sorts that not enough people heeded.

To make the lack of clarity even more confusing, the central bank had previously said 6.5% was the unemployment level it was looking for. Whoops, in practice, that means it will start tapering earlier, at 7%. That might have been understood by some careful Fed tea-leaf watchers, but most investors had seen 6.5% as far enough away as to only be clouds on the horizon. With the Fed raising its growth forecast and talking about a possible taper in 2013, suddenly it’s looking very immediate in some quarters.

The communication bolix is producing what it is almost certain that Bernanke did not want right now, a further increase in real yields after a marked rise last month.

Clive Crook at Bloomberg makes a good stab at trying to unpack Bernanke’s “transparent as mud” discussion:

Bernanke triggered the recent rise in long-term bond yields when he said last month that “in the next few meetings, we could take a step down in our pace of purchases.” You could argue that he was merely stating the obvious, but the markets took it as important new information. In itself, that needn’t have been troubling. The problem for the Fed is that investors didn’t interpret it as good news about the economy but as bad news about the Fed’s reliability.

As the economy strengthens, you’d expect long-term interest rates to rise. But the recent rise in bond yields coincided with unexciting jobs data and very low inflation — inconsistent with the “strong economy” story. The implication is that investors thought the Fed was bringing forward its plans not just to taper QE but also, crucially, to start raising short-term interest rates.

Bernanke tried to address this confusion this week. He emphasized for the umpteenth time that the decision on tapering QE is separate from the decision on starting to raise short-term rates. All being well, tapering would probably start later this year, he said, with asset purchases continuing in 2014 until unemployment falls to 7 percent.

Interest rates won’t rise, the Fed has previously said, until unemployment has fallen to 6.5 percent. And, Bernanke added with fresh emphasis, perhaps not even then: These numbers are “thresholds” not “triggers.” So the Fed will merely start thinking about raising interest rates once unemployment falls to 6.5 percent, and might well choose not to act at that point. Oh, and it’s always possible, the chairman told another questioner, that the unemployment threshold for interest rates (and presumably therefore also for QE) will be revised — more likely down than up.

You can see what a crazy place we’ve gotten to be with ZIRP plus QE. Raising short term rates at 6.5% unemployment, when that’s certain to be a gross understatement about how weak the job market really is? What that really signifies is the mistake that Bernanke made during the crisis, and too few have called him out on, was his “75 [basis point] is the new 25” Fed fund rate cuts. 25 used to be sufficient to reassure markets, and 75 was seen as panicked but too quickly became a new normal. I had the dim feeling that the Fed had crossed an event horizon when it dropped the Fed fund rate below 1.5%. Even 1% might have been less confining than where it wound up.

Bill Gross in a Bloomberg interview has a good take on where this is likely to wind up but, but it’s a long way from what Mr. Market and even the Fed seems to believe now:

I think they are missing the influence on inflation that obviously the chairman has considered and perhaps the committee as well. There was a question and Q&A that basically said, Mr. Chairman, if we are down at 1% inflation and it doesn’t rise, then real interest rates are in a quandary to which you have limited flexibility, and he said, I agree completely with the premise of your question. I would think the markets are looking at the 7% unemployment rate and suggesting the tapering will end at that point. I would suggest that yes, he did say 7% in terms of an unemployment target where tapering would end, presumably in 2014, but he also qualified significantly a number of times that inflation has to go back up towards that 2% target and at the moment we are not there. Those who are selling treasuries in anticipation that the Fed will ease out of the market might be disappointed unless we have inflation close to 2%…

I think the Chairman is almost deathly afraid and we have witnessed in speeches going back five or 10 years on the part of the chairman in terms of the helicopter speech and the reference not only to the depression but to the lost decades in Japan. I think he is deathly afraid of deflation. As we meander back and forth around the 1% level, i would suggest that the chairman to the extent that he perhaps has a limited time left in terms of being the Chairman, that he would guide the committee towards not only an unemployment rate which has been emphasized in terms of the Q&A but also towards a higher inflation target, which is really a target. It’s not something in terms of a cap, but the inflation target of 2% and for the next year or two, 2.5% has been specifically delineated in terms of that. It’s a target. Those who think it is a cap and we are 1% below the cap and therefore the Fed doesn’t care about it, I think the chairman told us the Fed does care about it and the closer we get to 2%, the better as far as he’s concerned.

TIPS and gold are continuing to say there’s no inflation in the offing. The big fail in the Fed’s forecast is it’s keen to believe it’s succeeding and continuing low or falling inflation amounts to a repudiation. And if it’s proven wrong on that front, that means spooking the markets and increasing real interest rates now wasn’t just creating some inevitable adjustments a smidge prematurely but a more serious error.

Update 8:30 AM. Krugman (hat tip Scott) is also seeing shades of 1937 in this move, and for similar reasons, that the Fed is choosing to look at the headline unemployment numbers and not at the state of the labor markets:

….the fact is that we are still a very long way from acceptable employment levels. Meanwhile, inflation remains below the Fed’s target. Maybe the Fed believes that the situation will improve — but as everyone points out, the Fed has been consistently over-optimistic since the crisis began. And for now the economy still needs all the help it can get.

How can the Fed help? With short-term rates up against the zero lower bound, mainly through expectations — by conveying the message that it will wait to tighten, that it will let the economy recover and allow inflation to rise before hiking rates. To use my old phrase, it must credibly promise to be irresponsible.

And what it has just done, instead, is signal that it’s still a conventionally minded central bank.

So what if recovery stalls, and inflation expectations fall even further? Can the Fed turn on a dime, and send a credible message that it really isn’t so conventional-minded, after all? It’s hard to believe; having already shown itself inclined to start snatching away the punch bowl before the party even starts, it has arguably already given away the game…

I really hope that the real economy recovers at a pace that makes my fears groundless. But if it doesn’t, I fear that the Fed has just done more damage than it seems to realize.

Print Friendly, PDF & Email


  1. RexLex

    Perhaps hoping that Draghi will take over since the FED has been doing the ECB’s job for some time.
    The ECB has been all over the place on its next steps, if any.

    1. NotTimothyGeithner

      The ECB lacks the sovereignty necessary to take over and is in a precarious political situation.

      -Merkel and her coalition are engaged in European race-baiting and even put on a dog and pony show in the hopes Obama could help her image. She is gone, and the Social Democratic coalition appears to be leftier and more solid in a long time. There won’t be “greens” trading values for a pat on the head which has happened in Germany.

      -Hollande would be laughed off the stage today. His focus on foreign affairs demonstrates his inability/reluctance to deal with domestic problems. When in doubt,

      -Cameron only won because New Labour is New Labour. An old style Labour would have cleaned house. Hell, holding Tony Blair accountable would have resulted in a huge win.

      -Italy is full of Italians! Lets not forget the rest of the PIIGS.

      The bulk of Europe is politically unstable, and they don’t have coordinated elections. Anyone who thinks Draghi might take over is insane. Bernanke if he has rationality (mind you he was a George W. Bush adviser and Fed nominee, so I think we know the answer) must be trying to get out of dodge without admitting his own failures to outline the limits of monetary policy and the inherent failure of negative interest rates or interest rates which are so low the rich can float themselves paying the interest while causing malinvestment.

      1. The Dork of Cork.

        If so – Thank God the ECB cannot take over but I have my doubts.

        I was at a political meeting last night in Cork.

        A certain Declan Ganley was giving a speech.

        In my opinion it was a typical political push to cement the new Euro market state on a permanent basis.
        Creating another US of fucking A nightmare.

        He is in favour of the Anglo “free” version of the market state and not the European managerial market state.
        Buts its all 9th circle in my book.

        I found the people in the chamber very lost souls from the very narrow minded catholic upper middle class of my masonic Llliputian city.

        The lack of a nationalist agrarian greenback political party in my country after all these longs years is truly shocking to me.
        What goes on in these peoples little heads ?

      2. charles sereno

        If Greenspan has survived and is able to travel abroad w/o fear of arrest, what does Bernanke have to worry about. Who knows? He may be nominated for a Nobel (or at least an Ig Nobel).

        1. NotTimothyGeithner

          He’s worried about his legacy, but there is no one out there who can replace the Fed and its effect on the market. Bernanke wants to get out before his name is dragged through the mud, or before guys like President (not necessarily the President) would refuse to share a stage with him. Europe is large enough, but its a basket case, incapable of concerted action.

          Even the bailout in 2008 was done with Nov. election being a foregone conclusion and George W. doing the heavy lifting. If McCain had a shot to win or the GOP could win the Senate or House, things may not have gone quite the same way. As such as things were, the issue was how much larger would the existing Democratic majorities be.

          1. charles sereno

            You know, Hopebama came in with the kind of congressional majorities similar (maybe not comparable) as FDR did in the wake of the the Depression in a similar economic crisis situation. What can we say. BHO was no FDR. FDR was a lot of talk in his campaign to be elected too. But once he got in, he acted and he led. Good ol’ times!

        2. jake chase

          I don’t think one should call Bernanke a confidence fairy. I mean, he isn’t exactly Clint Eastwood, but who is.

  2. MacCruiskeen

    How upset can we be about this really? Sure, the Fed has the dual mandate, but the dual mandate is a political goal, not necessarily a practically realizable one. The primary direct beneficiaries of Fed action are people who don’t really need the help; it’s an extremely inefficient way to get cash into the hands of people who really need it. Everyone is mad at the Fed, either for doing more than they should have or not enough. But the focus has been too much on the Fed because the Fed is the only one actually doing anything at all. The big Fail is in Congress and the President (just as in 1937). It is just plain not in the Fed’s power to fix the economy all by itself.

    1. Yves Smith Post author

      Where was Bernanke in calling for more stimulus in 2009? I’ve read various crisis accounts, and he didn’t make any public calls, which would have made a difference or even private ones. But the Fed is perfectly happy to weigh in on all sorts of other matters (see Greenspan telling consumers to get ARMs in the early 2000s, or supporting Bush’s privatization of Social Security plan). But no, Bernanke was calling for deficit cutting in 2010 (perhaps even earlier, this is based on a fast search):

      The Fed was extremely aggressive when it came to rescuing the banks, not just the formal programs but the goosing the MBS, the lack of interest in mortgage abuses (it didn’t even review the $25+ billion mortgage settlement of early 2012). Greenspan was long fixated on the stock market. The Fed is perfectly happy to take on jobs outside its traditional mandate. So it should suck it up and take responsibility for its own mission creep.

      1. C. Reilly

        I agree with both of these points, and they are not mutually exclusive. The Congress and President have to have the guts to exercise more influence with the Fed in a tough spot. There is much truth to the fact that this QE is really more about propping up and profiting the financial institutions than trickling down to individuals, and it wouldn’t take too much effort to expose that fact. QE is only so effective without recognition of the obvious fiscal facts that Bowles-Simpson highlighted. What is needed is a change in who’s taking the lead on targeting real unemployment and economic growth.

        1. Tokai Tuna

          Professor Depression also said home values wouldn’t go down, helping to create a painfully interesting trap of sorts for growing boys and girls who delusionally thought they’d own their own crib. And those foreclosures ain’t done yet.

      2. Susan the other

        Action is evidence of intent. And in this case probably high level collusion. It isn’t just the Fed; it’s the Fed and Congress. Bernanke might be afraid of deflation but he’s flat-out terrified of inflation. And he’s got the perfect foil. Unemployment. His dual mandate is as convenient as a shell game. Bernanke and Congress are not fighting deflation – deflation is the goal. If unemployment is kept high (true unemployment at 17%, propaganda at 7.5%) then the Fed can manipulate its true anti-inflation agenda without interference. Keep the banks and the stock market growing with zirp; save the banks’ fraudulent balance sheet by buying up all the MBS; and impose a stealth austerity on the rest of the nation; even on the rest of the world because we’re not a nation of consumers anymore.

    2. washunate

      Well said. Bernanke has been quite consistent, going back to when he was a Bush appointee, that he’s willing to do the emergency lending corporate welfare financial bailouts thingy, but that Congress is responsible for evaluating and implementing support for non-financial companies.

      If that double standard is a problem, well gee, I wonder what Congress and the President could have done about it. I can’t quite put my finger on it.

    3. Richard Kline

      To me, the Fed is using the headline unemployment rate as tawdry window-dressing on that the Fedheads want to do anyway. This is Uncle Ben reading the riot act to the FinSys and shadow player speculators, and all of the bets unwinding; at an orderly pace so far given their scale and correlation. Everyone dives for bonds and out of their risk-on bets in gold, emerging markets, the Nikkei, and shadow flows into China. Spec bucks on swap from the Fed were already out of commodities and Euro shorts at the moment, which is why there isn’t much movement there. Ben’s turned out the lights before the drunks break the furniture. And for the record, I don’t think Ben Bernanke gives a rat’s tokhus for unemployment, everyone starting with him knows the number’s bogus. It’s just an excuse for managing macro moves as he tries to Ozma the Great on the financial system, which is the only _real_ charge of the Fed for a generation. The financial system doesn’t care about unemployment, they only care about how much money the Fed will make available, and at what price, and that is all the Fed has come to care about. Period. The rest are optics for politicians and other rubes.

      1. Yves Smith Post author

        Bu the part you are missing is he is killing bonds too. Higher interest rates mean lower prices. The only thing that’s been up the last 2 days is the dollar.

        And banks are structurally long bonds. There’s not enough credible counterparties (given size of balance sheets) to take the short size (even if you found enough fools) for them to go net short. They can lighten up, go to shorter duration bonds, but they are long. And they lose when interest rates rise.

      2. Richard Kline

        I don’t think Ben’s going to hold rates higher long term, or much. To me, the move is to force the speculative money back _into_ bonds, regardless of price, and to repo their own assets as the Fed lowers, but doesn’t eliminate, it’s monthly swaps. Is Ben _really_ trying to push rates higher? I don’t think that’s the issue. Really, listening to what he _says_ just adds to cognitive dissonance. I’d say look at macro distributions of money flows.

        The problem with QE has always been the exit. There is NO smooth path that doesn’t pinch assets in the process of crunching speculation. My guess, and it’s only that, is that Ben and his (numb)skull trust have assessed that asset prices, the real economy, and the financial system have ‘stabilized’ to the point where he can pull some of his ginormous volume of phony liquidity back into the drain, so he’s trying to do that now rather than _after_ speculation reaches an uncontainable blow up.

        Is Bernanke right? I don’t know. But I’d rather he try now than wait. Which is more important at this point, crimping the banks and there real economy or heading off another systemic crisis while the former two are still in less than stellar shape? QE was always an asset sustaining strategy. It’s always been extremely dangerous. Massive, unconstructive speculative flows have resulted; little real investment has resulted; perilous correlation of asset price surges have occurred in different places around the world—and yes, those are in the main drive by the American Fed’s enormous float which has compelled practically every other central bank to follow suit. Surprise, surprise, several are reining in now. Let’s just declare ‘mission accomplished’ on this particular squish folly and get the liquidity in to try something more effications. That’s my view. (And hey, I could easily be wrong, and of course there’s much not taken into account here.)

  3. Warren Celli

    The more apparent each day incremental Xtrevilist power elite herd thinning continues. The aberrant inbred Jivey League Clique continues to lay out more good cop bad cop duopoly dodo distractive baloney cover.…0.0…1ac.1.17.img.ZmDieczxACk

    Deception is the strongest political force on the planet.

    1. ArkansasAngie

      In order to save abeconomics te yen needs to o to 102 or so.

      Abe cant do it alone.

      And … or … Benny really is scared

      1. Warren Celli

        Its not a new con, they have been working it for years.
        Moon money is next with the CBM (Central Bank of the Moon) buying toxic waste securities with Moon bonds.

        The moon is worth more than Japan.

        Deception is the strongest political force on the planet.

      2. Warren Celli

        The moon could be made a sovereign nation by creating a Moon Zone of nations and a Moon Zone Treaty that would then create and empower a Moon Central Bank. Member nations in the Moon Zone would get multicolored SDR chips and agree to adopt fiat Moon Money as an adjunct currency in their respective member states. The Moon Zone nation states would then use two currencies. Whatever currency they have now and the new Moon Money.

        The Moon Zone Treaty, like the Maastricht Treaty or the creation of the FED, will require no democratic consent of the people. It will be crammed down the throats of the people by the Xtrevilist power elite in the same fashion; through graft and super, super, super duper, pac money.

        Having a Moon Central Bank will help eliminate a lot of the bickering between member states as it will serve as a non aligned deflection from the existing individual nation state stigmas. Not everyone likes Japan, Germany, the USA, the UK, the PIIGS, etc., but everyone loves the moon! In keeping with that bickering reduction theme the Chairman of the CMB would be an imaginary iconic figure. Someone like Alfred E. Newman of MAD Magazine fame. Everyone likes Alfred E. Newman!

        As a sovereign nation with its own central bank the moon could begin charging for moon beams and declare them as exports. People on their honey moons would have to pay big money to gaze at the moon as they held hands and declared their love for each other. Every nation state on earth would be assessed a moon beam use tax. It would be kind of like a carbon tax except that the moon beams would be more visible, although that seems to be changing rapidly.

        The best benefit would be that as sovereign nation state the moon could print all the Moon Money it wanted to. This would help kick the (now celestial financial crisis) can down the road and make the intentionally depressing the world economy program easier to maintain and even accelerate. The moon could flood the heavens with cheap money and begin a QE program that would buy any and all bonds anywhere, including moon bonds, taking them out of private hands and thereby reducing the amount of moon interest paid to the private sector.

        This would all work to accelerate the Xtrevilist elite Jivey league Clique’s herd thinning program designed to rid the world of the untermenschen (yes that’s you conned boy and conned girl).

        Deception is the strongest political force on the planet.

  4. Sebastian Amithere

    Excellent analysis.

    But Bernanke the economist (2003) did argue in favor of tax cuts for households and businesses financed by money creation through monetary policy.

    Of course Bernanke the Fed president flew his helicopter exclusively over the banking cartel. Must be some major cognitive dissonance there.

      1. Banger

        Of course! This was really obvious but the mainstream media has, for several decades steadily refused to consider rational solutions to ANY collective problem whether it involved economics, foreign or domestic policy.

        1. Carla

          “the mainstream media has, for several decades steadily refused to consider rational solutions to ANY collective problem whether it involved economics, foreign or domestic policy.”

          The MSM, which is to say everything from FOX to NPR & PBS, is PAID not to consider economics, foreign or domestic policy, let alone rational solutions to any problem whatsoever.


  5. slothrop

    Because of QE the monetary base has tripled. But loans to private businesses have actually gone down since 2008.
    Given this, why does Yves Smith assume that QE boosts employment, when clearly the relationship must be in the other direction?

    1. NotTimothyGeithner

      Its prevented firms from collapsing or facing liquidity crises, but at the same time, its kept the same parasites and cruel structure in place. Its death by a 1000 paper cuts.

      Tomorrow QE boosts employment, but in the long term, it hampers real business formation and devalues the assets of people who don’t have access to the discount window destroying customers. Minimum wage hasn’t risen with QE, and small businesses don’t have access to QE the same way large companies do. My guess is the life/financial insurance companies are projecting problems from low interest rates for their business models which is what is driving this taper talk. A major insurer going under will have the same result as a major bank going under.

    2. washunate

      Yep, the problem with buying time. If you don’t use the time to actually fix the problems, you end up even worse off.

    3. Ben Johannson

      I suspect Yves doesn’t think QE creates employment, only that it might have some small, indirect effect on the margins.

      Personally I don’t think a rise in interest rates will necessarily be a macroeconomic negative. No one wants debt now, so a rise is unlikely to have a major impact on lending to the real economy. In addition higher rates will increase private sector income which might actually spur a little more spending.

      1. Malmo

        “Personally I don’t think a rise in interest rates will necessarily be a macroeconomic negative. No one wants debt now, so a rise is unlikely to have a major impact on lending to the real economy. In addition higher rates will increase private sector income which might actually spur a little more spending.”

        I’ll eagerly take the other side of that bet.

        1. washunate

          Depending upon how major impact is defined, I think Ben could make a fair amount of money on that wager. What primarily matters in the mortgage and student loan markets is the government guarantee, not (relatively minor) moves in interest rates.

    4. Yves Smith Post author

      Please go back and read the post.

      I said I have been speculating that QE is asymmetrical. I very clearly said it didn’t do much to help the real economy but withdrawing it could hurt.

      Also looking at business loans tells you very little. Bank lending is only 15% of non-farm, non-financial credit. Bonds are a much bigger deal in business funding. Research by Amar Bhide shows new businesses are funded via savings, friends and family borrowings, and credit cards. Credit cards are turned into bonds. None of that is business loans. Some might have borrowed against HELOCs, again that would not show up as business loans but a mortgage loan.

      The very small % that are VC funded ALSO would not show up as business loans.

      If QE has had any effect on the real economy, it’s mainly through related Fed cheerleading and confidence fairy, the financial media cheerleading the rise in the stock market as meaning the economy is recovering + the rise in housing prices in the last year (which as we know is significantly the result of private equity and other investor buying and some of those are debt financed via warehouse lines but they are counted as “all cash” buyers because they don’t use a mortgage).

      1. Malmo

        “I said I have been speculating that QE is asymmetrical. I very clearly said it didn’t do much to help the real economy but withdrawing it could hurt.”

        Really, that’s all I’m saying too: the withdrawing could hurt.

        I admit I’m being somewhat selfish here. Still, if withdrawing helps a significant amout of others on the margins then I can stomach the move. I’m just not convinced it will.

        1. Carla

          Nothing ever seems to help people on the margins. Lemme tell you. I live in Cleveland. I know.

      2. Banger

        And don’t underestimate the confidence fairy–it is everything in today’s Macroeconomic world.

  6. Aussie F

    Let’s face it, running a state capitalist economy while lecturing the population on prudence and market discipline is bound to create a bit of cognitive dissonance.

    It’s clearly all proven a little too much for Bernanke. A few days of bed rest and a dose of Ayn Rand should get him back on his feet. Within no time he’ll be lying like a statesman and shovelling billions to his corporate sponsors.

    1. ambrit

      Aussie F;
      A more apt analogy would be shoveling big heaps of cash into the boilers of the New Titanic while she majestically sails towards the Iceberg.

  7. Chris Maukonen

    First of all the only people who give a tinker’s damn about the economy are economists. Everyone else is concerned primarily – if not entirely – with their own personal situation.

    And if that sucks – and in most cases it does – they will not spend but will pay down their debt and put what little is left into savings and fuck the economy. Washington and the FED just don’t this.

  8. washunate

    But bailouts and corporate welfare and other wasteful spending isn’t inflationary!

    They just make prices higher than they otherwise would be :)

  9. Malmo

    This is truly insane. This recovery is extremely fragile, and any hint of rising rates will snuff it out in a heartbeat. As a homeowner I have benefitted from low rates. I was able to refinance at a much lower rate, thereby dropping my monthly payment by some $600. I’m now in the process of doing a cash out refi which will help pay down revolving debt. My home’s value has risen some 30% from the lows. This would not be possible absent lower rates. The only so called bubble blowing effects here are from the lower rates, not the liar loans, etc, excesses from the housing bubble years that preceeded this. Underwriting standards are downright difficult. Probably too difficult, yet home prices are rising and giving significant relief to those like myself and those who’ve trapped in negagative equity situations. The conditions that led to the last bubble are no longer in play. The low rate environment propably has plateaued for the time being regarding home appreciation, even before Bernanke’s opened his piehole. As the economy strengthened, home prices would have continued to rise, albeit at a slower clip. Would still take years under this environment to approach a real, broad based recovery, but we at least had a semblance of a chance. Now that the Fed is augering towrds an exit of QE and subsequent rate increases, I’m afraid the recovery will be stopped in its tracks. No wonder these fools are viewed as out of touch sociopaths.

    1. Tokai Tuna

      Just think, we can get those home values even higher if we line up the marks and get ’em mortgaged like the old days.
      Between the cacaphony of the Orlicks, Housing Wires, and the propaganda and falsehoods of low inventory coupled with complete and total indifference to the screwed masses – there are calls to loosen the reins of predation once again. Essentially, this is because fast money cannot be made without basically f$%king people. Rising home values are “good”, more people will go to Home Depot, buy from Amazon. We can ghettoize more areas in the country, and it’s been shown how this enriches groups of people and gets them spending, but can’t we arrange things a bit better? Sure we could have, Ben coulda’ have QE’d the serfs, and the Justice Department coulda’, and then Pigs Will Fly….and on and on.

      1. Malmo

        I’m not arguing that housing bouncing back is a panacea. By itself it isn’t. There is so much more to be done structurally throughout the whole economy, much of it radical. All I’m saying is that I’ve benefitted from lower interest rates. Others haven’t though. If rising rates benefitted more common folks than low rates then I’ll suck it up and accept where the trajectory is headed. I’m not convinced that is the case, however. In fact, I think higher rates at this point will choke off what little recovery we’ve seen, and many people will needlessly suffer subsequent to this move. All Bernanke is doing here is throwing a bone to his financial crony buddies or sucumbing to political pressure. Period. His actions here have nothing to do with the common person. Hell, even Greespan said raise rates; the hell with the economic effects. Didn’t Ben object either. Rather, he followed the maestro’s advice.

        1. Yalt

          One thing everyone seems to be able to agree on is that whatever asset they happen to be holding–a house, equities, bonds, whatever it might be–is the critical asset whose price the central bank should be supporting.

          1. Malmo

            Housing as an asset class has far more significance to an average Joe or Jane than do the others you’ve mentioned.

          2. Yalt

            No doubt, but maybe there could be some concern for people without assets? Recent graduates entering the workforce? People no longer in the workforce at all?

            The median Joe has a lot less than average in the way of assets (the median is much less than the mean), which means all this asset propping is, at least to first order, not really to his advantage. He’d be a lot better served if there was a general sense that the health of an economy is better measured by the wage level than by stock indices or housing prices. But it’s a given, in most commentary, that high labor costs are bad and high housing prices and stock prices are good.

          3. washunate

            Malmo, I would encourage you to look into median household net worth by homeowners and renters. You seem unaware that homeowners, as a group, are far wealthier than people who don’t own homes.

            Targeting asset prices (from housing to stocks), instead of human needs, simply entrenches the concentration of wealth and power in our society. Plus, housing supports in particular have caused other unintended consequences, especially environmental harms from overbuilding of wasteful McMansion style exurban sprawl.

        2. sierra7

          Ah, the “contradictions” of a capitalistic market!
          As you gain from lower interest rates in your debt restructuring, those of us who both own (or pay mortgages)homes and are retired both gain and/lose from the extremely low rates.
          We gain in refinancing; we have gotten crushed by almost zero CD rates; pension funds from labor, local communities and larger ones face possibly unrecoverable legacy costs adding to the national misery.
          There are those who would say, “….why not chase higher rates in ‘the market'”?
          That would be sure financial suicide given the almost predictable final end game with ZIRP, and the QEInfinity.
          QE will have to end eventually, as will, long term unemployment….but, we know that as more people stop looking for meaningful employment, the followed “official” rate (number) will fall as a result. Presto! “Recovering Economy”!

          During his tenure, Mussolini had his black shirted army force fed university intellectuals (and others who opposed him) caster oil…… “purge” their minds (wrong end!)……
          “Globalization” needs a dose of caster oil to purge it’s maniacal dreams of “lifting all boats” financially and ignoring our complete continued ruination of this planet.
          There’s only ONE way this stage play is going to end and “….it ain’t gonna be pretty”!

    2. NotTimothyGeithner

      First, we don’t have a recovery. The rich are getting richer, and in certain communities things are okay because of how trickle down works and the phenomenon of trend. Marginal businesses are shutting down due to commodity prices rising faster than what consumers can pay. This will show up in revenue collections over the summer as localities have to start announcing cutbacks due to budget shortfalls.

      People will duck out on property bills. Sales tax collections won’t come in the way they expected.

      Not to mention, a number of industries such as life insurance can’t sustain their business model with negative rates. Bernanke has to make a decision which is to end the party of see localities and insurers fail which will lead to the banks also failing.

      Barack Obama wasn’t in a place to beat Hillary Clinton as early as 2007 because the economy was booming or the Clinton economy worked for many Democratic-type voters. People wanted wholesale change from the height of the housing market because it wasn’t working then.

    3. Jerry Denim

      Where do you live if you don’t mind me asking? I’m not in the real estate market so I hear a lot of conflicting reports from different parts of the country.

      I found myself surrounded by a bunch of mortgage industry people on vacation in Los Cabos last month and they were giddy about the return of the easy credit boom days of the mid 2000’s. There were a lot of boasts to the effect that they had made a killing when the market was going up, they had just finished making a killing when the market was going down on Re-Fi’s and now they were preparing to make a killing again on a wash-rinse-repeat cycle as they all spoke with mirth about a massive relaxation of credit standards and rapidly rising home prices.

      The whole lot of them were trashy, drunk, loud and obnoxious. They were terrorizing the families by the pool with their language and behavior, and there were lot’s of self congratulatory “we’re the smartest people in the world”, tons of disdain and zero sympathy for their former customers who felt wronged by the industry when they woke up deep underwater in ridiculously overpriced houses . Absolutely disgusting bunch of people. Makes you want to believe that there is a hell somewhere for certain types.

      1. Malmo

        I live in Chicago’s western suburbs. My mortgage broker is a friend of a friend. He is a VP for a top five mortgage originator. Of course they fund their own loans. Underwriting standards are extremely tough. Most of this paper is bought by the GSE’s and the originators follow protocols much more stringent than the bubble years. Claiming we are back to the corrupt practices of the bubble years is simply false.

        1. Yalt

          Here’s a firm that’s brought out what they call a “traditional subprime” wholesale program but it’s only available in a few western and southwestern states (including California and Arizona, of course). They’ve also brought back stated-income loans.

          It’s a long way from the Countrywide neg-am days but it’s just the first step in a long process. After all, they don’t need to relax credit standards until this batch is about to default.

          1. Malmo

            Are they servicing these loans too? It’s one thing to advertise as a hook. It’s a whole other matter to deliver the goods.

          2. Yalt

            They wouldn’t be writing them if they didn’t have buyers. Originators aren’t in the habit of putting out rate sheets for loans they can’t sell.

          3. Malmo

            True, but the buyers are largely Fannie nad Freddie so the standards aren’t exactly lax.

          4. Yalt

            It turns out they’re putting these loans into their own mortgage fund and selling shares of that fund to the public. (I have no idea who, if anyone, they’re using for servicing but that’s a red herring anyway. The problem was never finding a servicer, the problem was lack of investment interest.)

            I got a chuckle out of the bios for the fund’s principals. See if you can guess what’s been left out here, in between the two paragraphs (left out by the bio writer, I mean–I’m copying it intact).

            In 1998, Mr. O’Shaughnessy established his own company, Bankers Express Mortgage, with the vision of running a smaller subprime shop that put profit above production numbers. For 9 years, the entire span of its existence, Bankers Express Mortgage never had a quarter that did not post a profit. In June 2007, Mr. O’Shaughnessy sold his company to Quality Home Loans, his largest competitor, and joined the combined entity as its Chief Operating Officer.

            Subsequently, Mr. O’Shaughnessy was involved in the sale of the combined company to Michael Klein, a successful entrepreneur and the manager of Pacificor, LLC, a $600M hedge fund. After the change of guard, Mr. O’Shaughnessy helped QHL successfully securitize a pool of $167 million of mortgages.


            Figure it out?

            In August 2007 the combined entity filed for Chapter 11. (The sale to a vulture fund was the giveaway.)

            36 successive quarters of profit, followed immediately by Chapter 11. There are legitimate, sort of, accounting and business reasons that this isn’t even uncommon.

            No matter how many times their firms file for bankruptcy, the guys that run these subprime shops just get richer and richer. And sooner or later they will all be back in business.

    4. MyLessThanPrimeBeef

      The recovery is fragile because it’s a fake recovery.

      In a real recovery, there will be many more workers (here, not abroad) working more hours making a lot more money, instead of relying on borrowing to make up of stagnant wages.

      1. Malmo

        Fake recovery? Not for me. And I’m not implying mine has been perfect either. But it’s preferable to the catastrophic alternative we were up against.

        1. Carla

          It’s a fake recovery because whatever few jobs that are available are crap jobs that pay less than a living wage, and even at that, they’re for less than 30 hours a week so the exploiters (oh, I meant employers) don’t have to pay for Obamacare.

          Individuals and families are being utterly destroyed by the millions. It’s hard for me to be glad that you got yours, Malmo. I’m trying, but it’s really a stretch.

      2. Banger

        Technically, however you look at it it is a “recovery” — however, it is a recovery, as is often said here, for a very different sort of economy. The new normal is what we see no, sluggish job growth the hardening of economic classes.

        1. Lambert Strether

          And a decreasing standard of living, and decreasing life expectancy. (The two are not necessarily linked, but they are if you life as the “supply chains” would have you do.

          * * *

          You have nothing to lose but your supply chains!

          1. Malmo

            I’m hanging by a thread. I wish no ill will on anyone. I’m just so sad Obama’s hope and change was a monumental lie.

          2. Banger

            Malmo I think many of us really need to mourn. I knew Obama was a fraud but voted for him because I was so touched by my daughter’s enthusiasm and that of other young people during the campaign–I felt like such a grouch when I tried to say that it appeared his greatest talent was saying nothing at all very articulately.

            The whole thing was an elaborate con and I hand it to the oligarchs–we aren’t dealing with cranky old men here these people are brilliant in how they completely destroyed the Democratic Party left–I mean completely.

          3. Banger

            And, more important than anything more stress and anxiety. We are a nation in deep physical and emotional pain and the f########ing media says nothing! 47% of Americans are suffering from chronic pain and the same amount suffering from stress. 20% of adults suffered from an identifyable mental disease in a 2012 study. This is ridiculous–I’ve lived in other societies and seen dramatic poverty but not the misery I see in this society–of course I’ve avoided war-zones.

          4. Carla

            Malmo, what I said above was based on a misunderstanding of your previous comments.

            I am very sorry that you are hanging by a thread, and many people in my immediate acquaintance are in the same situation.

            So, if there’s a way to help each other, I hope we can find it.

    1. Malmo

      RMM says, “Reductions in interest rates are not stimulative”. Wrong. At least in the micro sense it’s wrong, as my experience proves. Of course low rates by themself do little if borrowing standards are so draconian that no one but speculators benefit. Maybe, outside of my situation, that’s what’s happening all around me–only speculators are benefitting. I don’t believe that’s true, however. Regualr people have benefitted from lower rates, even fixed income folks. Mitchell’s analysis here is too simplitic to be meaningful, especially in a globally driven economy where all the big players are in a devaluing race to the bottom.

        1. Malmo

          Mosler: “The only way a rate cut could add to aggregate demand would be if, in aggregate, the propensities to consume of borrowers was higher than savers. But fed studies have shown the propensities are about the same, and, again, so does the actual empirical evidence of the last several years.”

          True, prehaps in isolation, but given the backdrop of a housing crash I’m afriad this doesn’t hold much water. Like it or not a robust housing market is a major factor in stimulating the economy. The old saw, “as goes housing goes the econmoy” is no less true today. That doesn’t mean strict guidelines shouldn’t be followed to avoid another monster bubble. But given the present circumstances an accomodative policy to tamp down rates isn’t remotely unreasonable, even if it does benefit borrowers at the expense of savers–at least in the short run.

          1. MyLessThanPrimeBeef

            The 99.99% borrowers against the 99.99% savers.

            It’s a zero-sum-game.

            Take what the 0.01% are not spending* and give to the 99.99% who will.

            * spending on dead artists does not count.

          2. MyLessThanPrimeBeef

            The root cause is still too much money owned by the 0.01%, even if the number of borrowers = the number of savers, or any other relationship.

          3. MyLessThanPrimeBeef

            You’re correct.

            We need to address wealth inequality and that will hopefully return the government to the people.

          4. Malmo

            I operate in a paradox. I want what’s best for me and mine under the present circumstances. But I also want what’s best for the common man and woman. There’s an incongruity here that keeps me sleepless sometimes.

          5. Carla

            @Malmo: “I think borrowers outnumber savers in our economy as presently constituted 10 to 1.”

            In a debt-money economy, how could it possibly be otherwise?

        2. Ben Johannson

          Mosler is correct, of course. Lending cannot stimulate aggregate demand unless credit expansion is accelerating faster than the contractionary effect of repaying the loans. Furthermore QE is a tax reducing private sector income flows as the Fed acquires securities paying 1-3% and replacing them with largely useless reserves paying 0.25%. Every penny the Fed “returns” to the Treasury is a penny that would have gone to the non-government sector.

  10. craazyman

    I bet he’s laughing his butt off right now. Sitting in the swivel chair contemplating the misery he can inflict on the gold bugs with an arch of the eyebrow at the words “QE forever” with his hands clasped under his chin. F*ck, what sport! All the leveraged speculators can crawl someplace cold and die, I bet he thinks that. No more rescues! One was enough. Now it’s revenge time. I bet they all thought he’d be there for them, like a neglected girlfriend. Well, she’s had it with you now, no more of your bullsh8t self enfatuation and drama. Now it’s back to the classroom for more indoctrination, pump some gas into the theory and keep it running. Models never fail. Reality is what fails and that’s why you have to stay buff and limber, just to get out of its way. If GLD goes to $100 I’ll buy it again. Maybe this time it works when they find out money is all they have and they better use it.

    1. AbyNormal

      po lill gold’rs…after this last ‘arched eyebrow’ dare me ta go onto their tradin sites an leave an abyism???

      Dare to love yourself
      as if you were a rainbow
      with gold at both ends.
      Aberjhani, The River of Winged Dreams

      bahahahahaaaa i crack myself up

  11. ifthethunderdontgetya™³²®©

    Isn’t everyone happy that the Administration’s (and yes, I’m including the Fed under G.W. Bush and Obama pick Bernanke) economic recovery efforts have been primarily devoted to giving free money to elite financial criminals?

    What could go wrong?

    1. Walter Map

      Except that it’s not ‘free money’. It’s a wealth transfer to the rich from the general population. The 99.9% are paying for it through the nose and will end up paying for it with everything else they’ve got.

      Fed policy has exactly one goal: enrich the wealthy. Since the U.S. economy is shrinking ( this must be accomplished by screwing everybody else. And it must be accomplished. And screw they have.

      As is often noted, Fed policy has done nothing for the economy or unemployment. It’s not supposed to. It should be obvious to even the casual observer that the Fed’s supposed mandate with respect to unemployment is just a cheap con. Unemployment is controlled with propaganda, not economic policy.

      Wealth and power, like water, seek their own level. Unlike water, wealth and power flow uphill, not downhill, and unless the flow is controlled and wealth impounded and diverted by the levees and dams and canals of taxation and worker empowerment it will all run to the top. Which is precisely what it is doing. It’s global economic policy because that’s the policy the obscenely wealthy want.

      The U.S. national debt is pushing $17 trillion. Where do you suppose all that money went? The rich like to blame the poor and the teachers and the firefighters and other union workers, but they obviously don’t have it. So who does?

      1. Massinissa

        Its sort of like Ross Perot’s ‘Giant Sucking Sound’, but this time instead of from Mexico to the USA, its from the Middle Class and the Working Class to the Rentier class…

        Strange that theyre sucking so hard but noone in the mainstream can hear it. Americans are such boiling frogs these days.

  12. RSDallas

    This is all about the banking, insurance and pension industries. The insurance and pension business is a legal Ponzi scheme and they have to be close to insolvency, especially if we have another financial melt down, which is coming. It’s already tearing through Japan and it looks like China is joining the party.

    This also has another side to it and goes back to the decision to bail out Long Term Capital Management and every other company that should have gone bankrupt in 2008 and thereafter. Bernanke, Krugman and our illustrious leaders are going to get a market 101 lesson wherein they finally realize that the market is ultimately in control, debt does matter and that failure is OK for the entire system. Bernanke has successfully ran, but he cannot hide!

  13. Wells Fargo Must Die

    The Fed became nervous about the helium balloon it had attached to the stock market and decided it needed deflating with some talk of ending QE. No doubt it would like to begin withdrawing. However, it would have to give up its peg for the market. It is relearning a lesson it will have to relearn over and over. It cannot peg and withdraw at the same time. The peg is more important so the end of QE will be abandoned. But it has at least talked down the market a little. When we drop below the 1600 peg, a new bit of propaganda will be forthcoming.

  14. profoundlogic

    Quelle Surprise! Mr. “100 Percent” certain is looking more and more human every day.

    We should not be surprised that the Fed is wrong; they are consistently wrong. The transcripts leading up to the initial crisis demonstrate just how clueless they are in terms of the real economy, and how callous they are toward the general population. They live in an intellectual vacuum, where the rarified air only echoes the crying voices of the wealthy establishment.

    Behold! The emperor has no clothes!

  15. b2020

    I believe Hussman is arguing that while the Fed might stop QE, that will not be enough to also raise interest rates, and that the Fed cannot raise interest rates without reverting QE purchases first, or it would wipe out its own balance sheet.

    So the Fed can cease backing itself even further into the corner, but it cannot do anything to get out of it. In other words, the problem with ZIRP was that the Fed had become irrelevant, and QE was a desperate attempt [to pretend] to do something, anything – hence no surprise QE did nothing to solve the problem, and the Fed is still irrelevant.

    1. PrairieRose

      Oooo, another John Hussman fan is lurking here! I’m so jazzed! I think he is brilliant.

  16. Kokuanani

    Yves, more info please.

    Could you please do an article on what exactly happens to all those “toxic assets” [or however else they’re referred to] once they’re removed from the banks’ books via QE? Are they securitized and rolled out to ignorant investors? Are they resold, with a new set of servicers to go after borrowers? Are they hanging on to properties to keep them off the market, but continuing the many evils of this route?

    Why couldn’t the Fed do everyone a favor and refinance this trash, including a substantial bit of cram-down?

    QE is about as transparent as Obama’s other policies.

    1. washunate

      This is where definitions get a little tricky because everything is so opaque and complex, but the issue now isn’t so much existing ‘toxic assets’ (where the public policy problem was that the government paid above market prices -“toxic prices” – and lent money at below market rates to the ‘banks’ themselves). Rather, QE now is the Fed being forced to buy some of the NEW issuance of mortgage-backed securities and treasury securities. (because private actors aren’t stupid enough to continue buying all the GSE and USFG debt at such low interest rates, and USFG isn’t interested in ending the bailouts/corporate welfare of FIRE, national security, healthcare, and tax cuts for the wealthy)

      I highly encourage poking around the Fed balance sheet numbers to explore this some more. It is truly staggering how quickly the balance sheet is expanding. The PDF links look better, but all the data is there in the html, too, if bandwidth is an issue. $3.2 trillion in outright holdings of securities. That’s an increase of $579 billion in one year (22%!). $247 billion increase in treasuries and $344 billion in MBS (and a decrease of $21 billion of other federal agency debt).

      1. washunate

        And by $579 billion, clearly I meant $569 billion.

        You know, a billion here, a billion there, eventually it’s real money…

    2. Yves Smith Post author

      The Fed never bought toxic assets. The most it did was open some lending facilities during the crisis to accept them as collateral for loans to financial firms. All those facilities were shut a long time ago.

      As for its MBS, it bought government guaranteed paper. Bernanke said yesterday they aren’t selling the QE debt. They don’t need to. MBS has about a 5 year duration. They amortize + houses get sold (people move, die, trade up or down) which also leads to extinguishment of mortgages.

      1. Ben Johannson

        What Yves said. Basically it would be a violation of the Fed’s charter to buy junk and knowingly take losses. So the Fed is limited to outright purchasing of high quality securities.

        1. washunate

          I generally agree with both of you technically.

          And yet, the hilarity is that this is all subterfuge. In a market-based economy, prices are not set by government guarantees and direct purchases of assets. There is nothing high quality about MBS and Treasury debt at the prices the Fed is paying. The whole point is to take a loss, to pay higher prices than the market price.

          The loss is the transfer of wealth from the public commons to connected insiders. It can be debated whether the benefits outweigh the costs of such public policy, but it cannot be debated that such policy has zero costs.

  17. Yancey Ward

    What Bernanke did yesterday was like telling a heroin addict that you will supply him product unless he goes cold turkey and gets a job.

  18. jonst

    Krugman writes that the nation is a long way from: “….. acceptable employment levels.”

    “Acceptable” to who? Krugman? Yves? et al. Sure. “acceptable” to the people making the decisions? Not so sure about that.

    1. Tokai Tuna

      Huge numbers are still out of work, some are posting more regularly to Naked Capitalism. I heard Rick Santelli, who plays a spokesman for the mafia on CNBC, died in Italy of a massive heart attack while on vacation. /snark
      RIP Gandolfni, even though I never watched the show, nor do I admire mother f$%king mobsters in real life.

      1. Tokai Tuna

        Take an aspirin a day if recommended, get a cardiac calcium score also if recommended, lose weight, control blood pressure, lower unhealthy fat intake, reduce salt, more fruits and veggies, take an aspirin a day if recommended, get a cardiac calcium score/echo cardiogram also if recommended, monitor and correct cholesterol, avoid debt.

        1. MB

          Avoid sugar and simple carbs, limit red meat, up the veg, fruit, EVOO. Inflammation can precipitate vascular & plaque instability.

      2. Massinissa

        Yeah, because in real life mobsters usually have more in common with Rubin or Jamie Dimon than with those classic siciliano types of yore.

      3. Sandy Jorgensen

        Santelli needs concrete shoes, but make his much larger than the rest of ours. He epitomizes a snarling disk jockey and while millions were suffering, lil’ shit pulled out the worst of American political advocacy, i.e pure hate for profit. They are still at it, and while the Bernanke is hated intensely by the lil’Eichmans who steal for a living, he attempted to buffer their criminality.

  19. Walter Map

    I’ve already explained why the Fed wants to wind down QE.

    QE ultimately amounts to the transfer of wealth to the financial economy (aka the fake economy) from the real economy. But it’s unsustainable. The real economy is getting liquidated to pay for it. The fake economy no longer supports the real economy: it bleeds it. Bernanke has prescribed bloodletting for a patient that has already lost a lot of blood, and if the Fed continues the patient will bleed to death.

    Economic stimulus is of no help precisely because, sooner or later, all the money flows to the top. Until economic policy is restructured so that money cycles through the real economy, and doesn’t just run off to the fake economy, running a deficit for the sake of ‘stimulus’ can only make the problem worse.

    1. Andrew Watts

      The Federal Reserve allowed this due to the lessons “learned” from the Great Depression. Allowing the banking system to collapse would just be repeating the mistakes of the past. Before the Great Crash of ’29 the banking sector as a whole was only around 40-50% of the United States’ total GDP. In comparison with the present it’s over 100% of GDP.

      To say that monetary policy is inadequate in addressing this problem could be the understatement of the decade. Even in 1932 when the Fed furiously bought bonds through open market operations, credit still declined. It did effectively stop the banks run though. Which is one of the reasons why I’m convinced the Fed is only concerned with preserving the banking system.

      Every other consideration despite past public proclamations to the contrary are moot.

      1. Linus Huber

        We have not yet arrived at the end of the story and it is too early to call the actions of the Fed a success except we accept kicking the can to be considered as success.

  20. kevinearick

    So, the demographic event horizons have been re-timed to cascading deceleration, and rates are turning…and the artificial borders are boiling steam….

    All you really need to do is issue vibrators to the majority, which will never understand parenting, and let it grant itself the authority to tax its future generations…

    Cream rises to the top, every time…black holes serve a purpose.

    Exactly what qualifications are required to watch a machine run on automatic?

    Of course, there is always an observation prism from which to throw in wrenches.

    You have demographic deceleration on one side of the fulcrum and rates on the other.

  21. MyLessThanPrimeBeef

    Not one shot.

    There was a second shooter – it’s called reality.

    Reality about real unemployment, real core inflation, real lack of growth.

    You might laugh it off as another conspiracy theory, but there is no denying the second shot.

    1. Massinissa

      About growth though, would growth even help at this point? And if so is it even possible?

      The American economy is too obese to ‘grow’ at this point, and any growth that is possible will be from further exploiting natural resources and labor.

  22. rich

    Alas, My “Foreign Affairs” Review of Alan Blinder’s Superb “After the Music Stopped” is a “Premium Article”

    Despite its many virtues, however, the book paints an overly optimistic portrait of the state of the U.S. economy. “More than four years after Lehman Brothers went under,” Blinder writes, “policy makers are still nursing a frail economy back to health.” But the U.S. economy is worse than “frail,” and there are few signs that it is being nursed “back to health.” Most economists claim at least one silver lining in the economic downturn: that it was not as bad as the Great Depression. Up until recently, I agreed; I even took to calling the episode “the Lesser Depression.” I now suspect that I was wrong. Compare the ongoing crisis to the Great Depression, and there is hardly anything “lesser” about it. The European economy today stands in a worse position compared to 2007 than it did in 1935 compared to 1929, when the Great Depression began. And it looks as if the U.S. economy, when all is said and done, will have faced certainly one lost decade, and perhaps even two.
    The U.S. economy has enjoyed a recovery only in the sense that conditions have not gotten worse.

    1. MyLessThanPrimeBeef

      ‘A lost decade…or two’ – that’s only if you travel second class in life.

      For the 0.01%, it’s the Roaring Teens.

    2. MyLessThanPrimeBeef

      By the way, it’s easy to make the conditions ‘not worse’ – it’s all about rigging the definitions.

    1. Massinissa

      Oh, youre so mean to Helicopter Ben!

      Im sure he also knows the 1890s!

      See, he knows two decades! Hes a total GENIUS!

      /snark off

  23. scraping_by

    You know, if the Ben was a Congresscritter, I’d say he was running up a reform flag to start the soft money flowing in.

    When Barry and the Congress started their political Kabuki about single payer medicine, the medicine industry responded with I think around five billion dollars. Even back when Mrs. Big Dog did her socialized medicine head fake at the beginning of Bubba’s first term, billions of dollars flowed to anyone with a vote.

    The financial industry? Too well known to recount. The reform bill brought in billions, both to Barry and the D’s and R’s.

    Gas mileage standards? Water quality standards? In a town where you say hello with a long white envelope filled with hundred dollar bills, talk of using government for the good of the governed will fatten those envelopes measurably.

    Threatening TPTB with government action often works as an invitation to start the money shower. And the Ben is going to be looking for a job soon. Might as well be a decently paid job, not the piddly ten million a year Rubin got.

    1. Lambert Strether

      I don’t recall “Barry” or Congress doing a single payer headfake. Single payer bills were introduced in both houses of Congress, but the Democratic leadership opposed them, and the career “progressives” made sure they never got a hearing in the media they controlled.

  24. VietnamVet

    If Japan never got out of the doldrums, it’s hard to see how the USA and EU will either.

    Even on this web site, there is a huge amount of cognitive dissidence that the government still cares about the public interest. It doesn’t. Financial gamblers and war profiteers have seized control of the USA federal government. Thanks to the surveillance state and propaganda, three outcomes are assured; failure to wipe out all the bad bets in the Elite’s portfolios, high unemployment, and endless wars.

    1. MyLessThanPrimeBeef

      After seizing control of the government, it’s claimed that it is a SOVEREIGN, free to spend as much as it likes.

  25. kris

    The whole article is based on an erroneous setting:
    Fed is independent.

    Fed is not independent and has never been independent.
    If you guys didn’t notice, Obama fired Benny on TV at Charlie Rose.
    White House rules right now and politicians have taken over decision making, not the Fed.

    QE was never ever an economic decision. QE was purely and simply a political decision.

    1. Yves Smith Post author

      No, I had heard privately from VERY good sources six weeks or so ago that BB was leaving, this based on definitive knowledge of where he going to be after he exits the Fed. I’ve been sworn to secrecy on the specifics, but the source is in a position to know.

      So Obama most assuredly did not “fire” Bernanke.

      1. kris

        Oh, I do not doubt at all that what you’re told is correct.

        However, the intent of the interview was to show that White House rules and that has been the case at least since Nixon times.

        The Fed is simply an adviser and executor, but not decision maker.

  26. readerOfTeaLeaves

    We have political dysfunction.
    The strange economics are a symptom.

    Easy to be in a tizzy about Bernanke, but isn’t the US supposed to have a functioning Congress, let alone a judicial system that hasn’t been brainwashed by B-school symposia?

    Bernanke will get much blame that rightly should be aimed at the Congress, and focused on outdated tax laws that continue to cater to capital, at the expense of all else. Capital is important, but it’s not the only factor of economic activity.

    1. Banger

      You make a good point–the problem is Congress and general political corruption throughout Washington–I include the bureaucracy, the WH, the mainstream media, the lobbyists, the fixers and bag men and the other usual suspects.

      Washington can do nothing anymore–it is utterly broken. The chief cause of that brokenness is the mainstream media–they have, increasingly, presented a view of reality that is hopelessly out of touch with reality in every sphere. We need to organize a boycott of all of the mainstream media whether it’s Fox, MSNBC, NPR or Comedy Central.

  27. Conscience of a Conservative

    I’m hoping the recent talk is driven by concern the Fed that it’s both painted itself in a hole and is creating future asset bubbles. Q.E. cannot go on forever. It’s already gone on too long. Recent market turbulence is akin to children throwing a tantrum when faced witht the possibility their holoween candy may be taken away. We can’t take every down day even one like today all that seriously. The stock market is not the economy.

    That said, I doubt the Fed ends Q.E. anytime soon. Besides throwing out dates like 2014, Bernanke also threw out lots of conditions and metrics and allowed for a change should he decide market conditions warrant.

    So while we know Q.E. ends some day, and may give Bernanke credit for prepping the market for an eventual tapering/cessation, it may not even occur by 2014. And an unwinding of all those positions? When one considers the effect on the Fed’s balance sheet and the public relations fiasco of a perceived loss/draw down on the Treasury, the likelyhood of unwinding is very small. Best we can hope for is an ending of new asset purchases and a normalization of Fed Funds..

  28. Fiver

    I totally disagree with the premise of the this piece with respect to any argument put forward that would support Bernanke either continuing asset purchases OR keeping the interest rate this low for even so much as another month.

    The mechanism used by the Fed ensures only banks and Wall Street speculators gain – any “boost” to the economy is temporary and illusory.

    It is the Fed and Treasury which created the dynamic whereby Wall Street chases yield and lowers lending standards to pull demand forward, then foots the bill for all the losses when the bloated assets exhale and all the bad loans surface.

    If the Fed had as its first interest to actually help the economy, it would create a new process that byp-passes major banks (and other big players) completely, putting money directly into approved self-sustaining productive activities – once banks have been cut out of this racket, they will start to behave like banks again, with no unlimited backstop and serious sanctions first from the Fed, then other agencies should senior officers ever again pull the sorts of stunts they are this minute, on their/our way to another meltdown in late 2014, 2015 or even longer.

    Bernanke should got out now, but of course Obama wants him to stay, as he is terrified of having an even worse mess dumped in his lap. Reason 555 to judge Obama an utter fool.

    1. Conscience of a Conservative

      Most likely successor to Bernanke is Yellen. It’s unlikely a change at the Fed from Bernanke to Yellen would mean any change in policy. I’m also still disturbed that Bernanke claims low inflation is bad for the economy. The dual mandate of the Fed means they are contiunually conflicted. Long term stable prices are the best path to a health economy. I also fundamentally reject the notion that lower prices which means increased purchasing power is a bad thing.

  29. Linus Huber

    “It’s hard to believe; having already shown itself inclined to start snatching away the punch bowl before the party even starts, it has arguably already given away the game…” Krugman

    “Before the party really starts”???? Can anyone take this economist that smells more like a political activist serious? Quoting him is definitely a turn-off.

    The serious distortions in the economy that are more and more institutionalised by this monetary policies seem non-existent to a number of economists who simply rely on aggregate this and aggregate that without having the slightest idea that, based on the longterm effects the past inflationary monetary policy, we arrived exactly where we find ourselves today.

  30. Banger

    I just want to echo that the Fed may be flying a little blind. This economy is very new and unlike all past ones at least in my memory. Basing anything on the official unemployment rate is not just wrong it is utter folly. But whatever BB is doing it is confusing to me and, it seems the markets as well.

  31. Conscience of a Conservative

    Fed conditions for withdrawal came with so many strings attached , an earliest date of 2014 and room for an about face that it’s quite likely to occur later not earlier.

    As far as today is oncerned, this is nothing more than the market throwing a tantrum, hoping Bernanke blinks.

    While I agree Bernanke has painted himself somewhat in a corner, i’m hoping he’s trying to waken the market up to the fact that Q.E. must end some day and that he’s becoming mindful of creating future bubbles and distortions. Economy is clearly not red-line and not in need of subsidized interest rates. That said, I doubt we’ll ever see the Fed unwind all those purchsed MBS and treasuries and face the possibility of losses on its book.

    1. F. Beard

      Who cares about Fed losses? Does the fact that the Fed uses a balance sheet fool you into thinking it is morally legitimate instead of what it truly is? The counterfeiter-in-chief for the so-called “creditworthy?” When actual losses affect the Fed NOT ONE SHRED, will you face the truth then?

  32. F. Beard

    Look at a balance sheet. Both Liabilities and Equity are on the same side. This means, if one thinks about it a bit, that money can be created as “shares”, not just as debt.

    So it’s really true, all you really need to know you learned in kindergarden but apparently rejected as impractical.

    Well, now it’s reaping time. Enjoying your usury for stolen purchasing power money system? Or shall we give it another 300 years to work out the bugs? Think God is that patient?

      1. F. Beard

        Your choice, I imagine. I suggest it be an informed one though. Contrary to popular belief, the Bible has little to say about homosexuality and a LOT to say about social justice.

        Whatever happened to Gaia?
        Can it be she’s not?
        Or did she leave the kitchen?
        Cause it got too hot?

        I never believed in Gaia
        But she kept the pagans quiet.
        Now a little heat (or cold!)
        and they nearly riot!

      2. Richard Kline

        Gods. Most of human history had the right idea, it’s monotypes who’ve went nuts. And Gaia’s gone off with Ge to start a better world on the other side of the sun . . . .

        1. Mansoor H. Khan


          The universe is about number of Gods (Worldviews) going to one god (one worldview). Kind of like how it is in science. The most useful idea (e.g., Newtonian Physics, or the Hindu numbering system) becomes victorious over time because it is the most useful.

          Everything approaches ONE as time moves forward as knowledge spreads globally and ideas (worldviews) are tested and retested again and again taking hundreds or even thousands of years.

          It is not about survival of the fittest race (tribe)but about the fittest worldview/outlook on life/understanding of reality.

          Mansoor H. Khan

  33. Hugh

    Markets have been mainlining ZIRP and QE for so long that the mere suggestion that either might be cut back even in some indefinite time in the future (the cut off dates always get pushed back) is enough to cause them to dive. Why?

    Because there has been no recovery for the 99%. The recession never went away for us, and it could be argued it has gotten worse for many of us.

    A good rule of thumb is to add 5% to the official unemployment rate to get an idea of where the real rate is at. We know we have an unemployment crisis. The official 7.6% rate however does not reflect either that there is a crisis or its gravity.

    I have not yet found a good way of quantifying it, but there is also the issue of the shitification of American jobs. A person working 1 hour at minimum wage in a month is counted the same as the CEO who makes a couple million in the same time period. Most of the jobs created in the last several years are of the low wage/no benefit hamburger flipping kind. They may lower the unemployment rate but they are an integral ongoing part of the jobs crisis. You can not fashion or expect to fashion a recovery out of them.

    Along with the unemployment and jobs crises, there are the drags of sequestration and austerity policies as well as ongoing crises in general debt, student debt, and the housing/foreclosure mess.

    And finally we have to remember that we live in a kleptocracy. The Fed is an important mechanism in the looting. Bernanke is not out to fix anything. What we are seeing being played out is a psycho-drama among various factions of looters about how they are going to divvy up the loot and what comes next.

    1. Dan Kervick

      That’s the way I feel too. Most of the financial sector exists to hoover the last remaining drops of lifeblood out of a dying economy. The whole racket floats on vapors of confidence, and QE is one of the vapor machines. I doubt 1 in 10 marketeers could give you a coherent explanation of what QE is and how it works. All they believe is that there is something called “QE” that is supposedly giving some kind of mysterious handjob to the markets to keep the blood flowing, and that if Bernanke “tapers” it, the blood will cool.

  34. tiebie66

    “Frankly, the real issue seems to be that the Fed has gotten itchy about ending QE.”

    I concur, but I wonder if it is not in response to stress signals emanating from abroad (most notably from Japan with its implementation of drastic economic policies) rather than in response to ‘improved’ local conditions.

    We have been much focused on the beneficial effects of QE, but what are the types of local and global collateral damage generated by these policies and how long can they be borne without generating more serious structural problems?

  35. MB

    I don’t think it’s “confusion”. I think the relentless media pressure singing the praises about how “good” things are, i.e., drinking it’s own kool-aid, has had an effect. The drum-beat, the potential interest returns ahead for the wealth are simply irresistible. The media is doing the daily bidding. The disconnect with the average person is huge. They have “NO IDEA, NO IDEA’, what this is going to do to the average guy…another wave of washout, just waiting to occur. They’re just out of game and need to rotate again. With Bernanke and unlimited Fed, they are just tired of it and know they can’t defend any rationale to keep on churning.

    The lack of any meaningful oversight and regulation (Dodd Frank, in all of it’s glory, still being written by lobbyists) puts the stamp on the lack of consumer participation. Like cornered animals, knowing you’re going to get maimed/slaughtered, again, either way, leaves people paralyzed and holding their breath. They know it’s coming, one way or the other.

    Just view the 6/20/13 bit on the Mad Money carnival ride with Cramer’s shock, shock I tell you, about the 2 second Michigan/Thomson advance release of data to HFT funds and other hitters. The banks and whoever thought they were first tier, thought they had the lock(!), but alas, there are multi tiers of payoff! (oh, all legal, right?) So along with all the other myriad of scandals, rigs and scams, (where we were all to be forced into stocks), should the average person invest? Perhaps an artificial housing bubble where so much shadow inventory is STILL being held back, with the illusion of rising prices?

    The truth is, the low mortgage rate support should only be supplied via a lending entity, but Fannie and Freddie lost their respectability thru mortgage crisis. There should have been and should be be a resolution trust a la 1980s, that disposes the homes to small investors/homeowners (US citizens, not foreign money). That would give meaningful price relief to the consumer.

    1. MB

      * A resolution trust to pre-qualified borrowers, with very low interest lending in place and allowed to apply to the sale.

Comments are closed.