The BIS Loses Its Mind, Advocates Kicking Citizens and the Bond Markets Even Harder

If anyone doubted that Ben Benanke’s “we’re convinced the economy is getting better, so take your lumps” press conference after the FOMC statement last week was awfully reminiscent of 1937, the newly-released Bank of International Settlements annual report is tantamount to a kick to the groin. And to change metaphors, if the Fed’s sudden hawkish posture is playing Russian roulette with the real economy, the BIS just voted loudly for putting a couple more bullets in the cylinder.

Investors took the news badly, with 10 year Treasury yields rising from 2.18% before the FOMC statement to 2.53% at the end of Friday. And the selloff continues, with the 10-year yield as up to 2.62% as of this writing.

Some commentators thought the Fed talk was misread, pointing to the various thresholds and triggers the central bank set for for commencing its QE exit and they actually weren’t so terrible. Others refused to believe Bernanke was serious, with Marc Faber saying that bonds, stocks, and equities were “very oversold” and arguing, “We are going to go with the Fed to QE99.”

Unfortunately, the worry warts are looking to have the more accurate reading. Tim Duy zeroed in on a key bit of information, namely, St. Louis Fed James Bullard’s speech on Friday, on his dissent from the FOMC’s vote (Bullard thinks low and falling inflation means the economy is weaker than his colleagues believe). This was Duy’s takeaway:

Why would the Fed lay out a plan to withdraw accommodation – which in and of itself is a withdrawal of accommodation – at a meeting when forecasts were downgraded? Because, as a group, policymakers are no longer comfortable with asset purchases and want to draw the program to a close as soon as possible. And that means downplaying soft data and hanging policy on whatever good data comes in the door. In this case, that means the improvement in the unemployment rate forecast. Just for good measure, let’s add on a new policy trigger, a 7% unemployment rate. In my opinion, it is not a coincidence that they picked a trigger variable where their forecasts have been most accurate or even too pessimistic. They loaded the dice in their favor….

I think market participants clearly heard Bernanke. After weeks of being soothed by analysts saying that the data was key, that low inflation would stay the Fed’s hand, Bernanke laid out clear as day a plan for ending quantitative easing by the middle of next year. Market participants then concluded exactly what Bullard concluded: It’s the date, not the data.

That’s been my reading as well. Something is driving a new-found eagerness to get QE over. Could it be the mid-term elections, that they believe their own PR (that the economy really really is gonna lift off once that little sequester bump is over) and they want any market adjustment (which they also view as temporary) to be over before the fall election? Remember, the Fed was very much criticized for easing on the late side in 1992. Bush senior believed it cost him the election. Yanis Varoufakis presents another theory from one of his correesondents:

What had happened was that interbank lending rates were rising in China. Unlike other credit crunches (e.g. that in Italy now), this particular credit crunch was effected by the Chinese government for the purpose of pricking the gigantic speculative bubble in China before it inflates further with devastating potential. This same bubble is intimately linked to the US economy: both US finance and the midwest mining areas of the US are fully involved. Shortly afterwards Chairman Bernanke started talking about relaxing QE3. If the Chinese government no longer wants to provide unlimited liquidity then the whole burden of sustaining the bubble would fall on the Fed. Mr Bernanke considers this to be far too dangerous and for this reason he may have brought forward the Fed’s exit from QE. In this reading, the Fed’s signal that it is exiting QE has nothingto do with the actual health of the US economy and everything to do with China’s economic situation and government intentions.

I’m not endorsing that view, but it does seem as if something is driving the Fed’s sense of urgency, and what that something is is not readily apparent. Remember that another lesson that the central bank supposedly was well aware of, indeed, this was the practice Greenspan and Bernanke both appeared to adhere to, was that of signaling intentions to tighten interest rates well in advance. When the markets reacted badly to the “t” word, the Fed not only failed to make reassuring noises, but also, in the mind of the market, moved the timetable up.

Now before you say, “This is no big deal, QE didn’t do much for the real economy” bear in mind what it was intended to do: to goose asset prices to help growth. The immediate object was to repair bank balance sheets. By making bond prices higher, they not only made equity levels looked better, but that operation also enabled banks to sell equity, something that would have been impossible if they looked feeble.

Now who gets whacked the hardest when bond prices go down fast? Banks and securities dealers (who are pretty much all banks these days). Banks are structurally long. Derivatives markets aren’t deep enough for them to get net short (and have the bet actually pay off). The best they can do to minimize damage is reduce their inventories, particularly of the long and medium term bonds (yes, and do as much hedging as possible, but that’s only a partial remedy). So Bernanke’s apparent renouncement of the “give banks plenty of warning so they can get out of the way” practice is a great big test of whether the banks are really as healthy as all the regulators have been insisting they are.

Now remember that Treasuries are also the foundation for valuation of all other securities. So hitting the Treasury market hard hits all other financial instruments because it raises the risk-free return rate. As Ambrose Evans-Pritchard points out:

The Swiss-based institution said losses on US Treasury securities alone will reach $1 trillion if average yields rise by 300 basis points, with even greater damage in a string of other countries. The loss could range from 15pc to 35pc of GDP in France, Italy, Japan, and the UK. “Such a big upward move can happen relatively fast,” said the BIS in its annual report, citing the 1994 bond crash.

The BIS poured more gas on the bond bears’ fire. The word most commonly used in polite circles to describe it is “remarkable,” and not in an approving way. From Ryan Avent at the Economist:

The annual report is a remarkable document, one which might well come to serve as the epitaph for an era of central banking spanning the Volcker disinflation and the Great Recession—the epoch of the central banker as oracle, guru, maestro. If the end of this era is upon us, we can credit a series of revelations: that central bankers learned the lessons of economic history less well than they’d thought, that they displayed an unfortunate tendency to set aside economic rigour in favour of an obsessive focus on price stability, and (perhaps most importantly) that they are in more need of democratic accountability than is often assumed. Above all, the report captures what may be the most critical error of the modern central banker: eschewing a focus on his proper domain—demand stabilisation—in favour of an arena in which he has no business sticking his nose—the economy’s supply side.

The article is a full-on shellacking of the BIS’s policy whining. For instance, it takes on the BIS’s call for more “fiscal consolidation” which is Troika-speak for austerity:

Something something fiscal policy. Central bankers have strong views on what governments ought to be doing with their budgets, many of which make most sense when given the least scrutiny. The BIS knows what it wants to say: that fiscal consolidation is almost universally necessary and the only real question is how to pursue it. Picking a path toward this argument that doesn’t immediately cave in under the weight of self-contradiction proves to be a difficult task.

The BIS fails to wrestle with the fact that borrowing costs for sovereigns without central banks have risen while those elsewhere have not; it finds itself relying on discredited ratings agencies for assessments of non-euro-zone sovereign creditworthiness rather than market prices. The BIS also dances around a parallel, uncomfortable fact: that austerity within the euro-zone has often enough been associated with falling market confidence and not the other way around. In other words, where markets are least frightened of sovereigns austerity is most easily tolerated, precisely because central banks are free to pick up the slack. And where markets are most reluctant to lend, austerity is almost entirely self-defeating thanks to the absence of a flexible central bank.

Evans-Pritchard is also gobsmacked by the report’s recommendation:

The call for double-barrelled fiscal and monetary contraction is remarkable, challenging the widely-held view that easy money is crucial to smooth the way for budget cuts and deep reform.

And Evans-Pritchard also points out that history shows that exiting extraordinary monetary measures on the late side isn’t the big deal that inflationistas have made it out to be:

Scott Sumner from Bentley University said the BIS is wrong to argue that delaying exit from QE and zero rates is itself dangerous. The historical record from the US in 1937, Japan in 2000, and other cases, is that acting too soon can lead to a serious economic relapse. When the US did delay in 1951, the damage was minor and easily contained.

And Frances Coppola stresses that the idea that QE caused inflation was a myth:

There is zero chance of domestically-generated inflation while wages are falling, contractionary fiscal policy is depressing real incomes, banks are not lending and corporates are failing to invest. Externally-driven inflation is possible, and we are of course seeing inflation in asset prices as a consequence of QE. But the core trend is disinflation in developed countries – I hesitate to say “deflation”, since inflation is still above zero, but core inflation is on a downwards trend in nearly all developed countries.

Now the wee problem is the super clumsy execution of whatever the Fed intended to do, compounded by the BIS hissy fit in the form of its annual report, means we are not only going to have some serious damage in the bond market. We’ve already seen 30 year mortgages go from under 3.50% as of March to 4.24%, and we’re probably not close to done with this “adjustment”. Pimco’s normally sober Mohamed El-Erian also warns to brace for a wild ride in the Financial Times:

3. Considerable disconnects between asset prices and more sluggish fundamentals make this phase particularly volatile and disorderly. Remember, central banks saw artificially-elevated asset prices as a MEANS to meet their growth, job and inflation objectives. But herd behavior among market participants ended up pricing this as an END itself, inserting an even bigger wedge between valuations and fundamentals.

4. Judging from Chairman Bernanke’s remarks, the Fed is confident that improving fundamentals will overcome current turbulence and validate high prices. With others less sanguine about economic prospects, prices are now converging down to fundamentals rather than the other way around.

Translation: odds favor all sorts of assets being repriced downward. And what do you think that is going to do for the confidence fairy?

Now Faber is likely right and we’ll see a bounce sometimes, but from what level? The one thing that might change the equation is that the Fed thinks it’s really been misread, and dispatches some key folks to give reassuring speeches this week. But remember, the Fed has never cared that much about the real economy, despite its gestures in that direction. The very fact that Board of Governors member Sarah Bloom Raskin had to visit a job fair before she understood how desperate unemployment conditions are speaks volumes as to how out of touch the central bank is.

While Tim Duy concluded that economic data has to be “pretty bad” to persuade the Fed not to taper, it might be even worse than that, that it will take signs of stress in financial markets or financial institutions to get them to relent. So brace yourself for a rough ride.

Print Friendly, PDF & Email


  1. 4D

    Putting all the comments from Fed officials, the BIS and BOE’s Andy Haldane into context, along with the PBOC tough stance, it is clear that central banks have grown very nervous of being perceived as perpetual put writers for the private sector. It’s lasted 30 years, and they know there can be no more.

    You don’t mention that it also all coincided with the BOJ going all in, so the others were probably betting BOJ QE was enough liquidity to keep prices bubbling.

    As Haldane said they “deliberately burst the bond bubble”. They probably will step in if necessary, but this is just adding some two-way risk to markets.

    It is necessary and healthy.

    1. Yves Smith Post author

      No this is not healthy. I was never a fan of QE, but this sort of ham handed exit at this juncture is misguided. Two wrongs, or in this case errors, do not make a right.

      First, as the post pointed out, the historical record is clear. An early end to stimulus creates train wrecks. A bit on the late side end does not.

      Second, no one was gonna let Abenomics go as far as they might like. We were mighty pissed when the yen got to 100. You forget Japan is still a military protectorate of the US. It’s one of the few major economies where we can throw our weight around. And Abenomics was well underway before the Fed pulled this move.

      Third, the Fed did not need to up the ante with raising its acceptable unemployment target as of last week. Even if I buy your logic, which I don’t, the bond market had already made a significant move since Bernanke used the t word. There was no reason to goose that. We were seeing bond yields rising already. Goosing it in fact increases the odd of Something Going Boom in the financial system, which would put the Fed in stop and go mode and ultimately make it even harder to exit.

      The Fed encouraged a lot of people to reach for yield. And that includes retirees who suddenly found safe investments earning squat. So you advocate the Fed pulling the rug out from under them? There is a big difference between a normal tightening cycle, where the Fed moves rates up a quarter point a time over a long period of time, giving investors a lot of time to rearrange their portfolios if they so choose, and moving rates by hundreds of basis points in mere months, which is what they appear to have set in motion.

      1. killben


        “I was never a fan of QE, but this sort of ham handed exit at this juncture is misguided.”

        Why do you think exiting now is wrong? When do you think we should exit? What do you think would have happened had the Fed used the t word in 2014? Why do you think that if Fed had made the done this in 2014 or 2015 there would be no “Something Going Boom in the financial system”

        It looks like using the t word at any time would bring up the same hissy fit. The financial system has just used to the “QE drug”. So withdrawal at any time would have symptons which actually gets stronger with time.

        1. The Rage

          QE is irrevelant. All it does is move bonds around the yield curve. Notice the amount of US securities held by the FED historically……..has just moved back to where it was pre-crisis.

          The MBS purchases may have helped push down some mortgage debt. Those bonds can be retired eventually leaving the “sheet”.

          The economy is clearly getting better. Government data lags are quite noticeable.

        2. Malmo

          She told you why it is wrong, and she is correct. Read her expalnation above. I’ll add that if the Fed doesn’t act to stop this soon then, if possible, it is worse than sadistic.

          1. killben


            When would it be a good time to end QE? Since we cannot predict the future what happens if that good time is not really good. Do you seriously think Fed can end QE without any pain?

            My point is whenever you taper this is the problem. There is no best time to do it. The best time was in the Past. Now that Fed had meddled and muddied the waters so much, extricating comes at a price.

            So if you are saying this is not time, please tell when and how also.

          2. kgasmart

            @kilben, that’s right. The uncomfortable reality is that there is never going to be a “good” time to end QE, if you look at the BIS report it’s clear they believe that markets have indeed become addicted to this “drug,” and that’s absolutely correct. I agree with Yves’ suggestion of gradual tightening, but look at the reaction to the mere **suggestion** that tightening **may** be coming. Do we think ACTUAL tightening wouldn’t produce something far more severe?

            1. Tyler Healey

              Raised interest rates cause an increase in the amount of interest paid by the federal government. Therefore, they constitute a loosening of the money supply, not a tightening.

          3. Malmo


            So raising interest rates will set loose more money into the economy and said monies will trickle down evenly to the 99%? That’s how it works, even in a deflation or disinflation? It’s just that simple? Sorry I don’t buy that.

            1. Tyler Healey

              When interest rates are high, the federal government pays more interest on T-securities, which pumps more money into the economy. Anyone can own a T-security, not just the rich or China.

          4. Malmo

            Yes, but when interest rates are rising in a consumer credit based economy as fragile as is ours there will be less consumer demand because of said rate rise at a micro level. Also, where is the rate sweet spot for this trickle down effect you speak of given the rate rise? 4%? 10%? 20%?

            1. Tyler Healey


              Anyone can own a T-security, so your use of “trickle-down effect” does not apply.

              I’m not sure what the sweet spot for interest rates would be. They never went below 5% in the 1990s.

        3. Can't Help It

          Somewhat agree with killben. When’s a good time to pull the rug out from under a repeat drug addict? Perhaps if enough people hadn’t reached for yield, the govt, etc might have been forced to do something else.

          We all want a good ending for people who deserves it, but a big crisis now may be beneficial for the younger people in the long run.

          1. Malmo

            A big crisis “may be beneficial in the end”? Are you for real? As if the last crisis proved beneficial for the masses. Good god, get a handle on what you are saying. The next crisis will be used to screw us even more.

          2. Moneta

            Get used ot it. Whether we like it or not, there will be crises every few years until we get out of this mess… which is huge. Time will get tough before they get better. Look at corporate profits (page 21) of this Fed report:


            The writing is on the wall. Profits WILL drop in due time. This will lead to a slowdown, if not worse, and what then? They can’t even cut rates this time. Bailouts and QE will come back to kick-start the economy.

            There are too many players with different agendas for things to evolve smoothly.

          3. AbyNormal

            Yves is correct here…the youth have the long run but boomers (larger pop.) don’t. at this point, it’s not about consuming/growing its about surviving and what little the boomers have left can’t afford the hit/smash…and furthermore the youth can’t carry them!
            but with history’s proof, one must ponder what the Fed sees. the hangover of the BOJs last beerfest is painful…could it be wringing out counter-parties? and clearly there was no derivative market of the 30’s like what has kept me stocked in antacids today!
            i got more bad bad feelins.

          4. PaulW

            “Beneficial for YOUNGER people.”

            Good point. All we are doing is keeping the crisis going in order to avoid a blow up now. Yet our generation created this crisis therefore we should take our medicine, not destroy the future for the next generations.

            The question, when do we exit, is a valid one because no one has an exit plan. The longer we wait to exit the bigger the economic collapse. Therefore we wait indefinitely? Too many people are living with the illusion we can put off that day forever. Can we not be mature enough to admit we screwed up totally and now we pay the price? Get it over and done with so younger people can have a chance down the road.

          5. pebird

            That’s right, get used to it. After all, death is inevitable, so don’t fight just enjoy the ride.

          6. Yves Smith Post author


            You’ve bought Mellonite tripe. The neoliberals have indoctrinated you well.

            How do young people lose? By being denied jobs and earning power NOW. Tons of research shows that your level of earnings (and whether you get a job at all) right out of college has a MAJOR impact on lifetime earnings.

            And the way young people lose out is by inheriting a smaller economy on a lower growth path. Economic mismanagement leads to permanent output losses.

            Now there’s an argument re resource limits. I’m prepared to accept arguments re lower (but I’d contend different, we could have a Marshall plan based on converting the economy to lower energy use) but not on economic mismanagement.

          7. Malmo

            Much of this “we need to take our medicine now” clap trap circulating among various NC commenters sounds as if it’s coming straight out of the mouth of Karl Denninger, who happens to be one of the most ill informed, offensive creatures I’ve had the displeasure of hearing/reading. He wants this country to go up in flames, and explains just how he set that in motion spewed by that charlatan. The rhetoric among some here echos the same misguided tripe. I’m all for radical change, but there is no reason why we can’t get there in a thoughtful, incremental and much more pain free way than the totalist madness advocated by the Denninger’s of the world.

          8. Moneta

            The problem with bailouts and smooth QE to infinity to protect the boomers and the young (maybe?) is like stretching a dried up elastic. Our way of life needs to change materially and these money injections stop us from getting the reset.

            Maybe millions of boomers who still have a 100K mortgage on their 2000 square foot homes should be downsizing their lifestyles and not expecting to finish their lives consuming too large a share of global resources and energy.

            The problem is that boomers want to get their services AND keep on consuming an oversized share of global material goods while not working. This is not going to happen without a fight. 7 billion on this planet fighting for what we have been consuming on credit.

            We are going to get shakeouts until the reset has occurred.

          9. Can't Help It

            Hm, much of the argument assumes that young people nowadays want what the previous generation wants i.e. higher economic output, etc. I am no longer young being 30 plus and although I like my field and I am quite well paid, it does not mean that I am enjoying coding 70+ hours a week throughout the whole year.

            So, economic output is lower, but first we need to define what that really means. What if that actually turns out to be what younger people wants? There’s probably no specific American example, but I do know for a fact that many young Japanese people do not envy their parents generation.

          10. Moneta

            And psychologically, let’s look at what the kids are facing…

            After being brough up in a Princess culture where they have been educated to be winners in the top 10%, the job market opportunities are shifting from investment banking to wheelchair pushing.

          11. washunate

            This is a fascinating exchange. I would like to offer the perspective that GDP is not the only indicator of standard of living.

            What would benefit Millennials?

            1. End to the drug war and the two tiered justice system. Right now, a lot of people would benefit simply from not being in prison (or not having their parent/sibling/cousin/etc. in prison). Many more fortunate Millennials who face little risk themsleves of being imprisoned are absolutely incensed that our society engages in such blatant racism and class warfare and destruction of communities.

            2. Universal unemployment insurance. A lot of older workers don’t realize this, but many young people enter periods of unemployment not covered by the wasteful patchwork of state-based employer-provided unemployment insurance.

            3. Rebuild our passenger rail network. A lot of older drivers nostalgic for the muscle car and the open road may not realize this, but a lot of younger people hate cars. Subways and intercity passenger rail would be widely popular, from the ‘liberal’ northeast to flyover country. If memory serves, the three busiest freight rail hubs in the nation are Chicago, Saint Louis, and Kansas City. Plus, trains are more mobile for kids (as driver license requirements have expanded) and senior citizens as eyesight and reflexes make driving, especially night driving, more difficult.

            4. Ending the administrative bloat in healthcare and higher education. It’s absolutely scandalous that there are employees in these supposedly public purpose sectors making high six figure and even seven figure compensation packages.

            5. Mandatory paid time off and higher salary test for FLSA overtime exemption. Millennials, broadly speaking, don’t want toys; they want time to do meaningful things in life. Purpose over Plastic, from personal journeys of exploration to fighting for human rights and saner care of our planet.

            This is of course non exhaustive, but I think it’s helpful to actually spell some things out. None of this has anything to do with QE or interest rates or GDP or S&P 500. It’s all about how we allocate resources within our society, and that means all resources, not just those financial ones captured by GDP and CPI and PCE and so forth.

      2. 4D

        Yves, if markets can’t now handle the simple prospect of tapering a policy with minimal impact how much worse will it be in six months or a year? This is hardly an imminent exit and still tied to the data being in place anyway.

        And while bonds certainly were ticking up as you say, equity markets were well into bubble territory with little prospect of a pullback while QE was to eternity. Every Wall Street punter was calling equities much higher.

        Its not about “advocating pulling the rug” on retirees, but the fact that they were getting sucked into this reach for yield is a clear indication things were getting well out of hand.

        We clearly disagree on this point, and while I am no fan of Bernanke by any stretch of the imagination, I think at least threatening to taper has put a lid on wild speculation for a while, after all its Wall streeters and their ilk driving this irrational mind set to drum up bro and offload their own holdings most of the time.

        I must say I was surpised Bernanke didn’t prevaricate a bit longer, but that makes me think they are really concerned about something. Whether its the soaring failures to deliver in repo, or simply just the global reach for yield I don’t know, but I think there clearly was broad and deep central bank concern about the mounting risks. And for once I agree with them.

        As I wrote here a few weeks back there is mounting negative gamma across all markets. The Fed and BIS et al, know the perpetual Fed put was a risk reversal, and the longer they keep writing puts, let alone putting back to the market, the greater the negative gamma gets.

        1. Malmo

          This is a 100 basis point move in yields in less than two months. That cannot be what Bernanke was aiming for. On the other hand, who knows? Greenspan a fortnight back said raise rates now, the hell with the economy. Looks like to hell with the economy it is. Sorry, but that’s policy hatched out from a sociopaths ass.

          1. 4D

            Sociopaths they may all be, especially the cronies on Wall Street, but the problem is that even the well informed commentariat, like here on NC, are too squeamish to deal with the consequences of bringing them to heal.

            For the record I advocate that from now on all stimulus support from any market fallout should completely bypass financiers and go directly to suport for poor and low income earners. Difficult I know, but its worth pushing for.

      3. jake chase

        Stop whining about the end of QE. All it has done is immiserate savers and encourage leveraged speculation. Do you really think ten year bonds are an investment at 2.58%?

        Maybe the elite will get serious when the financial markets crash. We really have nothing better to hope for.

        1. Yves Smith Post author


          Wake up and smell the coffee.

          Retirees and savers abandoned “safe” holdings, as in money market funds and CDs, in a BIG way under ZIRP.

          They went out on the yield curve. Since retail famously did not buy stocks much in this rally, and then focused on defensive, high yield stocks, it’s pretty likely that what they did do was buy bonds/bond funds or high yield debt.

          Go pull out a bond calculator and see what happens to principal when interest rates rise on a 5 to 10 year bond.

          So you get 3% yields again. What happens to the majority who lose 10% or more of principal due to not being market oriented (the media covers stocks much more than bonds) and not getting the Bernanke memo? Contrary to your claims, they don’t wind up ahead unless they are pretty nimble, and the sudden change in direction increases the odds that they suffer significant PRINCIPAL losses (they are probably gonna take some regardless, the question is how the losses get distributed).

          1. jake chase

            Anybody who ‘moved out on the yield curve’ to capture 2% interest deserves whatever happens to him. You can’t protect him without destroying the value of money saved.

          2. Ramakrishna Shanker

            But Bernanke, the academic, does not seem to have a gut understanding of markets. All he is doing is an analytical exercise of figuring out how many bonds he needs to buy to mirror the Treasury’s funding needs. Unfortunately the markets have a mind of their own – “Feral Hogs” that they are – and are reacting violently to a what Ben thinks is a perfectly reasonable thing to do. Of course , bernanke needs to come to grips with the big lie – he has repeatedly said in congress that he is not monetizing govt deficits – while making precise plans to do exactly that.

      4. Ramakrishna Shanker

        I dont think its all that complicated. The Fed has been monetizing the federal Budget Deficit – end of story. The $85 Bil of bond purchases almost exactly matches the anticipated deficit for FY 2013. If you go to the Treasury Monthly Statement website , you will see that the treasury projects a deficit of about $65Bil/mo ( average) for FY 2014 – which starts in Oct 2013. So, the Fed needs to taper or it will be shrinking the bond market. I really think its that simple.

        1. Ramakrishna Shanker

          Ofcourse , if the economy slows, then the deficit will be larger and Bernanke will not taper. He went to great lengths to make sure his audience heard that. He cant very well admit that all he is doing is monetizing the deficits – because that is the original sin in central banking and his other central bank colleagues may make snide comments at the next Davos shindig, if he were to do so.

          1. washunate

            Yeah, people say that Bernanke isn’t skilled like Greenspan, but it actually seems he’s been quite effective at saying nothing quite verbosely.

            The Fed has to partially fund the federal budget deficit because the President and Congress won’t cut corporate welfare or increase taxes on the rich and private savers/investors don’t want more USFG debt at current prices. But the Fed can’t overfund the budget deficit, either, or they create a shortage of Treasuries and MBS.

            But if Bernanke said that, then instead of these hours long Fed events with plenty of speculation running in all directions, it would be a 30 second presser, and people would have to face the BASIC fact that fiscal policy is controlled by the President and Congress.

            At this point, a Fed chair has three options – stick to the plan, engage in insubordination, or submit resignation.

      5. raghavan

        It is noteworthy that it is international civil servant economists, who have full job security, pension rights, health benefits etc, and tenured professors always lead the fight to make labour markets flexible, and reduce social security benefits. BIS report is no exception and in its citations in support of the Reinhart-Rogof thesis, they have not cited any of the contrarian studies.
        This is class war, of the rich and the one percent against the workers and the poor.

    2. David Lentini

      My understanding of the comments is that the BIS has proclaimed QE to be a failure, and now it’s time to pay the piper à la Andrew Mellon’s infamous advice to Herbert Hoover—Let ’em all burn!

      The point of QE was to give the banks breathing room to repair themselve and enable “transmission” of easy borrowing for the banks to enable the economy to return to growth. After several years of going nowhere other than making the bankers and bond traders rich, the BIS is now playing the scold, arguing that the supports have not worked because the governmnents have not balanced their books to make investment attractive, and the problems in the economy can’t be sovled by banks anyway. So on with the Götterdamerung!

      In short, the BIS—a buch of Swiss bankers—makes it clear that they view economics as identical to banking: It’s all about balanced books and low inflation, any debt is evil; therefore, debtors are just wicked people and must be burned at the stake to saver all our souls. Maybe we should stop thinking about Hayek and start thinking about Mr. Drysdale from The Beverly Hillbillies.

      Of course, I agree with the criticisms of this whole charade. QE might have made some sense in combination with a return to proper regulation, a true restructing of the banks, and a monetary policy to get everyone through this mess. But the idea that the crooked, incompetent banks and markets would right themselves by what is really just a bookkeeping parlor trick was insane from the beginning. (Which is why we should starting thinking of these folks like the farcical Mr. Drysdale.)

      Now, we’re stuck. Since Obama bought into Larry Summers’s stupidity about the stimulus and put his henchman Tim Geitner in charge at Treasury, and reappointed the weak Uncle Ben to the Fed, we lost our window for real reform and sane policy. I don’t see how we’ll get the nedeed reforms and stimulus until after the 2016 election, since Obama is a lame duck now and the Dems won’t touch anything that sounds “inflationary” during the mid-term elections.

      And that’s what I take fro the BIS’s timing. They all know the golbal economcy is failing; they don’t want to believe they caused the mess with their policies. In their world, they can’t ever be wrong, because their gods Hayek and Friedman are never wrong. Instead, they are doubling down. And don’t forget the deeper underlying issue—These people hate democracy, and would like nothing better than to control the world’s governments.

  2. The Rage

    The flight is all foreign. Tells me Japs were busy buying government bonds after then Euro-crisis.

    The FED has little to do with this. I guess score one for Abe?

  3. The Dork of Cork.

    The BIS concentration on labour market flexibility is well…… predictable.
    They already succeeded in extracting the maximum rate of profit for their shareholders & their broader middlemen & servants.
    Via the destruction of the family unit , national & local cultures & all other systems that once gave a measure of protection from these locusts.
    They clearly wish to atomize their slaves even further – but whats making this funny (in a sick fashion) is that any further drives to increase “dynamism” reduces their profits also.
    Imagine – we work for these bastards !!!!!

    PS Yves
    enough with the citizen thingie.
    What gives you that strange idea ?

  4. Moneta

    QE will continue but will not be continuous…

    Expect shakeouts every few years… to generate volatility… that’s the only way the big boys can make big bucks if there is no real growth.

  5. TBV

    “Remember, the Fed was very much criticized for easing on the late side in 1992.”

    WTF are you talking about? Who exactly thought Greenspan was “on the late side” when he began cutting the Funds rate in early 1989, taking it from nearly 10% down to its nadir 3% by late 1992?

    Don’t give your young readers the wrong impression that Greenspan might have exhibited rectitude costing Bush his reelection.

    Way back in October 1990 (perhaps before your time), Pru-Bache chief economist Ed Yardeni used to say: “There are 775 basis points between the federal funds rate and zero” (amended as time passed to: “There are 675 basis points between…,” etc.) — by which he was conveying the commonly held belief that Greenspan would cut rates to zero if necessary to stop asset prices from falling, thus giving rise to a new mantra: “Buy the dips.”

    1. Yves Smith Post author

      Are you old enough to remember the 1990-1991 recession? Evidently not. It was severe by the standards of the day. Citi nearly failed and it wasn’t just S&Ls that were collapsing. A bunch of decent-sized Texas banks did too.

      And Bush DID blame Greenspan cutting rates 6 months later than the Administration wanted to. Greenspan confirms that in his memoir:

      George H.W. Bush, the current president’s father, was very cordial, though Greenspan’s relationship with him was complicated by differing views on monetary policy, he wrote. Bush blamed high interest rates, in part, for his 1992 election loss to Clinton.

      So don’t tell me I have the history here wrong.

  6. Moneta

    zirp can’t go on forever. There is a tug of war and for the next decade we’ll have the printers and the anti-printers gaining ground and losing ground in a see-saw motion.

    Debt-to-GDP ratios needs to be controlled… Either debt stays flat or shrinks while GDP increases. The boomer generation wants the top-line to keep on growing to fund their retirement wishes but they are butting heads with Mother Nature.

  7. R Foreman

    > it does seem as if something is driving the Fed’s sense of urgency

    Heh, yeah all the hot money flows are creating bubbles everywhere so that not even DC insiders can make money in this froth. Deflation and mean reversion are starting to look better all the time. :)

    1. NotTimothyGeithner

      Wal-Mart is the answer. Its not fear of bubbles. Wal-Mart makes money on margins and heavy handed negotiations, but their customer is poorer. Wal-Mart is the largest employer, and in places the center-piece of the community as crummy as they are.

      QE is killing Wal-Mart. Bernanke can ignore little places failing for a while, but Wal-Mart can change the conversation. They own Hillary and much of the Democratic elite as well as being the mecca for low info voters everywhere.

      1. Massinissa

        If QE is killing Walmart, then a sadistic part of me sort of wants QE to continue just for that reason…

        1. NotTimothyGeithner

          Its not Wal-Mart but its customers. If there is no wage inflation, the customers have to choose between rent, food, and whatever shiny objects they buy. Something fails when there is too much wealth inequality in favor of a simpler system.

          Wal-Mart won’t go down without a fight, and Wal-Mart can go into capital hill and demand change because its just huge. Every Republican and Clinton-Democrat loves/fears Wal-Mart.

          Back when healthcare was more of an issue, I saw a comment (it may have even been an original thought) that Aetna cannot both co-exist as unregulated vampires. Something will give, and when they get too big, they become TBTF in their own right creating another systemic risk system.

  8. R Foreman

    > There is zero chance of domestically-generated inflation while wages are falling

    Nah that just means mainstreet starves while bankers bid food futures higher with their Fed handouts. Congress will just vote themselves a pay raise of course.

  9. washunate

    It looks like the markets will have to actually throw a hissy fit. Threats alone may not work this time.

    I can’t help but laugh at this comment:

    “There is zero chance of domestically-generated inflation…we are of course seeing inflation in asset prices as a consequences of QE.”

    Someone square that circle! Anyone claiming that median wages have been driving prices over the past couple decades is obviously hoping the rest of us are stupid.

  10. R Foreman

    > Now Faber is likely right and we’ll see a bounce sometimes, but from what level?

    Well once they’re forced to roll over $16 Trillion of debt at the new higher interest rates, then the money printing tax increases spending cuts will begin in earnest.

    40 years of fiscal mismanagement is coming home in an afternoon. We just need to get back to those long-term means.

    The trick will be keeping the masses alive while the super-wealthy get wiped out. Inequity being what it is, things have gotten quite out of balance.

    1. Susan the other

      Over time careful balancing of the economy has given us a 2% inflation model. I’m wondering about what Ryan said about “demand stabilization” instead of supply side nonsense. We have the model for it. It’s 2% inflation. Why on earth is the BIS injecting a weird edict just after the Fed freaked the world out? Too strange. And the BIS did not specify fiscal policies that supported demand – they did the opposite – they virtually specified austerity. And yes, (D of C), that is the reason for living for the BIS, ie international trade. But even international trade is going to need a certain amount of demand inflation. In fact a lot of it. This could be the equivalent of pre-disastering the course of the economy so no austerity policies are too severe. Strange timing anyway.

      1. Lord Koos

        If anyone thinks that real inflation for ordinary people has been anywhere near 2% for the last few decades, they must be living in a parallel universe that has no gas stations or grocery stores.

    1. Yves Smith Post author

      Japan in 1997 too. They had several major financial firms fail when they cut back on stimulus, Yamaichi (the number three securities firm) plus some long-term credit banks.

  11. wunsacon

    >> There is zero chance of domestically-generated inflation while wages are falling, contractionary fiscal policy is depressing real incomes, banks are not lending and corporates are failing to invest.

    “It’s amazing what you miss when you don’t look.”

    Gas doubled. The downpayment I had for a house halved in value, going from affording a third of a condo to a quarter of a condo. My rent is the highest ever. Package sizes are getting smaller or the price is going up.

    Yep, zero chance of any of that.

    1. wunsacon

      Heh…proof-reading before submitting would be nice. Still, you should get the gist.

  12. E.L. Beck

    “Now before you say, “This is no big deal, QE didn’t do much for the real economy” bear in mind what it was intended to do: to goose asset prices to help growth. The immediate object was to repair bank balance sheets.”

    That’s being far too kind, considering how far beyond repairing balance sheets the TBTF banks traveled.

    On the other hand, the whole question is still open as to how exposed to derivatives the backsides of the TBTF banks remain. Yet considering the billions the banks raked in from their commodity, real estate and equity bets, if such profits can’t cover their positions, then all Bernanke accomplished was to delay the inevitable.

  13. Chauncey Gardiner

    Hmmm… Policy coordination?

    — People’s Bank of China tightening (finally);
    — BIS suddenly publicly calling for QE to end;
    — Bernanke Fed complying with BIS directive?;
    — “Sequester” (Austerity) in the U.S. and continuing “Austerity” in the UK and EU on the fiscal side.

    Wonder who is driving this bus and what their objectives are?… “Do we have a winner here?”…

    Perhaps its to set the table for further “Globalization” (think fiscal consolidation and comprehensive trade and global monetary system agreements that abrogate national sovereignty), while in the meantime enabling those in control to pick up some cream assets on the cheap?

    In the immortal words of former chief of staff and current Chicago mayor Rahm Imanuel, “Never waste a good crisis”. Especially those that are engineered.

    1. NotTimothyGeithner

      This is about inflation and reaction to it. The Egyptian/Middle East protests weren’t set off an elaborate plot of super CIA/NSA/KGB/Chinese Saudocrats. They were set off because food prices spiked. This tend to anger people.

      The Egyptian crisis was the third set of large scale demonstrations in the last decade in the aftermath of food prices spiking. Even Brazil’s problems can be traced to a rapid rise in the cost of living. Turkey too. The park sparked the anger, but costs of living have been on the rise. Central bank liquidity has driven asset prices but not wages. The reductions in liquidity are countries worried about the same problem.

      As far as China goes, I think the Communists (not to be confused with Maoists and Stalinists but believers who aren’t in a cult of personality) might be in ascendancy. They have an ace in the hole because the most popular man in China is a general from the sticks. He isn’t in the leadership, but his career would suggest he has sympathies for the little people as well as the loyalty of his men. I can’t think of his name, but he led the successful earthquake rescues. The Communists may not be concerned with stock prices of Chinese billionaires who have bought homes in Vancouver.

  14. xyzzy

    What is driving the exit from QE might be Bernanke stepping down and Yellen taking over. Look what actions Greenspan did before Bernanke took over.

  15. Paul W

    Yves thanks for replying.

    Neo-liberal indoctrination. Ouch! And I was being so restrained by not mentioning the Quisling economists who litter the left and NC, criticising the economic powers that be on the occasional detail yet supporting the general narrative and offering solutions which they know will never be acted upon. I wouldn’t say I actually believe that, however I’d be lying if I didn’t admit I suspect it.

    I’m more than willing to go along with you guys if you could explain how our current path has a happy ending for future generations. The big problem is the criminal class running the global economy have no interest in doing what is best for everyone. Their continued empowerment means a compromised future for all. Perhaps crashing the system now will not mean getting rid of them, however supporting their system shall never lead to any positive change. Given what they are – and we know what they are – I would have thought it common decency to oppose their every action as a matter of principle.

    Perhaps I’m being harsh. NC is doing the best it can and I appreciate it. There are Chris Hedges in this world and Paul Krugmans. The Hedges drop out of the system completely, stake the moral high ground and work to end the system. The Krugmans pretend to be morally concerned while continuing to support the system because they get their 30 pieces of silver with each paycheque.

  16. Cui Jin Fu

    It seems to be generally accepted that the Fed’s actions are mostly focused on repairing bank balance sheets rather than helping the real economy and their dismal track record over the past few years seems to support that position. It only makes sense that the Fed’s primary concern would be protecting the interests of its owners. I think their recent actions have to be looked at through that lens. It may sound conspiratorial, but what better way is there to buttress shaky bank balance sheets than to deliver them a well-telegraphed market correction that they can leverage to easy profits?

  17. Moneta

    The biggest problem with our economic system is that it is essentially based on hard assets and material goods.. while we are already consuming too large a share on a global basis. This means that to keep on going we need to dupe the rest of the world out of their fair share. But the 6 billion others have seen how we live, thanks to telecom, and they want a piece of it.

    Money creation starts with collateral, hard assets (i.e. infra, real estate, etc.) and then trickles down to services.

    But to get out of this funk, we need money creation to focus on services and NOT on materialism. Something our banking system can not do and only government can. However, governments are hostage to the banking system and can only think in terms of high energy intensive GDP generation.

    To thrive, we need to reduce our materialism but with 7 billion people on this planet and our energy intensive lifestyles, I don’t see this happening anytime soon.

    1. efschumacher

      Moneta: But to get out of this funk, we need money creation to focus on services and NOT on materialism. Something our banking system can not do and only government can.

      Man, I’ve been waiting for a year for anybody to say this. And since there is no good way to pick winners in Services, money creation can be most fruitfully employed by having government directly paying minimum wage to all adults in the economy. Then you either volunteer your time and skills, or sell them to the highest bidder.

      1. Moneta

        The eternal dilemma is that services are unlimited and hard assets scarce. This means that, instinctively, people from both the service and goods economy would focus on accumulating hard assets which would lead to a stranglehold in the hard assets markets.

        This is what is happening right now as Westerners are consuming an unfair share but the rest of the world is pulling to get more. The Western world can not let the rest of world increase its consumption because it needs it for itself… however, it has just gone through a massive material binge where they printed treasuries in exchange for those good.

        Those who produced the goods and those holding the treasuries want to get paid but the Westerners want to default AND keep on consuming.

        1. systemic

          We only need more because our economic system requires constant growth. If we’re not growing, things fall apart. However, infinite growth on a finite planet with finite resources is impossible. People can argue over QE and all this other nonsense all they want but at the end of the day, the only way to fix our problems is to redesign our economic system so that it doesn’t require growth.

  18. allcoppedout

    Interesting analysis from Yves that is difficult to fault on evidence from the text from BIS. Once into these throwing good money after bad situations it is very difficult to stop. It looks, on evidence emerging, that the banks just plucked figures that would suck our governments into bail out from where the sun don’t shine, rather than provide full and honest accounts. This was essentially bait to hook governments into the procession of hole filling we’ve seen for 5 years. It looks a lot like various industrial bail outs we saw in the 60s/70s (e.g. British Leyland and Shipbuilders in the UK). The idea was always that cash injections and restructuring would allow survival in the business cycle and a return to profits. In fact, the underlying business model was changing and the reorganisations had no chance. Organised labour was crushed in the process. Typical Industrial Relations analysis at the time was that a secret class war was taking place.

    The banks have clearly been claiming that money spent in support now (for 5 years) would be buttons in comparison with what would be lost when the good times return and they make their killings on the basis of market share in that future. In industry we predicted what these markets would be and how we would achieve the productivity in our companies to take advantage. Only Germany, as far as I can see, managed this at all well in manufacturing.

    We hear very little from Wall Street and the City on their productivity and markets. Most of us think they have to create Ponzi bubbles in which to sell their very expensive, low productivity schemes and from which they extract massive fees for ‘expertise’. This too resembles the sale of high cost manufactures in imperialism and agreements between, say, Britain and Argentina’s landed class up to 1950. We suspect the financial tail wags the dog and that there is vast and endemic false accounting as bad as Enron’s.

    Steve Keen and many others have shown that financial services need to be return to a more ‘primitive’ level – I’d say we need to go much more high-tech, transparent and return to seeing financing as a cost to be driven down. If we are right, then the very idea of banks being able to recover losses in what would be a shrinking, less profitable (profiteering?) market is a farce.

    I’d go for collapsing the banks now and go for a genuine attempt to restructure our economies – much as I believed we should have taken much more radical change in UK manufacturing before Thatcher’s hapless ‘policies’ (that predated her by a decade anyway). The problem, as 40 years back, is the capture of our politics.

    I no longer believe our problems are economic – but rather economics is control fraud, even amongst those of us who can see the wood for the trees. When QE (and all the other hidden bank support) stops and we crash land, most of us face massive mortgage and other loan interest rises, unless we have a new plan. The banksters are probably planning to be in a position to take advantage in the carnage, leaving the losses behind and structuring their ownership of what remains profitable, much as venture capital does in taking over big money-losing business.

    It is very difficult for us to know what TARP/QE and their shadows really are. I suspect they were thought to be fuel to keep the engines of finance running in the belief the engine would start producing its own as before – and without much consideration that this was an engine already tapping its fuel supply illegitimately from wells it had sucked dry. On the inside of this, the banksters must know they need new wells to suck from. It reminds me of dire plans to be fitter and better armed than the opposition after nuclear war from the 60’s.
    I have given up on official figures. We need ‘Plan B’ and this needs to start with full employment, wealth redistribution (other than as the banksters intend)and how we avoid big government by the bankster-political class, dictatorship by the proletariat and war. We are running scared of the analysis needed in a time of affluence in which none of us should need to worry about keeping the wolf from the door, and which, perversely, is our major concern. Would the collapse of, say, 35% of UK, French and so on GDP be remotely as serious as the situation in September 1939?

  19. Dennis Redmond

    I sincerely hope I’m wrong about this, but all the economic signs point to a 1937-style downturn amidst the general Depression (the eurozone continues to implode, Britain still hasn’t returned to its 2007 GDP, the US is stuck in the mud, real estate/extractive bubbles in Canada and Australia have run aground). Two reasons to be a little hopeful: (1) the BRICs are much bigger (today, 20% of world GDP), which may put a floor under the carnage, and (2) digital insurrection is in the air (Cairo, Istanbul, Rio).

  20. haris07

    Yves has become yet another shill for unlimited monetary easing to solve all problems. Hasn’t yet learned that more monetary easing will only make assets even more wildly priced compared to fundamentals. The BIS was upfront in 2006 warning about the dangers of subprime, they are trying to get ahead of the curve and warn of even bigger dangers now. Yet, people like Yves will just condone stupid QE, more cocaine for the markets!

  21. killben


    There is no choice but to bite the bullet. You are looking at the reaction today on “mere suggestion” of removal. But I am saying that this is going to be the reaction anytime in the future with asset price further in bubble territory. So the reaction is going to be worse. So better do it now and take the pain NOW.

    We may debate till the cows come home but given that the Fed Army has yelping as if they have stung, it is very likely that Fed will come out with a statement that the taper will happen in 2020. All happy?

    1. Yves Smith Post author

      With all due respect, you have this wrong.

      The “mere mention” reaction was a month ago, when Bernanke used the “t” word. That was about 50 bps in a month. I’m not talking about that, and Mr. Market’s reaction since last week is not based on that either. It is based on NEW information, the FOMC statement, and more important, the Bernanke press conference afterwards.

      The FOMC then not only reitereated that, but in the press conference, Bernanke mentioned thresholds for the taper which were earlier than they’d indicated before AND are not consistent with the economy being at all robust. 7% HEADLINE unemployment? And they actually want to start the taper BEFORE that?

      And this is when inflation is low and falling. This is not driven by a concern that stagflation is starting or imminent.

      This looks to be based on Bernanke wanting to declare victory before he leaves office or some other arbitrary consideration.

      Your argument would be different if the weak recovery wasn’t so weak.

      1. killben


        I also felt Ben was interpreting the data to suit his pre-determined course of action. But despite that I want the Fed out. I also feel earlier the better.

        My point is not that. Irrespective of when the plug is pulled on QE, market is going to have a fit anytime you talk of removing QE. Did you see the jawboning by the Fed members today when the Dow has fallen by just 500-700 in a few sessions. What would happen if the Dow fell 1000 points in one session when they remove QE – would the Fed say they are not withdrawing QE?

        Also what is the guarantee that employment will be better by continuing QE into 2015? What happens if there is no inflation in 2015 also? Do we continue the program till 2017? It is like Krugman saying spend till you get recovery without saying when and how recovery will happen and what happens if the recovery does not happen after spending.

        The only guarantee of having QE (in my view only QE1 was useful) in place is a ramp up of asset price and of withdrawal of QE is that it is going to be difficult over time (meaning that if whiff of removal brings Dow down by 2% in 2013, it could be 4% in 2015). Since QE is a prop which seems to be aiding in creating asset bubbles (which are likely to burst later and create further problems) do you think it would be wiser to get going by removing the props asap and allow markets to find its feet.

        The other issue is when you say it should not be done now. Ok If not now, when? When the employment is 6% or inflation is 3%? If employment is going to be 6% or inflation is 3% in 2017 then what? What happens to savers, retirees and tax-payers by then? How are you sure the Fed will get you there (employement 6%, inflation 2%) later?
        What would be the stage of asset bubbles then?

        “Your argument would be different if the weak recovery wasn’t so weak”

        No. Regarding the recovery being weak (incidentally I think so), it would appear that you feel that if the Fed continues QE, we would have 6% employment, 2% inflation and real recovery. I would think otherwise(that if Fed does not meddle then we might have a recovery sooner). Also I think if the Fed withdraws later there could be bigger problems – unintended consequences:-)

  22. impermanence

    The BIS has been critical of what the central banks have been doing for a couple of years. Go back and read their papers.

    1. Yves Smith Post author

      If you mean BIS research, that tell you nothing about their official position. IMF research has for a long time been at odds (more anti austerity) than its official position.

      The BIS, for instance, famously shot down BIS researchers William White and Claudio Borio when they started raising concerns about a close to worldwide housing bubble in 2003. The BIS still published their papers despite ignoring them. The BIS ALSO publishes the work of Borio (now sometimes with Petit Disyatat) which argues against the savings glut/imbalances theory of the crisis (I’ve mentioned that paper as super important and ignored) and some of the speeches of the Bank of England’s Andrew Haldane. Yet those papers in no way, shape or form reflect official views.

      Their annual report is an official publication and that’s what I am referring to in this post. If you can point to official pronouncements, you might have a point but invoking research proves nothing.

      Please provide links, then we can see if you have the goods or not. There is a schism among central bankers on the topic of QE, but a lot are in favor (or were until Bernanke lost nerve). Mind you, I think the crucial error was actually driving short rates to ZIRP. That created a liquidity trap and gave the Fed no wriggle room. And the Fed has been trying to use extraordinary monetary policy in the place of fiscal policy (we’ve said this again and again). So why hasn’t Bernanke called for more fiscal stimulus? He’s been doing the reverse, calling for deficit cutting since at least 2010.

      Having used bad medicine, the Fed needs to withdraw carefully. Instead, they seem to be saying they just want to throw in the towel.

  23. Hugh

    Until we overthrow the overlying kleptocracy, we are only discussing how we wish to be looted. QE and ZIRP were used to build up a lot of paper wealth in the stock and commodities markets by jacking up prices in them. The real economy remains mired in recession. What I see is the Fed getting caught in its own contradictions between being an agent of the looters and dialing back on its policies as if there were an actual normal, non-pathological, non-criminal economy out there.

    What I find interesting is the Fed’s de facto signing off on the official 7% unemployment rate as the new normal. Not only does this ignore the much higher level of real unemployment but it also overlooks (I would say deliberately) the issues of underemployment and the poor quality of American jobs.

    I agree that the Fed is using unemployment as an excuse for a decision already made to shift policy, not in response to any indicatos in the economy but on ideological grounds. It’s important to remember that both Greenspan and Bernanke believed that regulation of markets was unnecessary because they would self-correct. I think Bernanke is still governed by this principle ungrounded as it is by any evidence from the real world.

  24. allcoppedout

    I don’t think Yves can be read as wanting or acting for QE or other market cocaine. The only spreadsheet in government use (even in Euroland where it is illegal) is QE and even I would argue now isn’t a good time to stop unless we do something more radical for the many. A new Breton Woods and Marshall Plan is long overdue (‘Plan B’) – what we’ve had is a bit like puncture repair on an inner-tube riddled with holes. Even this ‘Plan B’ is no use if we leave current bought-and-paid-for politics in place.
    Whenever I get a bit of time I try to quantify what I think the argument is. Most of the anti-neoliberalism has been around since Veblen, Soddy and others pre-WW1. I might say it has been practiced to death in Critical Theory, but you can even find it in Machiavelli.
    I spent a long time as a scientist working with secondary data I could trust and just don’t find this much in social science. QE looks like a desperate attempt to shore-up a Ponzi scheme with new money. In betting situations like this one might recover with new, successful bets on outsiders (the returns banks claim at about 25% are what slot machines take – how long can one play them before losing a month’s pay?) – and banks must be writing business plans based on good times ahead. Yet if we try to discover and unwind assets they claim – in order to work out future worth and returns based on such – we meet frustration.

    Ponzis have to claim past and future success to attract new money and presumably the banks are doing this to attract the government money. An outline spreadsheet is not difficult to put together but we don’t get one. For the banks to recover my guess is they have to reach what their accounts claimed in 2007 adjusted to whatever inflation has really accrued in the system, presumably doing more of what they did before the crash.

    Yet one could also spreadsheet for financial services taking a massively reduced proportion of real-work created wealth, better directed investment into what is really needed and so on.

    I see a bit of this, but never in main media reporting. The take over of one building society has broken my own bank (Cooperative) and one doubts they couldn’t add up in due diligence. I was used (in science) to figures telling me a lot of what was happening or to make guesses about this and fit reliable figures to the guesses. Some of the maths involved is mind-bending, as indeed some of the measuring.
    One only needs to glance at this speculative paper by Ma and Wang to know how hard some science is and how much specialist language one needs –

    I can see why physics and my own biochemistry get so esoteric – indeed in some areas we begin to think our ‘machines’ know more than we do. Although we think we try to describe reality in science, we do so in order to be able to control and change outcomes. In chemistry we often decide what output we want and control lots of processes to get that. Economics seems to know how to control to keep the rich rich. What if we consider that richness only be a stage in the process, not an end product but to be fed back? We would want the money system to be transparent to do this and to focus on why we get more noise than signal on inputting reagents like QE. In fact, the very transparency science seeks is prevented in economics.

  25. not sure

    “Take the exit”. “Which exit?, there are two” “They both go where we are going, doesn’t matter, take that one”.
    One ends with a long drop to the sea and then deep water. The other is directly into bumper to bumper traffic for ever.

  26. James Levy

    I’m confused by who the “we” are who have to “take our licks” or “medicine” or whatever euphamism is employed to mean quite literally hunger, hardship, and homelessness for a whole lot of people if we crash the economy by pulling out all the supports, however inapt they may be. Since my best guess is that the guilty will ride this out from their priviledged positions, the punative tone of some posts here is kinda frightening.

    I remember being at The New School in 1987 the day the market dropped 500 points. People speculated on how this might lead to the death of the capitalist system. My conviction, then as now, is that the results of such a process will look more like Germany in 1933 than anything else. Mills’ Mass Society isn’t ready for a social democratic awakening. They’ll want to know who stole their prosperity, and the answer (the Obama blacks and the banker Jews) will come quickly to hand.

    A Phoenix from the ashes? I doubt it.

  27. TC

    The BIS might very well be afraid the foot in the door to a Hamiltonian credit system that is Elizabeth Warren’s “Bank on Students Fair Lending Act” (S.897) soon could become a stampede. It might be a game of Russian roulette they’re playing, but the so-called “real economy” is not a participant. The real economy remains dead under the weight of hopelessly insolvent credits accumulated through the workings of an innovative Ponzi scheme over the decades since the end of the Bretton Woods system in 1971. This breakdown the BIS effectively is acknowledging. They’re trying to bring the focus of attention back to their world of fascist austerity in servile obeiscance to London’s imperial monetarist scam erected over recent decades (same Venice, new slave system) whose effect has brought the decimation of physical economies of once developed nations, and whose impact now breeds a growing ferment of mass strike pushing back, even to the point where effective, equitable political solutions are becoming credible threats to continuing the bankrupt scam the BIS heads.

    The BIS is playing Russsian roulette alright. Too bad the only players in the game are a bankrupt system’s wretched slaves, who, since 2008 most graphically, have been openly engaging in canabalism targeting each other. Evidently, the BIS recognizes it will not be spared if this game continues, so we should at least give them credit for this. Our task now is giving these folks a face-saving way out. It’s a Hamiltonian credit system financing the build out of a state-of-the-art physical economy worthy the 21st century, or bust. That’s all there is to it.

    What the “uh, there’s no inflation here” crowd misses is inflation of what are in truth massively mis-priced securities choking the global banking system, whose growth in absolute quantity and shrinkage in relative quality meets a physical economy simply not up to the task of indefinitely perpetuating this arrangement. Indeed, continuance of this inflation, a form allowing the so-called 1% to persist in fantasy land, in fact now must be joined by physical, violent force, and this out of very necessity lest the whole Ponzi scheme come crashing down. Well-entreched circumstance “depressing real incomes” indisputably confirms this necessity. So, if there is anything exceedingly “dangerous” about the BIS’ perspective, it is its advocacy of both deflationary collapse, as well as increasing violence, this likely precipitating as a consequence of their desired crash’s fallout.

    As for the “confidence fairy,” truth is its place now is with Elvis: dead, dead, dead. Of course, this fact will never detract from nostalgics.

    Lastly, I am stunned no one is quaking about last week’s bi-partisan knifing of Caesar Bernanke. First was the President during his interview with Charlie Rose, then the House Speaker during his interview with Maria Bartoromo. In this context does the BIS report appear but icing on the cake. So much for “Fed independence.” It is as plain as day this institution is being ruled from without and the game plan now is “bail in.” The only response anyone sane should be considering here is full blown nationalization of the Federal Reserve and repurposing it as a Hamiltonian national bank. Case closed.

  28. ChrisPacific

    Judging from Chairman Bernanke’s remarks, the Fed is confident that improving fundamentals will overcome current turbulence and validate high prices.

    Haha. When have we heard that before?

    I think this is the Fed’s default position any time except when economic data is so bad that it’s obviously ludicrous – and sometimes even then.

  29. Conscience of a Conservative

    I understand ROI is based on a “risk free rate of return” and that return is often none other than the ten year treasury, but consider this. The ten year is roughly 2.5%. Let’s say it gets to 3%. The thought that this stops investment is ludicrous. If an investment can’t generate positive ROI against a ten year treasury rate of 3%, perhaps it wasn’t such a good idea in the first place. Add to that a sensible return in risk free treasuries prevents insurance companies, pensions, individuals etc from making dumb investments in AAA CDO’s or plant and equipment that in a more rational environment would not be remotely justifiable, and we already see the top banks ramping up their activity in derivatives such as swaps of all types(must be some CDS too)

    My hope is that Bernanke does not want to go down in the history books as having contributed to the next bubble.

    1. mannfm11

      Bernanke is merely reinflated the last bubble. We are in the realm of bubble maintenance, where only speculators can prosper. Live by the sword, die by the sword.

  30. Lune


    I agree with you that something seems to be driving the Fed to end QE regardless of the data. But throughout this crisis, the Fed has always been Wall St’s backstop. So why all of a sudden the change of heart? Regardless of the blinders the Fed may have for conditions on Main St., it is well attuned to Wall St. So it can’t be unaware of Wall St’s gnashing of teeth. And a further deflation of asset values will inevitably hurt the sectors the Fed has so painstakingly built up these last 5 years.

    There are 3 possibilities:
    1) The Fed truly had a change of heart and is interested in returning the economy to more fundamental asset valuations even if it hurts the banks.
    2) The Fed is trying to help the banks but is going about it wrong and it will end up hurting them instead.
    3) The Fed is trying to help the banks, *and* is going about it the right way, and we just don’t see its logic yet.

    I would bet on #3 first, #2 second, and #1 a distant third…

    1. killben


      Succintly put! I have also been grappling with the Fed’s intention.. normally it does not benefit Main Street.

  31. Linus Huber

    I love all those comments that criticise the fact of ending QE at one stage. Except maybe the first QE, all further QE actions were rather a questionable exercise and that monetary policy should not even have been adopted in the first place as it enhanced and institutionalised speculative behaviour and moral hazard further by continuing to transfer the cost of risk from the debtor to the saver. All it actually did is to delay the day of reckoning and the unavoidable structural changes politicians will have to face and each day those decisions are postponed the imbalances and lack of sustainability grows until it pops and a unorganised collapse is on all our doorsteps with dire consequences for society.

    We have reached the end of the Keynesian model as the effect of devaluing the currencies turns slowly from positive to seriously negative.

    The real cause of today’s problems can best be recognised in my letter to the General Manager of BIS three days ago:

    “Dear Mr. Jaime Caruana

    I enjoyed reading your latest speech “Making the most of borrowed time” as it shows that the sentiment is slowly shifting and the real problems come increasingly to the fore. I find it interesting that the Keynesian approach (that was in any case never really adhered to) does seem to lose its effectiveness.

    As an outside observer of monetary policy, I would like to draw your attention to some aspects of the speech that did not match the overall high standard.

    You seem to be ignorant of or unwilling to address the fact that inflationary monetary policy over the past decades are the real enablers of the explosive growth in the volume of credit and the massive imbalances created as a result. Furthermore you imply that Central Banks maintained a policy of price stability over the past decades whereas in actuality an environment of enduring and consistent low inflation (debasement of currencies) was in place the world over. The situation was further enhanced by reducing the capital requirements for banks. Your lack of understanding the longterm effects of inflationary monetary policy on society is astonishing.

    Whereas I do agree with the overall direction of your today’s view, I am seriously questioning some of your assumptions made in your speech. I hope you will find the courage and strength to one day embrace a critical approach towards your own organisation’s past failures.

    With best regards”

  32. JGordon

    Yves, you have previously explicitly told me that you were against QE when I directly asked about it. As others have pointed out here, there will never, ever be a “good” time to end QE once it’s been started. Therefore could you please be consistent and switch your position to supporting the BIS’s new efforts to end QE?

    Sure ending it today would be painful for everyone, but ending it tomorrow would be even more painful.

    By the way, do you have any thoughts on what will happen to interest rates on Treasuries once the Fed ends QE? What does a government do once all or more of the money it takes in from taxes goes into paying interest on its previous debts? Continue issuing ever more debt on a parabolic slope upwards?

  33. mwfolsom

    I’m sorry but I just don’t buy it – the moment the Feds actually cut back on QE is the moment the bottom will come out of the stock market. The Fed is trapped – they cannot end QE without causing the Stock Market to fall by 30%, 40% or even more. To make matters worse with an end to QE will come a huge increase in interest rates thus compounding the problem of the national debt.

    I have no doubt QE will end but it will end when the bond market blows up and forces the situation not because the Fed wants it to end.

  34. mannfm11

    I hate to insult Yves, but this entire line of reasoning is an academic joke. 1937 wasn’t caused by what Bernanke says caused it. If it wasn’t 1937, it would have been 1938 or 1940 or whenever. The economy would have eventually collapsed.

    Fed data I looked up a few days ago said there was an excess of $1.5 trillion in reserves in the system prior to QEIII. Short term interest rates were in the single basis point range. Bond rates were at all time lows. QE has done nothing to bring down rates, but instead has created nothing but another unsustainable speculative bubble.

    Fed and government action created the bubble in the 1920’s. What was used to create the bubble can’t fix the problems the bubble caused. They can only cause another bubble. Seems the Dow, which started at around 100 in the mid 1920’s went to near 400, then collapsed to a little over 40. Fed and stimulus action took it back to 200. You can’t view an economy in light of the territory the numbers covered in a bubble. 200 was double reason. The whole matter was an artificial joke.

    I bought your book. Want to get back to prosperity, start packaging all the credit garbage you can find and let the banks finance it. This is what is happening and it will produce an even worse problem later. We are seeing collapse in a period of near maximum historical central bank intervention, not because the intervention isn’t enough, but because the intervention has been going on too long. I propose that QE ties up massive amounts of capital in cash, which is forced to exist. It will lower the standard of living and probably lead to ongoing deflation, until the whole house of cards collapses. Ben Bernanke and the others are nothing more than modern day John Law’s. The result will be the same.

  35. Fiver

    The only credible concern large enough to drive both the Fed and BIS to deliver a one-two punch is not mentioned – take a look around the world, and you may note that it is emerging markets that are gripped in mass protests, social upheaval and dismal policy choices that can all be traced back to the very high inflation and speculative excesses caused directly by QE. Does nobody remember the genesis of the so-called “Arab Spring” in the soaring energy and food costs brought on by QE2? I do. China, Brazil, Turkey, Russia and many other non-G7 countries have had policy rammed down their throats from Day 1.

    The rest of the globe has carried the can for the US-centred crisis, a quite deliberate beggar-thy-neighbour policy which couldn’t have been pulled off without control of the global Reserve Currency and the entire global rules-making apparatus.

    But it was one thing to see the weakest members of the Arab world de-stabilized, given the opening this presented for the sacking of Libya and Syria, as well as changing the face of US control of Egypt, but to send China and other vital nations into a spiral just to enrich already obscenely wealthy Wall Street is geopolitical and economic stupidity of the first order.

    That said, I would not bet a nickel that the last month’s or week’s events are a harbinger of anything, given this Fed’s relentless expansion of its own power, and its conviction that it is not just infallible, but above the law.

    Other points:

    A “tapering” of QE cannot be considered as equivalent to a graduated increase in interest rates, as QE is aimed at enriching banks and speculators only – hoping they will then trickle it, whereas a rise in rates at some point deters normal borrowing. Also, as noted by others, what is the “un-ham-handed” way to signal an end? In any case, Bernanke and others at the Fed have repeatedly talked either of “easing” or “tightening” throughout the entire QE experiment since 2009 to juice or cool markets (particularly around important political/legislative “decision-points”). There’s no reason yet to believe this is not yet another false “signal”.

    Re retirees and pension plans etc., nobody “forced” them to do get back into “markets” after serial debacles. If they were smart, they would’ve dug in and avoided any exposure by putting more money in individually or via a plan up front, and getting completely out of manipulated “markets” that make a practice of cleaning out precisely these investors. In fact, since it’s only when there is a substantial market mess that the predators relieve investors of their “investment” – and we were past due for a shearing.

  36. The Dork of Cork.

    Ironically, noted Liu, developing countries with their own natural resources did not actually need the foreign investment that trapped them in debt to outsiders:

    “Applying the State Theory of Money [which assumes that a sovereign nation has the power to issue its own money], any government can fund with its own currency all its domestic developmental needs to maintain full employment without inflation.”

    When governments fall into the trap of accepting loans in foreign currencies, however, they become “debtor nations” subject to IMF and BIS regulation. They are forced to divert their production to exports, just to earn the foreign currency necessary to pay the interest on their loans. National banks deemed “capital inadequate” have to deal with strictures comparable to the “conditionalities” imposed by the IMF on debtor nations: “escalating capital requirement, loan writeoffs and liquidation, and restructuring through selloffs, layoffs, downsizing, cost-cutting and freeze on capital spending.” Liu wrote:

    “Reversing the logic that a sound banking system should lead to full employment and developmental growth, BIS regulations demand high unemployment and developmental degradation in national economies as the fair price for a sound global private banking system.”

Comments are closed.