The Fed’s been doing some pretty nontraditional things recently under Ben Bernanke. A lot of this was not unexpected given his record of academic research on the subject of the Fed trying to be more public about its actions and the role of Quantitative Easing in Japan’s lost decade recovery. I thought I’d put a few things up about both. I’m going to have to use some monetarist jibber jabber so please ask questions if the jargon is overwhelming! It’s easier to explain the jargon downthread than write a long run on post with explanations included.
The Roosevelt Institute held a Future of the Federal Reserve Event. Here’s video via RortyBomb of Joseph Stiglitz discussing QE2 among other Fed issues. I mentioned something yesterday down thread about the effectiveness of transmission of monetary policy through the traditional interest rate channel into the real economy and Stiglitz has a fairly succinct comment on that. There is some debate on how much the Fed can actually do much at this point–with zero bound interest rates–to get at unemployment and even the inflation coming from higher oil and food prices. We know it can happen, it’s just we don’t have empirical evidence under similar situations–other than from Japan–to know the degree to which stuff can happen right now. So it could be an infinitesimally positive effect even thought it’s a positive effect.
There’s been some discussion of this on economists’ blogs since the Bernanke Presser a few days ago. Mark Thoma tweeted this critique of both him and Brad Delong on the Bernanke Presser from a monetarist’s site from blogger economist Stephen Williamson. My first masters was in Monetary Economics so I’m well-steeped in monetarist theory.
In standard form, Mark Thoma’s heartgoes out to the unemployed, as mine does. However, Mark is much more certain than I am that the Fed can actually help these people out. Here is what Mark would have asked Ben about, if he could:
The main question I wanted to hear Bernanke answer is, given that inflation is expected to remain low, why isn’t the Fed doing more to help with the employment problem? Why not a third round of quantitative easing?
In retrospect, more aggressive action by the Fed was warranted in every instance. Perhaps this time is different — I sure hope so — but the recovery has been far too slow to be tolerable. Green shoots require more than hope, they require the nourishment, and with fiscal policy out of the picture it’s up to the Fed to provide it.
Well, the answer to the question: “Why not a third round of quantitative easing?” should be: “Because it does not do anything.” (see here). In retrospect, the Fed could not have done any more than it did, even if you think that sticky wages and prices matter in a big way. Mark may think that the level of employment is intolerable, but the Fed has to tolerate it in the same way I have to tolerate the soggy weather outside.
I wanted to put this up before I linked to Krugman’s Op-Ed today which argues that Bernanke may be unduly influenced by inflationistas and Ron Paul, of all people called “The Intimidated Fed” and that he can do more. Because, I’m not so sure the FED can do much more or if it’s Ron Paul that’s the dragon needing slaying. First, I think it more like that Bernanke is being influenced by two Fed Presidents sitting on the Board of Governors right now than by Ron Paul. But, I’m not a DC or FED insider so it’s pure speculation on my part.
Some background: The Fed normally takes primary responsibility for short-term economic management, using its influence over interest rates to cool the economy when it’s running too hot, which raises the threat of inflation, and to heat it up when it’s running too cold, leading to high unemployment. And the Fed has more or less explicitly indicated what it considers a Goldilocks outcome, neither too hot nor too cold: inflation at 2 percent or a bit lower, unemployment at 5 percent or a bit higher.
But Goldilocks has left the building, and shows no sign of returning soon. The Fed’s latest forecasts, unveiled at that press conference, show low inflation and high unemployment for the foreseeable future.
True, the Fed expects inflation this year to run a bit above target, but Mr. Bernanke declared (and I agree) that we’re looking at a temporary bulge from higher raw material prices; measures of underlying inflation remain well below target, and the forecast sees inflation falling sharply next year and remaining low at least through 2013.
Meanwhile, as I’ve already pointed out, unemployment — although down from its 2009 peak — remains devastatingly high. And the Fed expects only slow improvement, with unemployment at the end of 2013 expected to still be around 7 percent.
It all adds up to a clear case for more action. Yet Mr. Bernanke indicated that he has done all he’s likely to do. Why?
Second, I’m not sure Bernanke (i.e. The FED) is in a very strong position to do much that can influence the real economy right now. The QE stuff really only shifts the FED portfolio around between long and short term debt which can influence yield curves, but, at the zero bound, there’s still a limited impact on real interest rates. You really can’t go lower than zero in nominal terms. Also, the FED’s bought all this crap from every one from Belgian cities to AIG to give them more liquidity and for the most part, that money’s not channeling back into the US economy in the forms of loans. Monetary policy is never very effective when an economy is in a liquidity trap (extremely low interest rates) and its transmission channel–the way the policy gets to the real economy where GDP lurks–morphs during various economic conditions. We’re not seeing anything resembling 20th century economic conditions.
First up is something that is one huge step back for civil rights and humankind. I can’t believe this outrageous motion was adopted by the UN. The US and its allies need to object vigorously.
The UN has removed a reference to sexual orientation from a resolution condemning arbitrary and unjustified executions.
The UN General Assembly resolution, which is renewed every two years, contained a reference opposing the execution of LBGT people in its 2008 version. But this year’s version passed without any reference to gay rights after a group of mostly African and Asian countries, led by Mali and Morocco, voted to remove it.
Gay rights groups fear the move — which passed in a narrow 79 to 70 vote — will act as a signal that persecuting people for their sexual orientation is internationally acceptable.
“This vote is a dangerous and disturbing development,” Cary Alan Johnson, executive director of the International Gay and Lesbian Human Rights Commission, said in a statement. “It essentially removes the important recognition of the particular vulnerability faced by lesbian, gay, bisexual and transgender people — a recognition that is crucial at a time when 76 countries around the world criminalize homosexuality, five consider it a capital crime, and countries like Uganda are considering adding the death penalty to their laws criminalizing homosexuality.”
Johnson was referring to a bill introduced in Uganda’s legislature last year that would mandate the death penalty for multiple acts of gay sex or for any gay person carrying HIV. Though the bill appeared to be shelved after an international outcry, its principal supporter said last month the bill would be law “soon.”
Thankfully, we’re moving closer to repealing DADT. The Marines have stated that they stand ready to remove enforcement of the provision. Semper Fi!!!
The head of the U.S. Marine Corps will fully cooperate with a repeal of the “don’t ask, don’t tell” policy barring openly gay and lesbian soldiers from the military, Joint Chiefs of Staff Chairman Adm. Mike Mullen said Sunday.
In an interview on CNN’s “State of the Union,” Mullen said there was “no question” that Marine Commandant Gen. James Amos, an opponent of repealing the “don’t ask, don’t tell” policy at this time, would implement all necessary changes to allow openly gay Marines to serve if Congress passes a repeal measure.
“He basically said that if this law changes, we are going to implement it, and we are going to implement it better than anybody else,” Mullen said of comments Amos recently made at a townhall-style meeting with Marines.
The U.S. Senate is expected to vote on repealing the policy in coming weeks. The House already has passed a repeal measure, and President Barack Obama says he supports repeal under a process worked out with Mullen and Defense Secretary Robert Gates that includes a review of what the change would entail for the military.
Secretary of State Hillary Clinton appeared on Fox News on Sunday . Clinton told Chris Wallace that she believed the ‘vast majority’ of Gitmo detainees should be tried in civilian courts.
We do believe that what are called Article Three trials, in other words in our civilian courts, are appropriate for the vast majority of detainees,” Clinton told Fox News’ Chris Wallace.
This week, a civilian trial convicted Guantanamo Bay detainee Ahmed Ghailani on one count and acquitted him of more than 280 other counts.
“The question is do you have any choice now except to hold all of the terror detainees at Gitmo or either give them military trials or hold them indefinitely?” Wallace asked Clinton.
“The sentence for what he was convicted of is 20 years to life,” Clinton replied. “That is a significant sentence. Secondly, some of the challenges in the courtroom would be the very same challenges before a military commission about whether or not certain evidence could be used.”
The Secretary of State also branded the procedure as ‘offensive’ and called for officials to make the new airport security measures less intrusive.
Speaking on CBS’ Face the Nation and NBC’s Meet the Press, Mrs Clinton said she recognised the need for tighter security but said there was a need to ‘strike the right balance’ and ‘get it better and less intrusive and more precise.’
When asked if she would submit to a pat-down, she replied ‘Not if I could avoid it. No. I mean, who would?’
Mrs Clinton added she understood ‘how offensive it must be’ for passengers forced to endure the measures.
Another economist–Professor James Hamilton–is incensed about that stupid bunny cartoon with it’s outrageous lies on QE. There’s some more take down of the stupid thing on Econbrowser. Hamilton explains why ‘the Goldman Sachs’ is one of the agents used by the Fed when it does Open Market Operations. Basically, it’s the law and this is true if it’s in the name of QE or just regular monetary policy. He also takes down some of the other ones so that I don’t have to do it. He tackles the inflation fallacy as well as the stupid comment about QE being the equivalent of printing money.
Goldman Sachs is one of 16 different dealers from which the Federal Reserve Bank of New York solicits competitive bids. That’s the way it’s been done for a century, and it would be illegal for the Fed to do as the bunnies propose. From U.S. Monetary Policy and Financial Markets, 1998, Chapter 7:
The Federal Reserve makes all additions to its portfolio through purchases of securities that are already outstanding. The Federal Reserve Act [of 1913] does not give the [Federal Reserve] System the authority to purchase new Treasury issues for cash. Over the years, a variety of provisions had permitted the Treasury to borrow limited amounts directly from the Federal Reserve. Options for such loans existed until 1935. Temporary provisions for direct loans were reintroduced in 1942 and renewed with varying restrictions a number of times thereafter. Authority for any kind of direct loans to the Treasury lapsed in 1981 and has not been renewed.
The reason that the Fed has always been required to buy bonds from private dealers rather than the U.S. Treasury is that the process of money creation needs to be institutionally separated from the process of financing the public debt. In fact, the potential blurring of those boundaries is one of the most important legitimate criticisms of quantitative easing.
Another topic that confuses a lot of people is the Social Security Trust Fund. Does it exist or not? John Holbo at Crooked Timber takes on Matt Yglesias and a Planet Money podcast. He explains it in terms of a parent (the government) borrowing a future allowance from a child (Social Security).
If the US government completely and unrecoverably collapses, as a going economic concern, then the Social Security Trust Fund will be bust – and there will be no United States, too! (The latter is the more consequential concern, I should think.)
If the US government falls on seriously hard times, economically, there may need to be belt-tightening. Maybe the US government will have to break the deal it made, not making good on the IOU’s in the Social Security Trust Fund. Likewise, if our family falls on hard times, I may be driven to spend my daughter’s back allowance money on food for our table, in the sense that I may never pay her that money. (Hope not!) But if that happens I won’t describe the logic of the situation in terms of my daughter’s back allowance having turned out not to have been ‘real’, all along. If I don’t pay her, it won’t be because I don’t owe her – nor because that specific money ‘doesn’t exist’, whereas the money to put food on the table ‘does exist’. Talking that way just takes the minor accounting fiction that starts us out, and inflates it into a major fiction.
If the US government doesn’t fall on seriously hard times, but just finds financial life a bit tight – as it often is – the same point applies, only more so.
Scientific American has an important piece up on the Web with an important call for continued Open Standards and Net Neutrality. They also have taken a strong stand against snooping and protecting free speech on the web. You can see in this article just how far ahead our European cousins are in protecting individual rights over corporate rights on the Web and the internet. They even quote Secretary of State Hillary Clinton’s firm stand on internet freedom.
Free speech should be protected, too. The Web should be like a white sheet of paper: ready to be written on, with no control over what is written. Earlier this year Google accused the Chinese government of hacking into its databases to retrieve the e-mails of dissidents. The alleged break-ins occurred after Google resisted the government’s demand that the company censor certain documents on its Chinese-language search engine.
Totalitarian governments aren’t the only ones violating the network rights of their citizens. In France a law created in 2009, named Hadopi, allowed a new agency by the same name to disconnect a household from the Internet for a year if someone in the household was alleged by a media company to have ripped off music or video. After much opposition, in October the Constitutional Council of France required a judge to review a case before access was revoked, but if approved, the household could be disconnected without due process. In the U.K., the Digital Economy Act, hastily passed in April, allows the government to order an ISP to terminate the Internet connection of anyone who appears on a list of individuals suspected of copyright infringement. In September the U.S. Senate introduced the Combating Online Infringement and Counterfeits Act, which would allow the government to create a blacklist of Web sites—hosted on or off U.S. soil—that are accused of infringement and to pressure or require all ISPs to block access to those sites.
In these cases, no due process of law protects people before they are disconnected or their sites are blocked. Given the many ways the Web is crucial to our lives and our work, disconnection is a form of deprivation of liberty. Looking back to the Magna Carta, we should perhaps now affirm: “No person or organization shall be deprived of the ability to connect to others without due process of law and the presumption of innocence.”
When your network rights are violated, public outcry is crucial. Citizens worldwide objected to China’s demands on Google, so much so that Secretary of State Hillary Clinton said the U.S. government supported Google’s defiance and that Internet freedom—and with it, Web freedom—should become a formal plank in American foreign policy. In October, Finland made broadband access, at 1 Mbps, a legal right for all its citizens.
What’s on your reading and blogging list today?
I figured I better start a series of posts on the frontiers of our third war. You probably won’t be thrilled to hear that the General in charge of the theater is none other than Timothy Geithner. The other general in the war is Ben Bernanke. Feeling any better year?
Well, ready or not, we may be in the very first strategic moves set out to wage a currency war and possibly a trade war. The two superpowers in the battle are China and the U.S. who seem to be in a fight to see whose currency can go the lowest. Paul Krugman has written about this quite abit. Naked Capitalism actually had a superb guest post on the topic today. The Economist front paged the entire topic in mid October.
I’ll quote from one of The Economist’s major articles here.
Behind all the smoke and fury, there are in fact three battles. The biggest one is over China’s unwillingness to allow the yuan to rise more quickly. American and European officials have sounded tougher about the “damaging dynamic” caused by China’s undervalued currency. Last month the House of Representatives passed a law allowing firms to seek tariff protection against countries with undervalued currencies, with a huge bipartisan majority. China’s “unfair” trade practices have become a hot topic in the mid-term elections.
A second flashpoint is the rich world’s monetary policy, particularly the prospect that central banks may soon restart printing money to buy government bonds. The dollar has fallen as financial markets expect the Federal Reserve to act fastest and most boldly. The euro has soared as officials at the European Central Bank show least enthusiasm for such a shift. In China’s eyes (and, sotto voce, those of many other emerging-market governments), quantitative easing creates a gross distortion in the world economy as investors rush elsewhere, especially into emerging economies, in search of higher yields.
A third area of contention comes from how the developing countries respond to these capital flows. Rather than let their exchange rates soar, many governments have intervened to buy foreign currency, or imposed taxes on foreign capital inflows. Brazil recently doubled a tax on foreign purchases of its domestic debt. This week Thailand announced a new 15% withholding tax for foreign investors in its bonds.
Currencies are actually my research area and I’m preparing for a series of papers and presentations on the ASEAN+3 area and the GCC area. China is one of the +3. The U.S. dollar is the peg for the GCC because of the influence of Saudi Arabia. Every one has a stake in this including the European Union. Anyway, let’s just say this is part of my thing and it’s a complex thing so I’m going to do a series of short posts on this to get every one more or less situated.
This is a quick introduction because I’m going to have to start with what’s happening tomorrow. This situation is likely to be on the meeting table for APEC Forum starting tomorrow in Japan. ( That’s the Asian-Pacific Economic Cooperative.) Geithner’s trying to get the region to shrink their current account imbalances with the U.S. The current accounts are the accounting mechanisms for an open economy that deal with foreign trade. They are bookkeeping entities where trade payments from exports and imports for goods and services as well as a few other things like any incomes made by citizens who work or invest in other countries are tallied. The things that most international economists are interested in are the flows of imports and exports (the stuff and services) and the flows of capital (money, plant and equipment for businesses) between countries. Of course, all this exchange and investing happens with the currency of the country. It is the country’s medium of exchange.
As you know, the United States is the biggest customer in the world and we buy a lot of things from other countries. That means we need their currencies to transact business there. This also means the amount of their money floating around the world and the amount of our money floating around the world is important for trading or exchange of goods and services. It’s also important because if you don’t buy, you invest, and if you invest, your currency goes into a financial market and earns interest. If that doesn’t happen you sell the currency for another one at the going exchange rate. The market for currencies also influences the levels of interest rates in the world among a few other things. And, of course, the keepers of the currency–the Central Banks of a country are involved–hence our FED. So, Bernanke watches exchange rates, amount of money floating around and interest rates while Tim Geithner’s folks set up terms of trade between countries. Terms of trade can include free, open markets or things like tariffs, quotas, and capital controls. These things get set up in trade treaties and are usually negotiated frequently. All of this stuff determines whether a country will outsource your job some place else and will fund a business someplace else instead of your town. It also determines what you can buy at your favorite store.
Geithner aims to use a Nov. 5-6 meeting of Asia-Pacific Economic Cooperation forum counterparts in Kyoto, Japan, to press his case for current-account deficit or surplus targets of less than 4 percent of gross domestic product. The proposal is also on the agenda for a Group of 20 summit in Seoul next week.
The U.S. has cited a glut of Asian savings for helping spark the credit crisis earlier this decade, while Asian officials now counter it’s the American central bank’s liquidity injections that are warping global capital flows. Geithner’s initiative is undermined by complexity in calibrating current accounts and a failure of similar efforts in the past.
“We have the outline routine of an impressive-looking agreement that literally changes nothing,” said Steven Englander, Citigroup’s head of Group of 10 currency strategy in New York. “Nevertheless in the short term investors are likely to be more impressed by the indications that U.S. and China are reconciled than by the underlying content of the reconciliation.”
Geithner’s plan was in part designed to broaden discussions beyond China’s exchange-rate policy, blamed by U.S. lawmakers and companies for keeping the yuan artificially low in a subsidy for local exporters. China may be open to the idea, a central bank adviser indicated last week.
And, what’s up with Brazil, the country that fired the opening salvo in this edition of Currency Wars? Well, according to that link at the FT, it seems that the word is not happy with Timothy Geithner.
Brazilian officials from the president down have slammed the Federal Reserve’s decision to depress US interest rates by buying billions of dollars of government bonds, warning that it could lead to retaliatory measures.
“It’s no use throwing dollars out of a helicopter,” Guido Mantega, the finance minister, said on Thursday. “The only result is to devalue the dollar to achieve greater competitiveness on international markets.”
At a joint press conference with president-elect Dilma Rousseff, outgoing president Luiz Inácio Lula da Silva said on Wednesday he would travel to the G20 summit in Seoul with Ms Rousseff, ready to take “all the necessary measures to not allow our currency to become overvalued” and to “fight for Brazil’s interests”. “They’ll have to face two of us this time!” he said.
Brazil and others are not happy with the Quantitative Easing 2 we talked about earlier today. This is because it’s an attempt to stimulate the economy and it will cause there to be more dollars floating around the world. Any one with a first semester class in economics should know that an increased supply means falling prices. The price of money is on one hand, interest rates and in the open economy, it is also the exchange rate. This means that U.S. goods will become cheap and every one else’s will look relatively more expensive. U.S. folks should import less and be able to sell more abroad as exports. If you’re trying to grow your economy on the back of the U.S. consumer’s appetite for stuff, that will now be more difficult.
Okay, so I’m reaching MABlue’s limit for me blathering on too long. The links I gave you are pretty wonky and long. I just wanted to bring up the topic and get you up to speed because this is THE NEXT big THING. I’m going to try to keep up with what’s going on with the meeting and let you know more about the topic.
If all else fails, you can consider this a way to your good night’s sleep.
I am a financial economist and I’ve been through most phases of my career one that applies the trade in banking. That’s because my first economics specialty was monetary economics. I still have my original copy of Patinkin’s Money, Interest and Price sitting next to my dad’s original copy of Keyne’s The General Theory of Employment, Interest and Money. My grandfather was one of the first Fed lifer’s having been in charge of the bond area in the Kansas City District for both world wars. My ex-husband’s first job out of college was with that Fed. I worked for the Atlanta District Fed before retreating back to academia. So, in this day and age, with all the unpopularity that entails, I have to confess to being a banker of sorts. I hope you won’t hold that against me.
Today, there is more evidence that this is not my Grandfather’s Fed and it’s not completely the Fed I worked for either during the Greenspan years. When I was there, the emphasis was consolidating functions to various branches and realizing that check clearing and wire transfers, the main source of revenues for the branches, were being taken up by big money center banks and clearing houses. Clinton was President and the economy was good so there wasn’t much dithering about the technical things done up there at the desk in NYC. I just had my staff transmit the bond sells every Tuesday (even on Mardi Gras) dutifully.
Much consolidation has taken place and many traditional Fed services have been privatized. Oh, and then there’s that one other difference, Ben Bernanke and his realization that traditional monetary policy is pretty useless when interest rates are close to zero. Welcome to the world of Monetary Policy at the Zero Bound which is actually something we talked about last fall. I’m going to point you again to Ben Bernanke’s treatise again because it explains a lot of what we’re going to discuss. It’s written for wonks, but if you read the first few pages, you’ll get the basic idea.
The Fed’s upcoming retreat from its current position has been a topic of much discussion and speculation. That’s because every one has some concern that they will be accommodating for way too long and it may lead to another Bubble or to general inflation (instead of price increases in a specific market like housing). That’s pretty much the consensus of what happened post 9/11 when Greenspan left interest rates extremely low and we developed a speculation crazed housing market. For some reason, he popped the bubble of excessive exuberance during the Clinton years and the Tech stock run-ups, but let the mortgage market baste in low interest rates for way too long. My guess is that he was more accommodating to Republicans because he himself was one of them, but that’s a discussion for his biographer and just a source of speculation for me.
So, Ben used his platform as the second most powerful man in the US today to reduce the information asymmetry surrounding the Fed’s exit strategy. Again, if you check the link to his academic paper above, you’ll see that’s one of the things he believes is necessary when monetary policy hits the zero bound. He basically calls this “using communications policies to shape public expectations about the future course of interest rates” and that’s exactly what he’s doing in today’s Op-Ed piece in the WSJ.
I’m not sure how many people wrote and edited this piece, but it is a brilliant discourse that explains in a very succinct and clear way what the FED will do in the coming recovery to ensure that we won’t get inflation. He also reassures that they won’t reverse the course of any improvement either as was done in 1937 to cause a double dip depression. This Op-ed is historic in nature, although I’m sure only those of us steeped in Fed lore, culture and history will realize what’s going on here. Ben is opening up the some what secret world of the Federal Open Market Committee (FOMC) to those with the need to know.