Intervention, Not Wisdom
In a recent post at Financial Armageddon, I took issue with the claim by Paul Krugman, Dean Baker, and others that low yields on U.S. Treasury and other bonds can be seen as validation of Washington’s aggressive policy of spending and borrowing to “rescue” the crisis-torn U.S. economy.
Aside from questioning the alleged wisdom of the (trading) crowd, I argued that credit markets are being distorted by a variety of temporary and artificial influences, including massive intervention by the Federal Reserve.
As it happens, Brian Sack, who runs the markets group of the New York Fed, helped bolster that argument in a speech he gave last night to the Money Marketeers of New York University (from a recap by Real Time Economics):
Mr. Sack’s group estimates that the Fed’s purchases of $300 billion in long-term Treasury securities earlier this year helped to push yields on 10-year Treasury notes down by about half a percentage point. Some critics have argued that the Treasury purchases didn’t have the intended impact of pushing rates down. But Mr. Sack – a long-time proponent of such purchases – said his estimate is supported by regression analyses by the Fed. Purchases of mortgage backed securities, he says, pushed those rates down by a full percentage point.
Sources:
The Fed’s Expanded Balance Sheet
Brian P. Sack, Executive Vice President
Federal Reserve Bank of New York, Dec. 2, 2009
http://www.newyorkfed.org/newsevents/speeches/2009/sac091202.html
The Fed’s Market’s Guy Eyes Asset Sales and Rate Increases
Jon Hilsenrath
Real Time Economics, Dec. 2, 2009
http://blogs.wsj.com/economics/2009/12/02/the-feds-markets-guy-eyes-asset-sales-and-rate-increases/
Economists: Wrong Again
Michael Panzner
Financial Armageddon, Nov. 21, 2009
http://www.financialarmageddon.com/2009/11/the-economists-are-wrong-again.html
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December 3rd, 2009 at 8:38 am
+50 bp on 10yrs doesn’t change my mind at all on this topic. These are still very low rates.
There is no doubt about it – the Fed should be purchasing much more than they are now. They should be pushing two year rates to nearly zero, and shorter term than that below zero.
We have 10% unemployment and 17% underemployment. We should be flooding the market with money until the banksters start lending, period.
December 3rd, 2009 at 9:05 am
>> We have 10% unemployment and 17% underemployment. We should be flooding the market with money until the banksters start lending, period.
If the goal is to help the unemployed, then government should hire them. Start the Pickens Plan and any other investment that will work to reduce the trade deficit.
Giving money to “the market” as an indirect way to help the unemployed is — it seems to me from recent observation — a way to unjustly enrich the banksters and rely on the much-tarnished trickle-down theory (aka, a golden shower).
December 3rd, 2009 at 9:06 am
From Jim Welsh’s “Financial Commentator”, posted at the “Think Tank” earlier today:
In recent months, purchases of mortgage backed securities by the Federal Reserve have amounted to 80% to 85% of the total. As noted last month, the Fed is the market. The Federal Reserve has said it expects to complete its buying of $1.25 trillion of agency mortgage-backed securities by March 31, 2010. Is it realistic to expect demand for agency MBS to match the Fed’s buying, so that mortgage rates don’t rise? I don’t think so. The Fed’s buying has succeeded in keeping mortgage rates low.
December 3rd, 2009 at 9:08 am
Correction: That was posted a the “Think Tank” yesterday.
December 3rd, 2009 at 9:14 am
I can’t remember who said it, but kudos to you (not verbatim):
The Fed has the gas pedal and the break held firmly to the floor.
What could go wrong?
December 3rd, 2009 at 9:29 am
wunsy wrote: “If the goal is to help the unemployed, then government should hire them. Start the Pickens Plan and any other investment that will work to reduce the trade deficit.”
Whether or not you agree with the Pickens Plan, it truly is BIZARRE that the left has not jumped on a jobs program idea that is so simple and with some political cover from the right. The left, knowing it can never win the South, continues to desperately trump up a demand-side Keynesian reflationary program on steroids just so it can eek out a few more votes to keep states like Michigan and Ohio, even if the jobs it would create are non-structural and unsustainable at best.
On the other hand, perhaps the left’s reluctance to pursue the Pickens Plan may have something to do with the massive overhaul of electricity regulation in this country, an ideological fight involving state versus federal rights that may be more politically gnarly than even health care reform.
December 3rd, 2009 at 9:32 am
wunsacon,
I agree, but your proposal is so far away from most economists mindset and our governments possible actions that I feel the need to propose something possible.
I think the best action right now would be a suspension of social security taxes on both the employeer and employee side. This would give 95% of the workers in America a material pay raise.
This recession would be over and unemployment would be falling if a payroll tax holiday had been enacted in July. Maybe next July we can see a payroll tax holiday when unemployment is at 11.5% and 1 in 7 people are on food stamps, instead of today when we have only 10% unemployment and 1 in 8 people are on food stamps.
December 3rd, 2009 at 10:03 am
Pay out 3%, Collect 6% at the Links by 3PM..that was the 3-6-3 banking rule that kept US business and mortgages rolling for decades, with necessary and ordinary recessions when the animal spirits needed a rest. FED enabled ZIRP interest rates today are a transparent band-aid solution to a tourniquet situation. This is triage for the perp not the victim. The victim gets to pay 29.9% on credit while the perps get free money from the public trough to hide away in USTs and make their dole 3.25-0.25 =3% magic old school banking rule by helping no one but themselves. Now is that fake, or what? Bernanke, Out! Geithner Out!! Summers Out!!!
I hear they will take their bats and balls and go home and shut their ATMs. Go home ane surrender their charters, one by one and let there be new 10:1 max leverage US National banks with new money.
December 3rd, 2009 at 10:03 am
Pay out 3%, Collect 6% at the Links by 3PM..that was the 3-6-3 banking rule that kept US business and mortgages rolling for decades, with necessary and ordinary recessions when the animal spirits needed a rest. FED enabled ZIRP interest rates today are a transparent band-aid solution to a tourniquet situation. This is triage for the perp not the victim. The victim gets to pay 29.9% on credit while the perps get free money from the public trough to hide away in USTs and make their dole 3.25-0.25 =3% magic old school banking rule by helping no one but themselves. Now is that fake, or what? Bernanke, Out! Geithner Out!! Summers Out!!!
I hear they will take their bats and balls and go home and shut their ATMs. Go home and surrender their charters, one by one, and let there be new 10:1 max leverage US National banks with new money.
December 3rd, 2009 at 10:29 am
ToNYC – “triage for the perp not the victim” .. got it
wunsacon – agreed on capital spending plans that reduce negative energy trade flow
Mike S – cash starve the gov – WTF – why not a real flat tax while your at it so other nations can flourish via tourism to the fancy places
December 3rd, 2009 at 12:41 pm
“…it truly is BIZARRE that the left has not jumped on a jobs program idea that is so simple and with some political cover from the right…”–CNBC S, above
it is only, truly, “BIZARRE”, if one believes that the Political Duopoly-controlled USGov is, actually, interested in benefiting, instead of Bankrupting, the Country..
see:http://www.eia.doe.gov/emeu/aer/ep/ep_frame.html
and Chart, Figure 8
“1 Energy lost during generation, transmission, and distribution of electricity.
In the 1950s and 1960s, coal, which had been important to residential and commercial consumers, was gradually replaced by other forms of energy. Petroleum consumption peaked in the early 1970s. Natural gas consumption grew fast until the early 1970s, and then, with mild fluctuations, held fairly steady in the following years. Meanwhile, electricity use (and related losses) expanded dramatically.
note that when the U.S. isn’t Importing Oil, the Petro$ is ‘hard to Float’..
December 3rd, 2009 at 1:59 pm
Just thinking just one move ahead of the FED who is playing checkers, not chess:
Charge the banks the positive carry of the Treasury rate for NOT lending their cash…oh yeah, they’ll get religion. Use it or lose it, force them into the game of lending to small businesses so there can be a real job
and a real economy instead of a jo gov pump. The FED is the enabler, spreading Armageddon fears to the economically illiterate masses. Only by facing the stench of the toxic waste can we clean out the basement; no running to the attic and the trees until the smell goes away. What’s the real haircut of a HELOC whose first is 20% under water? Put that one in your pension and smoke it.