Night of the Living Fed
Jeremy Grantham has some fun at the Fed’s expense:
The Ruinous Cost of Fed Manipulation of Asset Prices: My diatribe against the Fed’s policies of the last 15 years became, by degrees, rather long and complicated. So to make it easier to follow, a summary precedes the longer argument. (For an earlier attack on the Fed, see “Feet of Clay” in my 3Q 2002 Quarterly Letter.)
Purpose: If I were a benevolent dictator, I would strip the Fed of its obligation to worry about the economy and ask it to limit its meddling to attempting to manage inflation. Better yet, I would limit its activities to making sure that the economy had a suitable amount of liquidity to function normally. Further, I would force it to swear off manipulating asset prices through artifi cially low rates and asymmetric promises of help in tough times – the Greenspan/Bernanke put. It would be a better, simpler, and less dangerous world, although one much less exciting for us students of bubbles. Only by hammering away at its giant past mistakes as well as its dangerous current policy can we hope to generate enough awareness by 2014: Bernanke’s next scheduled reappointment hearing.”
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Source:
Night of the Living Fed
Jeremy Grantham
GMO, 10/26/2010
http://bit.ly/aPD4va
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October 27th, 2010 at 10:56 am
If the Republicans take the House, then won’t Ron Paul have more power to ask uncomfortable questions?
October 27th, 2010 at 11:16 am
funny graphic … just right for this thought … is the FED attempting to put the genie back in the bottle .. that being a mass of “people thinking there is a REAL Living in pushing paper” and nothing else … I mean think about it from an import/export perspective … get real you can’t turn straw into gold that way alone .. and imo is our problem at the heart
October 27th, 2010 at 11:24 am
Marketwatch ripped you off:
http://www.marketwatch.com/story/fed-zombies-hungry-for-quantitative-easing-2010-10-26
October 27th, 2010 at 11:36 am
Login required.
Anyway, one reason the ECB can work without a full employment mandate is because Europe fulfills its obligation to provide for the “General Welfare” much better than the United States.
October 27th, 2010 at 11:50 am
Our economy is like an infected or cancerous human. We put on bandaids and take pain killers but the disease continues. No one has the courage for major surgery or chemo or whatever because it would be “too painful”.
Economic pain is like interest. You can choose to take it all at once swedish style or spread it out over time. But if you choose to make “payments” there is additional pain applied over time just like interest compounding. If you don’t ultimately cure the disease the patient dies or perhaps comes back as a zombie.
People keep saying yes we need to fix this “but not right now”. We need to wait until the economy is better. I have heard this for over 50 years. The lesson I have learned is the economy will never be quite right to take the pain so it gets put off.
In 1973 when I was doing macroeconomic oral finals I got into a pissing contest with a professor about the price of gold. He was adamant it was a meaningless fixture of the past and our fiat currency would be secure forever. Oh how I wanted to hunt him down in the 80′s.. Those were truly the days when keynes was king, and multihundred variant econometric models run on big computers were the rage. Everyone force fit equations backward on historical data. For what it is worth, if I recall correctly it was friedman that originally coined the now famous phrase “deficits don’t matter”.
I used my student loans to bet on such results and promptly got killed. The better answer turned out to be to rely on logic and behave accordingly.
I only tell you this because the “more things change, the more they remain the same”.
October 27th, 2010 at 11:53 am
I was able to download the PDF here without a login: http://www.gmo.com/America/
October 27th, 2010 at 11:54 am
Let’s feed them – the Fed sure could use some brains (yum…)
October 27th, 2010 at 11:57 am
The Fed, as long as we’re stuck with it, should have one mandate: a stable Dollar. Everything else is merely catering to irresponsible politicians.
October 27th, 2010 at 1:46 pm
“swear off … asymmetric promises of help in tough times”
Well, that’s the thing – it isn’t the Fed’s job, but Bernanke has been manuevered into the role of picking up the slack. He should have been smarter than that because the Fed does not have the right tools for that job.
The job properly belongs to Congress, but they’ve all gone home to work on getting their own particular futures secured – never mind the rest of us – and to the President, who seems to either not notice or not care.
October 27th, 2010 at 2:59 pm
Fortunately, macroeconomics has moved on to much more productive endeavors, such as Real Business Cycle models with Rational Expectations and complete financial markets. Oh, yeah. Nevermind.
By the way, I’m sure Gauss, were he alive, would love to be told that his method was “force-fitting” data.
October 27th, 2010 at 3:02 pm
Humor aside, I haven’t a clue why Janet Yellen would be included among the likes of Greenspan and Bernanke. Bush-appointed hacks like Kevin Warsh have had much greater influence on the conduct of monetary policy than has Yellen (thus far), playing the role of Wall Street’s chief apologist. Perhaps this is the humor of forward expectations.
October 27th, 2010 at 3:06 pm
As I’m sure Dr. Athens would tell you, as he defended his dissertation in the mid-1970s, macroeconomics has evolved to in a manner that acknowledges only the the monetary authority as having a relevant role in macroeconomic policy.
October 27th, 2010 at 3:57 pm
Grantham: Yes, Stocks Are Overvalued, But You Have To Buy Them Because Bond Prices Are Ridiculous
In his latest quarterly letter, Jeremy Grantham says stocks are still overvalued, but are a better long-term choice than bonds–because bond prices are absurd.
Of course, you’ll also want to keep a bigger-than-normal pile of cash in the hope that prices will crash and you’ll get a chance to deploy it and not get screwed.
As the asset class forecast chart shows (click for a larger version), the most promising classes of stocks are “high quality” (no debt, high cash flow) and emerging markets. Basically there’s nothing attractive in bond lan
October 27th, 2010 at 6:16 pm
HENRY BLODGET:
Could you please not totally misrepresent what Jeremy has said in his piece? Your main headlines in not what Jeremy is saying, he never says you “Have to Buy Stocks” anywhere. He clearly states they are overvalued and that it is absolutely wrong to look at them as cheap to bonds, because bonds are highly manipulated and there for are not an indication of value.
Even on Emerging markets, he stated that “everyone and their dog” owns EM Equities and that a bubble is forming that can continue to form before it pops for good. So no good value here, just momentum.
And finally, after going to your blog i find this absurd statement by you on Jeremy’s recommendations:
“6) For the very long term (20 years) overweight resources, particularly if they have a sharp decline.
(This is my personal view rather than that of GMO, which on this topic is agnostic.)”
THIS IS Jeremy’s view. He specifically states that he is a long term bull on resources but that resource stocks are stretched here so a stumble by China would present a correction to buy. Agnostic?? Your view??
Henry, you are doing a great disservice to the readers here and on your blog by taking a well respected veteran like Jeremy and twisting everything around to suit your bizzare needs.
All readers: Please read the original 15 page document by Jeremy. Its fantastic and far more honest and honed view than you will get in 95% of what you read today.
October 27th, 2010 at 7:37 pm
Enjoy this 4 minute overview of the government program on bank take-overs relating to bad mortgages.
YouTube – fiercefreeleancer’s Channel = http://www.youtube.com/user/fiercefreeleancer
The Tea Party is said to be incapable of governing because they won’t compromise. At least you can trust that the Democrats and Republicans are compromised.