The Story of Monetary Policy
By Barry Ritholtz - November 17th, 2010, 5:30PM
As we noted previously, many of the critics of QE2 have put together a pretty awful track record of analyzing markets, economy and the Fed.
QE2, for better or worse, has legitimate reasons for criticism, but unfortunately, many current critics are merely spotlight seeking media whores who are rather uninformed as to the workings of the Fed.
To clarify these misunderstandings, the Federal Reserve has elected to explain the meaning and purpose of monetary policy. They have chosen to do so in a way that is at the appropriate level for at least some of their critics: Comic Book form.
Full embed of Comic PDF after the jump . . .
How the Fed makes monetary policy, and how the tools of monetary policy work. Revised Maximum 34 copies. 24 pp.
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November 17th, 2010 at 5:34 pm
I like this just as well:
http://www.youtube.com/watch?v=PTUY16CkS-k
It has more than 1,000,000 views and was just added this week.
November 17th, 2010 at 5:49 pm
Final line of the comic book:
‘Making monetary policy is a complicated job, but it’s a job that’s necessary in order for our economy to enjoy continued growth along with stable prices.’
Every single clause of this sentence is a flat-out, absurd lie. ‘Stable prices’? The dollar has lost 97% of its purchasing power since these lying liars went into business. Don’t lie to me, you sniveling dirtbags!
The Soviet central planners claimed that THEY did ‘a job that’s necessary in order for our economy to enjoy continued growth along with stable prices.’ They don’t exist anymore, and neither does their dysfunctional, value-subtracting planned economy.
How many Federal Reserve economists does it take to dig a ditch in the hot sun? Give me a chain gang of effete academics, a shotgun, a straw hat, and a mean dog, and I’ll run that experiment for you.
Losers!
November 17th, 2010 at 5:55 pm
Machinehead.
Perfect example of why TBP needs some kind of moderation in the comments section.
November 17th, 2010 at 5:56 pm
I didn’t find in this “comic” some of the the most recent, most important, and least publicized actions of the Fed: bank bailouts, bank bailouts, more bank bailouts, to the point of letting the primary dealers to blatantly front run the Fed and rip profit of up to $50Billion!
November 17th, 2010 at 5:57 pm
It’s a shame that that comic book makes no attempt to explain deflation. I remember when I took freshman economics in high school, and I first heard about inflation/deflation. I thought “why would it be bad if prices dropped rather than increased?”
Then I got older and better educated, and now I know why deflation is the real enemy of any nation’s economy.
Sadly, Calvin’s video shows why John Q. Public can’t be trusted to sit at the table of monetary policymaking. The first substantive suggestion it makes is that deflation is a *good* thing!
Wow. And most people would applaud that idea, because most people are morons by choice who refuse to be educated past 9th grade economics!
November 17th, 2010 at 5:59 pm
Can’t wait to read this to my kids…The image on p. 13 makes the Fed look (oddly) like a drug dealer hiding his goods close to the chest.
November 17th, 2010 at 6:09 pm
Barry, instead of talking about the track record of a select number of people criticizing a certain policy, why not look at the track record ON AVERAGE of people criticizing a policy vs the track record ON AVERAGE of the people promoting a certain policy. Saying that in a group of 20 people, 10+ or even 17 completely missed the crisis tells you NOTHING when almost everyone else missed the crisis too!
Let’s look at the track record (in terms of calling the crisis) of some people who think QE2 is a terrible idea:
Taleb
Klarman
Grant
Burry
Hussman
Einhorn
This is like half of the people who actually saw the crisis coming! So instead of the .01% success rate of people who predicted the crisis amongst those that support QE2, you have maybe a 5% or 10% success rate amongst those who are against it. 10% for people who signed the letter (Grant and Klarman).
What does that tell you?
Attacking a group of people for being 90% wrong when the general economic population was 99.99999% wrong is being extremely disingenuous. I realize that “Invictus” wrote the other article, not you, but that does excuse the absolutely terrible logic. You should not have allowed that piece to be published, or referenced it in your current post as if it was at all related to the QE2 debate.
November 17th, 2010 at 6:20 pm
Someday when historians talk about the decline of the American era they will cite this as an example of:
>> How dumb Americans had become that their government spoke to them through comic books.
>> How arrogant the kleptocracy had become that they thought it best to speak through a comic book.
>> How little the American public knew about the Federal Reserve.
>> How little the Federal Reserve wanted the public to know.
November 17th, 2010 at 6:32 pm
So, how did America do doing the century-long Fed experiment with average annual inflation of 2-3%?
I’ll take the Fed, thanks.
Please feel free to invest all of your money in a place where the central bank is run by the government, like Zimbabwe, Weimar Germany, or North Korea even.
P.S. Oh, sorry you all missed the March ’09 – Nov ’10 rally because of your Austrian “teachings” (aka Home Schooling.) Why don’t you rant and rave at a NASCAR track instead of where people discuss finance?
November 17th, 2010 at 6:50 pm
Barry -
This is beautiful. Unfortunately, I think it’s above Palin’s pay grade. Is there a coloring book available?
November 17th, 2010 at 6:55 pm
The problem is that all they want is “growth,” and low unemployment! I is like only wanting sunshine, and loly-pops!
November 17th, 2010 at 7:03 pm
I forgot to say “forever!”
November 17th, 2010 at 7:09 pm
Stop. This is a joke, right?
This is F-ing awesome of this is really from the Fed. I hope Sarah Palin got a signed copy from Bernanke.
I left this on the last post but it is more appropriate for this one:
http://www.youtube.com/watch?v=PTUY16CkS-k&feature=share
Seems comic books and youtube animations are the best way to explain things these days. TBP on Cartoon Network soon?
November 17th, 2010 at 7:09 pm
Where is Super Bernanke?
November 17th, 2010 at 7:13 pm
Wow. Turns out it is real and they even have other comics. I gotta believe these are for kids though…
November 17th, 2010 at 7:19 pm
VennData, take the FED, all the way until the Bond market feeds them to the dogs!
November 17th, 2010 at 7:21 pm
Loved this post. Last week I commented on Sarah Palin’s order to Bernanke to “cease and desist” at the WSJ Real Economics blog. I was shelled with criticism. I have these comic books in my classroom. We use Krugman Wells Economics as a textbook in the AP Macro class. My students laugh when I offer this comic book to them and really, they do understand more about QE II than most of the critics. Today I put the new CPI information from Dismal Scientist up and asked them if they see inflation. They also know that price stability as a goal works in both directions—apparently better than some politicians. They see disinflation and the risk of deflation—and they are high school students!
November 17th, 2010 at 7:27 pm
Maybe the fed could release some more comic books:
* What Ben Bernanke has ever been right about in the last 10 years
* Why the constitution said gold and silver are the only legal tender
* Why this country is more in debt than its ever been, especially in ‘peace’ time
* Why this next generation is widely acknowledged worse off than their parents
VennData: The dollar has only been fiat for 40 years, and I suggest you look forward rather than in the rear view mirror. And buckle up.
PS Sarah Palin is a w—re who is right for the wrong reasons.
November 17th, 2010 at 7:40 pm
Barry,
I hope you realize that the section regarding fractional reserve banking is misleading. A bank’s lending is not limited by its reserves. The federal government and other banks, lend every bank sufficient money to cover any amount of needed reserves.A bank could start the day with $0 reserves and still lend billions.
Strictly speaking, bank lending is limited by its capital, not by its reserves.
Rodger Malcolm Mitchell
November 17th, 2010 at 7:54 pm
Comic propaganda from a private bank which claims it is apolitical. That was one of the funniest reads since this mornings ‘Pearls Before Swine.”
I would have thought they at least had a Batcave and some cool rides.
The FED always gets the last laugh. They have a printing press! I want a copy in book for to see if it’s printed on linen with security threads.
November 17th, 2010 at 7:56 pm
barry,
do you think the fed res bank of ny is a private or public entity? the real story is that it is a private corporation. and in fact a cartel of banks. imagine if the peoples bank of china let walmart have a monopoly on printing their currency.
this is easily the biggest story of the century. and 99% of wall st traders are ignorant to this. the scam of the century. makes bailouts look like jaywalkers.
i was at the fed last summer. i was flabbergasted at their comic book handouts. orwellian in the dumbing down.
bet donuts that you don’t know the real history of fed. 3rd one we have had.
~~~
BR: Um, you might want to read the Federal Reserve chapter in Bailout Nation before you lecture me on Fed history, boy . . .
November 17th, 2010 at 8:02 pm
tt
Seriously?
Do you have any clue who the author of this blog is? Are you utterly unfamiliar with what he has written previously ?
No one who posts comments here is really that ignorant, right ?
November 17th, 2010 at 9:31 pm
Well said Venn!
The Fed is the new Roswell. Every kook aka (austrian and gold bug) is running around howling at the moon about nonexistant inflation.
You(kooks) are 5 years too late, sub case-schiller for “owner imputed rent” in the cpi and you missed massive inflation from 04-07 just as you are now missing the true extent of the flat to deflating state we are in now.
November 17th, 2010 at 9:48 pm
I can’t believe this is real.
Agree with the fellow above on the fractional reserve banking system. The way that the neo-classical school and almost every text book in America believes this to be the truth is what makes the whole system unstable. What 95% of of econ students and professors think is the “truth” in regard to fractional reserve banking is demonstrably WRONG.
Please read anything by Steve Keen to understand how it’s all wrong.
November 17th, 2010 at 9:58 pm
I don’t get it. BR skewers Palin as essentially a shallow thinking “hard money” ideologue puppet, and this comic strip explaining the rudimentary functions of the Fed is suppose to justify QE2? I like BR, but it appears that he is more interested in temporarily pumping up the stock market than giving careful consideration to the possibility that QE2 will lead to excessive future inflation. The BerBank You Tube cartoon at least strongly articulates the critics’ points. The Fed’s comic strip says nothing about the current debate. As someone said, if monetizing a nation’s debt is correct policy, then where did Zimbabwe go wrong?
November 17th, 2010 at 10:43 pm
I would like to register a protest over the following comment, made by Machinehead.
“How many Federal Reserve economists does it take to dig a ditch in the hot sun? Give me a chain gang of effete academics, a shotgun, a straw hat, and a mean dog, and I’ll run that experiment for you.”
I am presently incarcerated in a minimum security facility in Kentucky. Part of my rehabilitation process involves the fracturing of large rocks into smaller ones, and then pulverizing them into yet smaller pieces with a large sledge hammer. My co-workers and I are chained together. The warden tells us this is to facilitate trust and bonding, a team building exercise. As such, it would be unwise to foist effete Federal reserve academics on us. We have enough problems with self esteem on our team without being grouped together with low lifes like those guys. Thank you.
November 17th, 2010 at 11:34 pm
One issue that jumps out at me while reading, er, skimming the first few pages: The comic book compares the Fed’s monetary growth with increasing GDP per capita. It creates the impression that there’s cause and effect. I’m not entirely pleased with that.
Yes, there *is* a relationship over “short” time frames of a few years or even a decade, if the pace of monetary supply changes direction rapidly. But, real GDP would grow with or without increases in money supply. Continuing advancements in science and technology improve our lives. Not Fed monetary growth.
November 18th, 2010 at 12:08 am
This article from Keen was particularly good at debunking conventional theories on money creation and the fractional reserve banking system:
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
November 18th, 2010 at 2:03 am
Here you go:
http://imgur.com/CnWa3.png
November 18th, 2010 at 6:47 am
If the disqualifier for leveling criticism of QE 2 is a track record of not seeing the obvious then surely the Fed, Bernanke, Franks and Dodd–who had to good sense to go and hide– to name a few should be institutionalized and taken out of public view. The idea that these folks should have anything to do with monetary policy and finance reform is scary indeed.
I think a better solution would be to pause and first deal with our collective Stockholm syndrome.
November 18th, 2010 at 7:18 am
Right…
And Bernanke & Krugman’s track record is better?
Or is this just becoming a reflexive political issue? (ie if Sarah Palin believes in it, I must not because I dislike Sarah Palin?)
November 18th, 2010 at 8:25 am
Most ridiculous line of the comic
“When people withdraw cash form the banks-to go shopping,for example- banks’ reserves and the amounts they can lend decline”
What complete and utter rubbish. Loans are NOT constrained by cash in the vaults.
November 18th, 2010 at 8:34 am
franklin441
Spot on about deflation!!
This one sided obsession with inflation is absolutely biased toward those WITH plenty of capital and biased AGAINST those who actually owe money….. most of us. Trying to scare the masses with inflation stories only persuades us to support deflationary policies which increase bankruptcies,( good for people with high savings-can pick up some property cheap) decreases wages (greater profits for the industry titans) and makes most of us poorer and the FEW a lot richer…… sound like today??!!
November 18th, 2010 at 9:14 am
This is really the briefing book they gave to GW Bush when he came into office, isn’t it? Should be titled “The Fed and You.”
November 18th, 2010 at 10:20 am
It’s an effective summary of the standard loanable funds model, with which notable left-wingers Irving Fishing, Jacob Viner, and Milton Friedman agreed.
Oh, and apparently the Cleveland Fed disagrees with Sarah Palin: “The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.50 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade.” Perhaps Sarah can still down with noted monetary expert Bill Kristol to develop a fully articulated model… of something other than war with Iran.
November 18th, 2010 at 10:21 am
“P.S. Oh, sorry you all missed the March ’09 – Nov ’10 rally because of your Austrian “teachings” (aka Home Schooling.) Why don’t you rant and rave at a NASCAR track instead of where people discuss finance?”
Yes…they all missed it…didn’t make any money in gold or silver or emerging markets either probably. You sound like the idiot crew of halftime report on CNBC criticizing Peter Schiff for being bearish on the US economy and “missing” the rally in US stocks. Meanwhile, I am sure you timed the march bottom exactly.
This post didn’t match the usually high level on this blog.
November 18th, 2010 at 10:37 am
Also, Invictus, your reference to your track record of predictions on this post wasn’t a very good idea:
http://www.ritholtz.com/blog/2010/11/dubious-open-letter-to-bernanke/
You seriously think this was all Bush’s fault? Are you kidding me?
I see you have conveniently omitted Seth Klarman from your list of people here too. I wonder why.
November 18th, 2010 at 12:32 pm
LOL, “DC” Comics… “super” Fed man, fighting inflation and defending American values (e.g. cheap credit).
Can’t wait to see the artist depict Fed man fighting deflation, guess I’ll have to buy the next issue.
Money, money everywhere, but not a penny to lend…
November 18th, 2010 at 2:19 pm
LOL Check out the “President” on page 7. If the prez even thinks of messing with the Fed, they won’t hesitate to cut off his barber privileges and make him shop for suits at Goodwill!
November 18th, 2010 at 3:12 pm
B_thunder@5:56PM
Yes I would also have liked an explanation as to why the Fed lets the primary dealers front run them and milk them of billions. But I guess that is one of the things they want us to forget, not one of the things they want us to understand. And with a new congress owned and paid for by Wall Street I don’t expect that will be the topic of one of those daily investigative hearings scheduled for next year.
November 18th, 2010 at 7:30 pm
The funnies part was:
“The US Economy is the largest in the world, producing more GOODS and services in a year than Japan, Germany and China Combined.”
BWAHAHAHAHAHAHA!!!
Are they talking about all the paper?
After I read this, I knew this was a bunch of horses…t.