Markets have had the excited giddiness of a kid during the week before Christmas. Childlike, they cannot wait for the big day to arrive to open their presents from Santa.

Only the bearded dude isn’t a jolly fat guy in a red suit, he is an academician who is carrying not a bag full of presents, but an unconscionable burden.

This time last year, Ben Bernanke had some concerns: There was the fear of deflation, a decelerating economy, and asset prices acting squelchy. The FOMC decided to target stock prices with another round of quantitative easing — buying bonds — to keep rates as low as possible.

The markets quickly jumped — first in anticipation, than on the fresh flow of liquidity. $650 billion dollars puts an unnatural bid beneath equities, and the short side was a painful place for Hedgies to play.

QE2 ended June 30th this year, and market volatility has risen since. We already have QE 2.5 — rolling Fed repurchases as their short term bond holdings mature — but QE3 remains more doubtful. Not because its “treasonous“,* but because it is failing to reach the “real” economy. The political situation within the FOMC makes it increasingly unlikely anything like a QE3 will be coming out of the Jackson Hole confab. Perhaps Santa Clause Ben Bernanke has something in his bag of tricks, but that looks like a long shot. Thus, we are set up for some disappointment.

The Fed’s focus on equity prices is the least of our concerns. The US is suffering from a long list of serious — but not unsolvable — problems that require intelligent, mature and potentially painful decisions

Can the US resolve these issues?

1) An excess credit problem, left over from the 2000s Housing boom and credit bubble — being solved v e r y  s l o w l y through deleveraging and passage of time;

2) Slowing economy and high unemployment (including increasing High School drop out rates creating a structural employment problem);

3) Crumbling infrastructure: Electric Grid, Bridges, Tunnels, Roads, Naval Ports, Airports;

4) Medical Costs that are double the rest of the industrialized world’s yet produces worse results.

5) Systemic deficits caused by unfunded tax cuts, unfunded entitlements, and a military bigger than the next 20 countries combined, (plus a lack of fiscal discipline);

6) A wholly dysfunctional electoral process, including corporate control of what was once a democratically elected legislative branch;

7) Increasing wealth and income inequality (Historically not a long term positive for social unrest and political legitimacy)

8) An overt hostility to empiricism and science (which helped create most of our wealth) and an embracing of “magical thinking”

9) An intellectually bankrupt political class married to outmoded, disproven, fantasy based economic ideas.

Note that the last of these is directly responsible for much of the prior 8 problems.

We need to distinguish between immediate concerns  — market crashes, unemployment, re-election — with the longer term structural problems facing the US.

The next 10 years can either be the end of the empire or a new healthier phase. The US has managed to reinvent itself every few generations. Its time for another such moment of reflection and redirection…

>

_______________

* Won’t someone please explain the difference between monetary policy and seceding to Gov. Rick Perry?

Category: Bailouts, Federal Reserve, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

58 Responses to “Waiting for the Cavalry (in Vain?)”

  1. lunartop says:

    “unconscionable burden” really?

    No one forced him to take the job and he clearly believes in his neoclassical nonsense despite its repeated failure.

  2. dougc says:

    Reinventing our economy would require sacrifice, americans believe in a fantastical world where QE– or cutting taxes will solve all problems.

  3. scapescu says:

    magical thinking=believing that by coloring a piece of paper you can bring wealth ( a symbolical act transforms the physical reality , bringing to life more useful objects, wealth)

    ~~~

    BR: If you REALLY don’t believe those colored pieces of paper have any value, give them to me.

    Otherwise, you are merely seeing the world through the filter of your own belief system.

  4. techy says:

    i think deflation risk is much higher and devastating than inflation. but FED can only do so much…liquidity is useless at this time since it is not getting converted into wages.

    but i dont have much hope in near term…repubs are willing to lose one eye of usa in return for two eyes of dems and the kenyan..

  5. atandon says:

    I am a technical brain, nevertheless, I want to share my analysis of Economic problems in America. Problems persist only because there is net Money Outflow from US and is caused by the following imbalance.

    (Internal Produce that is consumed internally + Internal Produce that is Exported) is less than Imports, causing a net outflow year over year from many years.

    In my view, a problem like subprime (G Recession – 08-09) can only emerge if people do not have enough to pay from their pockets and that will only happen if people do not have enough jobs and the only reason they would not have enough jobs is because of above imbalance.

    Even the problems now, excessive debt for example… perhaps the country is paying more on imports and hence need to print money.

    Can it be stopped?

    My take on the answer is “No” because businesses face a very competitive environment and are pressed to keep their costs low to gain better margins than their competitors and so they push more of their services and products to be disbursed out of low cost regions of the world (Import category). If businesses are compelled to stop importing, it will stall the competitive machinery and will hurt businesses in long run and will be unhealthy for US economy as well.

    So what can we do?

    Well if businesses can’t stop importing serivices and products from low cost regions and exports are still desired to be increased, the only option that looks viable to me is that people start exporting themselves to low cost regions and start living there and play the role of money controllers for the money that is coming to the region from the US. Spread America!. In 100 yrs (well if humans survive that long), there are high chances of a common world governance any way (final milestone for globalization) so whats the harm in starting the process now. Once the cost potential difference reduces in 15-20 years or so, one may settle back in US (next generation ofcourse).

    Bringing enterpreneural brains from across the world to US won’t solve the problem in my opinion until the cost potential difference remains.

    Just my 2 cents. Hope I am thinking correctly.

  6. Scott says:

    BR, every single commentator I can find is saying exactly the same thing as you are.

    That expectations are too high and Bernanke won’t do anything new.

    Can you point us to a single commentator that expects something from the fed? Even the friggin’ WSJ’s Hilsenrath, who is the “official” leaker for the Fed is saying that he won’t do anything.

    And the markets sold off hard yesterday. hardly a sign of Christmas coming early.

    ~~~

    BR: Traders think a Xmas present is coming, and it looked like markets sold of on German DAX tanking 4% (tho thats merely a guess on my part) . . .

  7. Scott says:

    addendum to previous comment;

    Even friggin Scott Granis @ Calafia Beach Pundit is saying Bernanke won’t do anything.

  8. dead hobo says:

    BR lamented:

    The next 10 years can either be the end of the empire or a new healthier phase. The US has managed to reinvent itself every few generations. Its time for another such moment of reflection and redirection…

    reply:
    ———–
    I think it will be worse than that. Nobody goes ‘responsible’. They either are responsible or they aren’t. Occasionally, a youngster who acted irresponsible learns a lesson and grows from the experience, but that’s just growth. Not a change of character. I’m not even including the professional liars who run Wall Street, government, and everything that might allow a large buck to be made. It’s just a different form of organized crime, only the people who make the laws are the under the control of the mobsters, so, tada!!!, it’s all legal. Controlling a union pension fund is punk assed small potatoes compared to controlling a central bank or a country. In 10 years, all we will see are new ways to funnel money from whoever has it to whatever scheme is being run at that time.

  9. Chief Tomahawk says:

    I think I smell a Wa Po column with this entry. May the conservative online editor re-work the title to “At the Crossroads…”?

    ~~~

    BR: Maybe later this Fall — this Sunday is about (Surprise!) banks and BoA

  10. Low Budget Dave says:

    Two news items this morning on NPR:
    1. Rick Perry now leads all polls, forcing challengers to adopt his belief that climate change is a lie.
    2. Texas is suffering the worst draught in recorded history.

    Is there some kind of law in Texas that you are never allowed to admit you are wrong?

  11. dead hobo says:

    Seriously, if you need a working model to explain and predict much of what has happened and much of what will happen in the future, organized crime provides a good fit. Take almost any big economic catastrophe over the past decade, apply an organized crime model to its major events, and credibly explain how it doesn’t apply. You can’t. It’s just not the Gambinos (possibly).

  12. Petey Wheatstraw says:

    “An intellectually bankrupt political class married to outmoded, disproven, fantasy based economic ideas.”
    ___________

    Playing on the emotions of those too daft to understand that being ass-raped does not make you a party to the rape, but a victim of it.

    Ignorance was our downfall.

  13. pclivin says:

    Isn’t it fair to say that by design, QE funds are not meant to hit main street, but they are rather used to zero out the Taylor Rule which the Fed uses to determine Fed Funds Rate which would otherwise point to a negative short term rate? The funds deployed are designed to be transitory

  14. drewburn says:

    Very well said, Barry.

  15. Greg0658 says:

    Tripper: “9:30 as you know. Tomorrow is parents day, and you must look rested or Morty will be sent to the state penitentiary”
    and then …
    Tripper: “Come on, Morty! Make up your mind!”
    quotes from Meatballs I (1979)
    http://www.imdb.com/title/tt0079540/quotes

  16. Raleighwood says:

    Great list – I would add a “captured” corporate media / propaganda program.

  17. wally says:

    “Can the US resolve these issues?”

    How can we? We aren’t even trying to solve them. In fact, there are groups that are perfectly happy with those conditions and are willing to pay to see them continued.

  18. DC says:

    I agree that this post, esp. the bullet points, should become a WaPo column. One way or another the Beltway crowd needs to have this drilled into their heads (that means the leaders and the lobbyists).

    Note to Obama and Biden staff: You need to invite Mr. Ritholtz in for a reality lesson. Gene Sperling and Jason Furman are smart guys but neither is a heavyweight much less a magician. Bring BR and a couple of other bulls into the china shop. Today.

  19. Greg0658 says:

    joking aside (had that cued for what I knew would arrive) … a HEAVY list BR
    what hit me most (& in spectrum of the summer camp theme) .. the kids getting an education for the talent arms race .. so our country can beat the commies or whaterver .. thats a heavy heavy one

  20. jeremyF says:

    > Won’t someone please explain the difference between monetary policy and seceding to Gov. Rick Perry?

    Correction: It’s ‘Future President Rick Perry’

  21. krice2001 says:

    Of course an excellent post, Barry, and probably a good base for a new WaPo article.

    Wally adds an important piece to the picture that we all know as well and I’ll copy and paste it here as I think it’s significant:

    “How can we [resolve these issues]? We aren’t even trying to solve them. In fact, there are groups that are perfectly happy with those conditions and are willing to pay to see them continued.”

    And there’s the rub. So much money depends on things staying the way they are, that it ‘s hard or impossible in the curent environment to fight that. Unless a politician or Political Party wants to unilaterally “disarm”. Not sure the way out of it.

  22. wally says:

    “Won’t someone please explain the difference between monetary policy and seceding to Gov. Rick Perry?”

    He is beyond explanations; they bounce off. Like all the current prototype GOP candidates, popular acclaim is the goal, not good policy.

  23. Disinfectant says:

    Ditto what Scott said near the top. I haven’t seen anyone who thinks Bernanke will say anything useful. But I’ve seen plenty of people railing against this straw man. Sounds like a setup for some short covering regardless of what Bernanke says.

  24. Scott says:

    thanks Disinfectant.

    can anyone point to anyone who actually thinks the Fed is going to “do something big”?

  25. scapescu says:

    ”If you REALLY don’t believe those colored pieces of paper have any value, give them to me.

    Otherwise, you are merely seeing the world through the filter of your own belief system.” BR

    I didn’t say these pieces of paper do not have value (thats why I wont give them to you), I only said that they do not CREATE value which is something totally different; value is created by work, organization, creativity and so on; you cant produce bread by using paper, you can only buy it. Moreover, everyone is seeing the world through the lenses of his own belief; only god and animals have the advantage of being objective (for different reasons of course)

  26. Jim67545 says:

    In the ’60s, with the development of the highway system and the maturing of the workforce in the South, we experienced a steady drain of manufacturing from the North to the South and it’s favorable labor laws, cheap land and growing population (underserved and growing markets.) There was nothing that the Northeast and Midwest could do to avoid the disappearance of their garment, carpet, furniture, steel (to a degree) and other traditional industries. Industrialists each independently made the logical choice to concentrate investment in these modern facility, lower cost areas. To not do so made them less competitive compared to others who did. De je vu all over again?

    Cheaper transportation (containers, etc.), modern production facilities, much cheaper labor, huge underserved and growing markets close at hand now describe Mexico and southeast Asia. As water seeks its own level, so does capital. Yet, no one is discussing this highly depressing situation and no one is proposing anything to change it. I don’t know if this rises to the level of a #9 for above. You decide.

    It took Pittsburgh roughly 30 years to reinvent itself start to finish from a steel producer to high tech and such. Are Americans ready for 3 decades of privation and rebuilding? Will every place, which might not have the univerity system Pittsburgh has, make it to the other side? Does any politico have the courage to discuss this?

  27. tradylady says:

    Barry, add the unfunded pensions to the list; disconcerting is the article read this morning, i.e. (Oregon) Pension liabilities per household cost
    http://www.bipac.net/page.asp?content=unfunded_pension&g=OREGON

  28. GreatWarrior says:

    Barry, So you think the market will go much lower? I thought you recently advocate to deploy cash to buy at the lows?

    Thanks

  29. BuffaloBob says:

    IMHO, the keystone is number 6. Our political class is married to outmoded, disproven, fantasy based economic ideas, because they paid to be.

    The corruption between our “elected” officials and those who offer them campaign contributions and lucrative lobbying positions is complete. They are in the service of the corporate and economic elite, John Q Public be damned. The Citizens United ruling merely removed the fig leaf.

  30. number2son says:

    So you think the market will go much lower?

    Down goes Frazier! Down goes Frazier! sigh

    Finally moved all but a few bucks out of equities in my retirement account. The crooks aren’t getting any more of it!

  31. louis says:

    “Proactive response to Housing” – What an F %^ng shocker. Now all we need is someone like LBJ to get it done.

    http://www.youtube.com/watch?v=NP0mQeLWCCo

  32. Donald says:

    Raleighwood Says:

    “I would add a “captured” corporate media / propaganda program”

    The glue that makes all this dis-function work! If people didn’t “feel” informed and were not passionately divided by opinions offered by news anchors (NPR included) to support the meager amount of spun information, it would all fall apart.

  33. [...] via Waiting for the Cavalry in Vain? | The Big Picture. [...]

  34. WFTA says:

    I suppose there is a possibility that Bernanke will say that monetary policy is best suited to breaking and fiscal policy is better suited to accelerating.

  35. streeteye says:

    Vicious cycle going on… trust in institutions going out the window. In financial markets, leads people to do flight to quality and buy gold, and volatility…not conducive to long-term investment decisions and growth. In politics, leads to elections of weirdo Tea Partiers who hold government hostage, also leads to further underperformance and less trust in the system, which is really what distinguishes us from dysfunctional weak states.

    By Fed standards, Bernanke called out the legislative and executive pretty sharply.

    “Finally, and perhaps most challenging, the country would be well served by a better process for making fiscal decisions. The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses. Although details would have to be negotiated, fiscal policymakers could consider developing a more effective process that sets clear and transparent budget goals, together with budget mechanisms to establish the credibility of those goals.”

  36. Gormm says:

    @Low Budget Dave

    RE:
    Two news items this morning on NPR:
    1. Rick Perry now leads all polls, forcing challengers to adopt his belief that climate change is a lie.
    2. Texas is suffering the worst draught in recorded history.
    Is there some kind of law in Texas that you are never allowed to admit you are wrong?

    1. He did not say that climate-change is a lie. He said that he doesn’t believe it is caused by man. It is your statement that is the lie.

    http://www.theregister.co.uk/2011/08/25/cern_cloud_cosmic_ray_first_results/

    2. The drought is the worst in 50 years, not the worst in history as you falsely asserted.

  37. Topspin says:

    “colored pieces of paper”

    BR you can have mine, all of mine, at least the green ones.

  38. James says:

    > The next 10 years can either be the end of the empire or a new healthier phase

    I’m not clear why we can’t – or shouldn’t – have both . . .

  39. willid3 says:

    i am thinking that our anti science came about because of a trend that started many years ago, where males stopped going to college, then about 10 years ago, the few jobs that were available to males, was in the construction trade (and see where that got us?????!!!).
    the other shoe was the exporting of jobs as a new export, with nothing in return (supposedly it was cheap goods. but it only reduced the price maybe 10% to consumers, and their incomes collapsed more than that that).
    to make up for those ‘features’ of our economy. the women started to school and to work to make up for the collapsing incomes. then to make up for even faster collapse of incomes we had to use debt to replace lots income (and wall street and the banks loved this. as it fed their easy credit business!). now it may have been wall street that actually drove the collapse in incomes. and they did push business to export jobs. and then fell into their easy credit program

  40. TrickStyle says:

    Compared to thirty years ago, the average US citizen today:

    - Is fatter and less healthy
    - Is less educated
    - Is more in-debt
    - Has less net wealth
    - Uses infrastructure that is older and in disrepair
    - Spends more money on military campaigns
    - Has a Congress that gets less done

    Any disagreement?

    Forget about US patriotism, it’s just plain sad to see any country run itself into the ground like we have.

    And it doesn’t take a rocket scientist to realize that our folks in Congress do not have the character to stop the momentum of the above trends.

    Kind of embarrassing, really.

  41. Greg0658 says:

    Jim67545 @0950 “As water seeks its own level, so does capital”
    willid3 @1133 M vs F .. wonder where enlistment rates would be without the dispartity .. be remiss to not mention all the temp soldiers (Moonlighting) we are using these days

    & read move to the work .. um ah

    & BR don’t take Topspin up .. green ones sound like w/red taint :-)

  42. [...] Let’s distinguish between the short-term and long-term problems the US economy has.  (Big Picture) [...]

  43. Great Caesars Ghost says:

    BR, so what solved the Great Depression? Clearly Ben Bernanke’s monetary policy is being proven wrong day by day and week by week. So could it be the misguided Keynesian economic policies implemented this time. Is it possible that some combination of both were not well coordinated enough. I have read enough of your commentary to believe it has to do with some X factor. Is it possible that the X factor could be missing leadership in government? Maybe, we just need time to heal without anymore intervention and stop fiddling with the economy and let creative destruction take its course. Somewhere there has to be a solution.

  44. [...] Barry Ritholtz has written an excellent economic summary in his blog, The Big Picture. [...]

  45. DeDude says:

    Keynes did not suggest that never ending increases in government spending was the model for permanent economic growth. Keynesian policies can be used to solve cyclical problems, but other approaches are needed to solve our current structural problems (all economic gains harvested by a destructive rich speculator class, and none shared to the economically constructive consumer class). To solve the structural problems lets:

    1. Add $3/hour to the minimum wage. It may be inflationary but right now we can afford a little more inflation.

    2. Implement a 10-20% import tax on all products (higher on countries with unfair trade practices). That would basically force the companies that export jobs to other countries to pay for the social cost of that “treasonous” behavior.

    3. Increase taxes on non-productive income such as capital gains and inheritance incomes, and use some of the proceeds to increase both length of and amount of unemployment support.

  46. peter north says:

    BR, adding to item #3 in your list, I’ve read that dams around the US are in even worse shape than our bridges. Scary. (But hey, all these problems could be opportunities, right?)

  47. MBD1120 says:

    “The markets quickly jumped — first in anticipation, than on the fresh flow of liquidity. $650 billion dollars puts an unnatural bid beneath equities, and the short side was a painful place for Hedgies to play.”

    I never understood this argument – QE2 was not an injection capital directly into the markets, but rather an asset swap on bank balance sheets. All you have to do is check out the St. Louis Fed’s “bank reserves held at Fed” chart. It’s been on rocketship trajectory from 0 since 2008. That money isn’t being lent and thus isn;t making its way into the system

    I think what QE2 accomplished was to force yields to unacceptably low levels for most institutions and retirees, forcing them out on the risk spectrum.

  48. Daniel says:

    BR, don’t you think the growth of government might be part of the problem? And government unions?

  49. DeDude says:

    Daniel;

    Why would government growth/spending be a problem?

    Look at the GDP formula it makes no difference for GDP if the spending is by a consumer or by a government, $1000 spend in either category is counted as the same $1000 of additional GDP.

    If a group of 5 people each spend $1000 to repair their own houses, or they pool their money and spend the $5000 to repair a bridge, or they pay that $5000 to a government that they elected such that this government could spend the $5000 to repair the bridge – it is all giving the exact same effect on the economy and GDP.

    Government spending is simply a collective spending of money on products and services that a democratically elected government consider to benefits the collective group. There is no reason to consider it in any different terms than when you consider individuals spending (and waste) on products and services that they consider to be of benefit to themselves.

  50. Daniel says:

    And with that reasoning we can all work for the government, right?

  51. leeward says:

    re-post this one again over the rainy weekend

  52. Daniel says:

    DeDude
    Crickets

  53. DeDude says:

    Only if we decided to let government deliver everything we ever needed and wanted. But experience has shown that there are some things better delivered by the private sector and other things better by the government sector. So we have both. But that does not mean that the size of government can be defined as “to big” simply based on emotions regarding “big gobinment” or some phony arguments about the size of governments being bad for the economy (by some secret mechanism?).

  54. [...] Ritholtz distinguishes between the short-term and long-term problems of the U.S. economy and looks at secular bear [...]