Tonite, let’s have a little fun with our subject, being the Fed:

How much is the Fed driving markets?

What about the Economy — how much impact is the FOMC having on auto purchases? Home sales & refis? GDP?


What say ye?

Category: Federal Reserve, Humor, 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.

49 Responses to “Open Thread: Federal Reserve”

  1. The_Dumb_Money says:

    The Fed is engaging in a non-revolutionary procedure that has significant parallels to what it did in the late 1940s, when it kept interest rates pegged low for some time, and owned a significant portion of all government bonds of certain durations. It has acted to prevent deflation, like a captain steering the rudder left to counteract deflationary headwinds what would otherwise push us the other way. 99% of people talking about the Fed don’t know what they are talking about, including many major market commentors. The Fed is not interested in driving equity markets per se, but lower interest rates drive up the value of assets like stocks, inherently. I think the Fed is the primary reason we didn’t suffer another Great Depression over the last four years. I think it is wildly underappreciated, and demogogues on both the left and right have made a lot of money for themselves, and garnered a lot of underserved attention, by attacking it. I think there is little chance the Fed will ‘lose money’ if interest rates rise, because it can let its bond portfolio run off to maturity, meaning no principal losses. And if growth/inflation gets too out of hand it can raise the interest rate it now charges on reserves, to curtail lending, a tool it did not use to employ. I could be wrong, but I think the single biggest money-losing proposition of the past four years has been not fighting the Fed, but misunderstanding the Fed.

  2. drewburn says:

    In a vacuum, the fed is totally driving markets, most certainly bonds. Aside the vacuum, I guess we’d be in a great depression. Is the market over-valued versus a “nominal” fed policy, probably a little, but interest rates would be higher at least somewhat (the 10-year would at least be 3%!!) However, the fed is always a major factor. Probably the next calculation is when will they remove stimulus? Personally, I believe if they reverse course sharply we would reenter recession and possibly worse. So, is there an option for them at this point? I doubt it.
    Can stocks run dramatically from here? Probably not, but the rally can continue in moderate terms. Can things rotate; I expect it. Defensive stocks are over-valued. Cyclicals are not. That is just based on the backdrop macro. I’m in the camp that says Ben errs inflationary. If I wasn’t, I wouldn’t own stocks at all: I’d buy sub-2% treasuries.

  3. Gaucho says:

    The Fed has a lot to do with this. Back in 2007, we had a financing bubble, 4% unemployment rate and a booming world demand driving the market. Today, we have 8% unemployment, deleveraging, slow world demand, similar earnings and the S&P is about to hit the same level. Only the massive liquidity can explain this. I think the current situation is as unsustainable as the financing bubble prior 2008. However, I cannot picture how this current situation will unravel and the consequences for the market. Will it be Japan? 20 years fighting deflation and four 50% stock market drops on the way. For the time being, I would not fight the rally, quite the contrary, cautiously ride the wave.
    In terms of the economy, I think it’s unfortunate that consumer credit is going up again. It might be a short term boost to the market, but longer term, households need to target significant lower levels of leverage. It feels like very little has been learnt from the crisis.

  4. Frilton Miedman says:

    I summed my thoughts on the “Recession began 2012″ blog –

    “Equities are almost completely disconnected from the economy, either they’ll eventually drag Joe Six up, or Joe’s gonna drag them down.

    Maybe a play on that idea is to get long middle of the road retail & short the S&P or other more frothy sectors.”

    With the Tea Party crowd still forcing the ill-conceived idea that deficits should be addressed in the midst of a struggling economy & middle class trying to get back on it’s feet, it’s going to be nothin’ but Fed for a while.

    Timing is everything, now is not the time.

    Maybe we can get a repeat of election 2012 in 2014, until then, my fingers are crossed.

  5. Angryman1 says:

    The FED hasn’t pegged any interest rates. Matter of fact, more seigniorage should raise nominal interest rates, which the current push has helped stop the drop of. Once debt servicing falls below debt production, the economy will surge toward recovery. Raising the nominal 1 year note would then be prudent. It is all about money demand and store value. That is why deflation generally has sucked in the past and sent the capitalist system to its knees. While it may provide a temporary value boost, it destroys value in the economy and money in general. So thus default comes ala 1895 or 1933 which was coming fast as debt owners give up on the economy as a whole.

    The problem is debt deflation causing lack of areas to put money. We don’t have enough cash which is chasing to many goods. If anything, the Bernanke FED hedges to close to disinflation. If the FED were abolished and replaced with a true public national bank, we wouldn’t have this problem.

  6. cuprous says:

    The_Dumb_Money –
    where to begin… Did the Fed help avert a greater “crisis”? Perhaps in the sense that it preserved (saved) the bloated financial sector which has grown far, far beyond its use to society thanks to accommodating legislation. Another course of action would have been to put every bank or firm that was insolvent into receivership until it could all have been unwound. Could we have back-stopped some of AIG’s guarantees while also breaking the company up into 20 pieces? Of course. Would there have been lots of lost jobs in the financial sector? You bet.. But guess what — the bottom half of America owns less than 1% of equities and could give a damn about however many brokers and analysts have to change careers.

    So now the Fed is spewing $120 million dollars per hour into the market and the profiteers are giddily clapping their hands about new highs, “confidence,” and an economic turn-around when one need only GLANCE at the macro data to realize that the markets are way out of touch with reality. How much longer can it go on? What sort of fool’s errand is Bernanke on?

    As to the Fed “raising rates” — spare me. They can’t. They know very well that the Federal Government can not handle anything but near ZIRP on treasuries lest our debt servicing costs explode (which they will). Its independence is a farce — operation Twist was a grand act of can-kicking to buy just a little more time. And do you really think QEternity is going to help unemployment when, again, half this country doesn’t own a share? It’s a joke.

    Think about it – it now takes $4-5 of deficit spending to generate $1 of GDP growth. What happens next? $1 billion per hour? The velocity of money is lower than it has been in 50 years. Your comment about “curtailing lending” is farcical. There’s hardly anything to curtail.

    When the next down-draft comes everybody will look at the Fed with the puppy-dog eyes of Oliver Twist – “Please, sir, may I have some more?” And the Fed will literally have nothing more accommodating to offer. It is then that we will learn how far off its charter it has gone and the deleterious consequences that come of short term thinking by critical institutions. No amount of gnashing of teeth will matter at that point. Gravity will take hold and the markets will fall onto the million punji sticks of margin calls (we’re already back at 2008 levels).

    It would be tolerable if the great wash-out just resulted in lost money and finance returning to being a boring job for boring, risk-averse people. But by allowing our government to leverage itself as highly as it has and by preventing any meaningful consequences to come about from the most recent bubbles popping there will likely be far worse effects as the government has to suddenly draw-down its spending or take other drastic action.

    Will we draw the connection at that time to the Fed’s current “accommodation”? Will we even care or will there be far more urgent matters at hand?

  7. mad97123 says:

    If the free markets had to absorb the 2 trillion in debt the Feb has purchased it seem clear that money would not be available to look for another home in other assets.

    Forcing down interest rates has certainly created a “wealth effect” for bond holders as well as stock holders. Off-setting that bond “wealth effect”, which can only be realized by the few who actually sell, is the fact that savers earn no income to spend as consumers.

    Retiring baby boomers must work longer because they can’t get a decent yield, crowding out younger workers. Low rates are also keeping house prices higher than they would otherwise be, so younger families can’t afford a home.

    Interest rates are one of the economy’s most important price signals. Price-fixing interest rates by Central Planners certainly can’t be call capitalism. Price fixing Cental Banks are picking winners and losers, redistributing wealth, and distorting capital investment allocations.

    People are now running into junk bonds like they did mortgage backed securities in the housing bubble. Virtually all the Gurus say “this will end badly”, but we have to party while the music is playing and the punch is flowing. Perhaps they are wrong, and a free lunch has been found for all. This time may be different.

  8. rd says:

    Cars wear out and 2008 was 5 years ago. I suspect the Fed is helping car sales, but probably more at the mid-to-upper price end.

    I suspect that much of the “resurgence” in home pbuying is not for primary residence purposes, but for rental and nvestment instead. The Fed is clearly handing out nearly free money to push that hard.

    Similarly the FEd is driving much refinancing which is probably the single best thing that they have accomplished to assist with the deleveraging process. If you meet traditional mortgage requuirements, you can have major savings which opens up more disposable income for consumer purchases and savings.

    The Fed is clearly goosing GDP which is allowing the politicians and business leaders to wriggle off the hook so they don’t have to woory about being effective.

  9. Angryman1 says:

    “Think about it – it now takes $4-5 of deficit spending to generate $1 of GDP growth”

    Poppycock. That is pure intellectual mumbling with no basis behind it. The amount of debt created will generate the GDP in which the investment that is made. You are not going to get as much with transfers as you would with infrastructure. That is a fact.

    Zirp is a creation of learning from the past of debt deflation and debt servicing. You make debt servicing more expensive by artificially forcing nominal rates up like done in the long past, you destroy the economy even more. It was easier to handle when the US was slow growth and poor like in the 19th century, but now, you are setting the stage for disaster. The US doesn’t need “zirp” to handle debt. Debt is the price of doing business which any invester or capitalist knows.

  10. The_Dumb_Money says:


    1) After asking where to begin, you chose in your first paragraph to begin with something unrelated to my comment. I fully agree many banks could have been broken up. Glass Stegall should never have been repealed. It’s not what I’m talking about. (Also, a lot of that bailout stuff was the Treasury’s doing, not the Fed’s.) Perhaps it is my fault for being unclear: when I said the Fed saved us from a Great Depression, what I mean is with it monetary policy. I think how you began your comment perfectly encapsulates how many on the Left have allowed their view of the bailouts to cloud their judgment as to the monetary policy. So thank you for providing that service.

    2) The markets are not way out of touch with reality. The markets do not respond to the employment rate primarily, or to the wages of the middle class. They respond primarily to corporate profits. Those are up. So are the markets. We are at a reasonable yearly P/E and a not great, but not stratospheric Schiller P/E. Your statement is factually wrong, or based on false assumptions of what drives markets.

    3) What does it matter that QE and Twist were can-kicking to buy time? Of course they were. That’s the whole point. That’s what a very similar program was in the 1940s. Who cares? Also, QEternity is not about helping people because they own shares of stock, so that sentence in your third paragraph is also based on a lack of understanding about what’s going on. QEternity is about what the call of this discussion pice talks about: allowing that part of the country that doesn’t own shares to more easily afford a car, or refinance a mortgage, or afford an adjustable-rate mortgage whose rate has consequently gone down, etc. These are real effects of QE, that impact real people, often those on the lower half of the income spectrum who tend to be the most indebted.

    4) I do not understand why you think my comment about curtailing lending is farcical. You wrongly imply I was talking about present lending, when in fact I’m talking about a future scenario in which lending picks up. Ironically, you make my point on deleveraging and deflation when you talk about how low the velocity of money is. That is precisely why the Fed’s actions have been so beneficial and necessary now.

    5) The idea that the Fed has nothing more accommodating to offer is another common misconception. The Fed could buy the bonds of foreign countries. The Fed could buy even more Treasuries. The Fed could buy way more mortgage bonds. The Fed could reduce interest rates another fifty percent.

    6) If you think there have been no meaningful consequences from the bubble-popping, you are not living in the same world I am living in. Lehman, one of the most respected investment banks, is gone. It’s shareholders and bondholders wiped out. Bear Stearns, another highly respected and influential firm, though also second-tier, gone, its shareholders wiped out. BofA turned into a near ward of the state and “strongly encouraged” to buy Countrywide and spend its profits for half-a-decade on staunching Countrywide’s losses. Were there consequences enough, no, but there were vast consequences. People now belittle the fact that even Lehman was allowed to fail, but before the crisis, even that was unthinkable.

    To the rest,

    I deliberately posted a provocative pro-Fed comment on Barry’s thread, and I’m grateful to him for publishing it. To respond more to the call of the question, I should say that the Fed is having a huge impact on refis, car loans, etc.

    drewburn is on point. Either the concerns of people who think what the Fed is doing is ‘artificial steroids” will prove correct, and we’ll all end up screwed. Or the opinions of people like me will be borne out: that the Fed’s monetary policy has smoothed over what really is or would have been the Second Great Depression, and that given enough time, private deleveraging will end, and at that point the economy will be able to stand on its own two feet and resume a more normal trajectory of growth without Fed intervention, even if there is disruption from likely inflation overshooting by the Fed at the end of the deleveraging cycle.


  11. cuprous says:

    “Poppycock. That is pure intellectual mumbling with no basis behind it. The amount of debt created will generate the GDP in which the investment that is made. You are not going to get as much with transfers as you would with infrastructure. That is a fact. ”

    Well, duh. But we’re talking about *government* deficit spending. Do you think a dollar spent by the government equates to a dollar spent by the private sector? Is a buck spent to buy fuel for a destroyer or a deposit into a EBT account going to have the same effect on GDP? Me thinks not.

    Lee – the chart says it all. The question is, when does the unhappy divorce take place.

  12. mitchn says:

    @cuprous says the velocity of money is lower than it has been in half a century.

    What do you expect after the biggest credit binge in history? There are three things you can do with debt: pay it back, write it off, or inflate your way out of it. The completely clueless austerians (Faber, Schiff, Santelli, Taylor, the Chicago boys) are pushing for the former, which would make the Great Depression look like a walk in the park; the left lefties would like to see option two, which would cause massive deflation and another Great Depression, or worse; and Bernanke and the Fed is trying to navigate a path between one and two through mild debasement of the currency. (Mild because all the other indebted Western economies are debasing their currencies and their emerging trading partners have no choice to be follow suit.)

    Deflation is the problem here, people. The genius of capitalism is its ability to kick the can down the road. The Fed gets it; why is it so hard for supposedly knowledgeble market participants to get it?

  13. barbacoa666 says:

    My wild guess is that the Fed, by keeping interest rates low, allows people and businesses to refinance debt on better terms, freeing up cash for other spending. A byproduct being that Federal debt service is is now very low, even though total debt is high. Thus thwarting the doomsayers forecasting Federal default will be proven wrong.

  14. Chief Tomahawk says:

    Just a review of the score to date: Bernanke testifies before Congress in 2007 that the sub-prime crisis would be contained. An unprecedented meltdown ensues. Bernanke, despite being appointed by a Republican, is then re-appointed (early) by a Democrat who zings Republicans for their “failed policies”. Meanwhile, in the dark of the night in March, 2009, the Financial Accounting Standards Board issues FASB 157, changing the rules on tier 3 asset accounting from “mark to market” to “mark to model”. A multi-year bull market ensues. 2012 election non-issue: prosecutions associated with the 2008 financial crisis. America: what a country!

  15. TennesseeTrader says:

    ^^^ what cuprous says.

    I think the thing that really gets to some people is the policy of doing whatever it takes regardless of the costs to preserve the banks that got us in the mess to begin with. I don’t believe there was truly no middle-ground. I mean do what we did, or do nothing… yeah it’s probably better to do what we did. Why do people assume do nothing was the only alternative. Protect the AIG counterparties at par? Allow Libor bid rigging? etc. etc. etc. My Dad (retired) who doesn’t have a lot of money had a hunk stolen by Corzine. Why is that man still walking around? I got a bit off topic of the FED, but they go hand in hand…. do anything at all costs in an attempt to never have to face the truth. So that’s our reality and the environment we have to “invest” in. When I buy/sell stocks now, my main concern is the FED, since the FED is the market. Yes I am oriented long only, but I have a quick trigger.

  16. subscriptionblocker says:

    I often wonder how a skilled and rigorous historian will analyze this period 50 years from now via the benefit of hindsight….Setting aside all the theories and religions – it’s not at all clear the Fed made effective moves and the costs of these moves concern me.

    Not swayed by conspiracy theories, recognizing some potential for corruption *and* for good will, and not at all certain the fed serves the public interest. Only time will tell. Change from our present central bank system would be welcomed – if only because multiple efforts might help us finally get it right.

    Our economy may be smaller now without adequate demand, but it’s hard to pin causality to the fed. For those who refinanced, the fed might have saved them from ruin, and provided a window to heal by lowering their debt carrying costs. But the fed can’t change the underlying economic defect of “inadequate income to support demand” – therefore they can only buy time.

    We’ve “bought time” before. Maybe it’s time to look for another way?

  17. gloeschi says:

    Imagine: another zero GDP growth print in Q1, so US back into recession. What now, Fed? Can’t stop printing those trillions now, can you? And with CPI-U already in negative territory over last 3 months panic will set in. Those silly “some FOMC members expressed concerns…” remarks will never be heard of again. Instead, Fed will have to invent some new QE magic and possibly try to trash-talk the strengthening dollar. Good luck!

  18. MikeNY says:

    OF COURSE the Fed wants, and targets, higher asset prices — especially houses and equities. Greenspan admitted as much. Houses, because of the massive mortgage debt overhang; both houses and equities because of the wealth effect, which is one of primary transmission mechanisms of Fed policy.

    The Fed wants people to take risk; people are taking risk. How much of equity prices is due to the Fed? Dunno — Grantham said a “fair price” was somewhere around 1150, but that was a year or so ago. Profit margins are historically very high, interest rates very low — you might expect both to mean revert. Someday.

    I suppose we should all ride the wave — as Grantham and Dalio recommend. But don’t expect it to last forever, and diversify among asset classes if you want to sleep at night. No one knows the day or hour when this bubble will pop.

  19. TennesseeTrader says:

    It’s actually fairly easy to have a quick trigger since during QE the market doesn’t drop more than 2 percent.

  20. beaufou says:

    The Fed wants to avoid deflation and is doing a good job, keep interest rates low and wait until the next bubble forms.
    The real economy is the Government’s job and they are swimming in the sand primarily because they believe money thrown at oligarchs will save the day. It hasn’t for 15 years and it will continue to be so.
    Now, making everyone refinance their debt and get a new “smaller” car might get the job done for a while, but at what price for society?
    It won’t solve inequalities which is the main problem lately, but that is the Government’s job and politicians are clueless…absolutely.

  21. Bob is still unemployed   says:

    Little ole me can borrow money (home equity loan) at a rate of 2.85% from CitiGroup.




    2.friggin’ 85 percent.

    Two point eight five percent. Read that slowly.

    If I were a country, I would want to jump on that opportunity for cheap money to build an infrastructure for the future.

    Unfortunately, I am not a country.

  22. Internet Tourettes says:

    Low interest rates is becoming the newest form of corporate welfare. Just wait until the economy starts to become self sufficient and every neocon will be harping on intrest rates the same way that they complain about taxes now. These rates are like the taste of meat to a dog, once experienced it will never be forgotten just like the stupidity of the first Reagan tax cuts they will be come part of the corporate lexicon of government needed for the free market to work.

  23. neddyj says:

    I’m not as smart as many of those posting responses here I’m sure – I can’t comment on the impact of the Fed’s actions on the housing market (though 40+% of last year’s home sales were distressed, that number seems pretty large for all those saying that the housing market is recovering) or on the jobless number (those numbers have certainly looked better lately…remember when we had the first really good number in October and Jack Welch said the number was changed by Obama to secure reelection?) – but I can say that when the stock market got an inkling of a whiff of a very beginning of a conversation about the Fed possibly pulling the punch bowl away, the market reacted like Jack Welch hearing a good jobs number just before an election with a incumbent democrat president.

    Which tells me that the ‘Great Rotation’ – where a large segment of the bond market is sold (to no one, if you buy this theory – or else we couldn’t call it a rotation, right?) is really a cover story for the “Great Re-levering” except that it’s not done by consumers borrowing all that spare equity in their homes to buy ipads, lcd tvs, and yachts, but rather the huge amounts of leverage being put to work by the hedge funds run by Dalio and the lot. They love how much this market loves Bernanke…and they love that Bernanke has been so unwavering in his stance…and they love that he has enough members of the Fed agreeing with him that he can keep driving the bus – but man will they hate him if he ever takes the punch bowl away…or even just threatens to do so. Actually, when you think about it – the Fed could just threaten to take the punch bowl away and the market reaction would be so extreme that they’d have the same evidence that they used to create the punch bowl in the first place and the bernanke bus can just keep on chugging.

    So how much is the Fed driving markets? My scientific answer is – quite a bit. I like Lee’s chart – picture says it all. They’re doing what they can to keep the markets up, and they’re hoping that the economy gets some traction…but it’s all a big experiment, the side effects of which we’ll start to experience within the next few years.

  24. Concerned Neighbour says:

    The initial round of QE was defensible. An extraordinary credit event – of which it’s worth noting this august institution did not foresee and arguably contributed too – called for extraordinary measures. It’s now four years later and we’re on to QE4, the biggest commitment of them all, an open-ended vow to purchase $85B of debt per month. This so-called emergency, temporary stimulus is now the permanent monetary policy of the Fed. At what point do we say this policy has run its course? I say the cons started outweighing the pros after QE2, and possibly even after QE1. Now we’re into the realm of ridiculousness, with the Fed seemingly hell bent on creating bubbles in all asset markets. They’ve already got an historic equity bubble, and I’m guessing they won’t stop until housing returns to bubble levels too. And since QE really benefits most banks and speculators at the expense of everyone else, we’ll be waiting a long time for housing to return to bubble levels (by which time no doubt the DOW will be trading at the “cheap” level of 50K and hedge funds will own 75% of all real estate).

    And yes folks, we already have equity market bubbles on our hands. Stocks are simply not allowed to fall any longer, a tell-tale sign of a bubble and a total lack of caution in the market. P/E valuations give the illusion of fair or only moderately over-priced levels, but that’s a function of historically high margins, low interest payments on debt, ZIRP “temporary” stimulus, and complete and total regulatory capture (i.e. anything that would hurt corporations in any way is no longer possible). Meanwhile other valuation metrics with better track records are saying overpriced, some hugely so.

    BTW, the Nikkei is up another 2% today. That’s a ~30% gain since December 1st. Recall that Japanese minister saying he “wanted” 13K on the Nikkei a while back? Well, color me shocked and awed, his “want” is miraculously going to come true. It’s almost as if he or some other part were exerting control – perhaps you could say “manipulating” – the market higher, but we know those kinds of shenanigans can’t go on in developed countries…

  25. nofoulsontheplayground says:

    Consumer confidence surveys are basically a gauge of the stock market. In that respect, the various QE programs are likely putting a floor under the stock market as well as the consumer.

    With TBTF and the Fed back-stop, risk-taking keeps ratcheting up little by little, particularly with the improved capitalization of the US financial sector.

    As for the housing sector, anecdotally, I am seeing a bit of a frenzy in my area in all housing. Tight supplies in non-judicial states combined with minor hikes in mortgage rates have sent folks scurrying and even bidding up prices above listed prices. It makes sense, as a move from 3% to 3.6% in a mortgage increases the interest cost by 20%. 25-years ago a similar move would have been from 10% to 12%, as that was the prevailing interest rate range at that time. In this cont

  26. mitchn says:

    @Bob is still unemployed

    You’d want to borrow at those low rates to build infrastructure because you’re smart. Republicans in Washington? Not so much.

  27. MidlifeNocrisis says:

    I don’t hardly know enough to have any idea with regard to the questions. However, I have been working hard the last few years to become educated about the economy and markets of countries that have their own sovereign, non-convertible fiat currencies. That said… I would have to generally agree with The_Dumb_Money.

  28. raholco says:

    I currently have a 15-yr mortgage @ 4.5% that I’m 3 yearsi nto. Even with the refi rates at historic lows it makes no sense for me to refi at the lower rate due to the myriad closing costs. I already have a 0% APR on a Toyota Prius! And to top it off, my latest property tax bill will be dropping over 30%.

    My immediate goals is to pay off my HELOC and the Prius. As long as the US doens’t shit the bed economically, I hope to ride out the future by retiring as much debt as I can in the most expeditious manner I can, while keeping my 20% 401(k) contribution and finding a new home for my underperforming JPMC 401K.

  29. bear_in_mind says:

    Q) How much is the Fed driving markets?

    A) It’s a tough question to answer since the counter-factual outcome is (virtually) impossible to measure. I think it’s provided something of a perma-bid for equities that even HFT has been able to break… yet. But it does seem to resemble superconducting levitation, and when the power (i.e. flow-of-funds) is cut, we might see a frightfully fast 15-2o pct drop in equities.

    Q) How much impact is the FOMC having on auto purchases? Home sales & refis? GDP?

    A) Autos are surely benefiting from the low interest rates because how else do you explain auto sales continuing to climb while per-capita miles driven are plummeting to levels last seen in 1998?
    See Doug Short’s awesome charts here for more deets:

    Low interest rates have surely helped home sales, refi’s and renovations, all feeding consumption and GDP by probably 1.0 to 1.5 points. But if median incomes and employment don’t start getting traction, worry that the U.S. is in the grip of a mild form of Japanese-style economic malaise.

  30. bear_in_mind says:

    One other link with nice graphs on U.S. income trends:

    Reflections on the “Wage Recession”
    Mike “Mish” Shedlock
    March 1, 2013

  31. cuprous says:

    @mitchn “The genius of capitalism is its ability to kick the can down the road. The Fed gets it; why is it so hard for supposedly knowledgeble market participants to get it?”

    Yes, that’s working swimmingly well for Japan isn’t it? No doubt they only need to kick a little harder and all will be well.

    To an extent you may already be right though. We are so far down this debt binge that we have no choice but to dance like a mongoose in a snake pit. Just please, please don’t call it “genius.” It’s not.

  32. wally says:

    The biggest problem with the Fed stimulus, from day one, has been that the Fed can pour money out the door bur has little ability to direct that flow anywhere but to the usual cast of characters. It has propped up the banks and spread at least some feeling of confidence in the future, but the overall economy is too big to be dragged by brute force by the Fed.
    We now have supply up the wazoo – all the cash hoards of corporations represent supply in a stunted form: they don’t know what to do with the money. What we do not have is demand, but that is slowly changing. The Fed definitely helps to spark that demand, but the pace of improvement has been very slow because of the inefficiency inherent in the Fed’s approach. Fortunately, the Fed only needs to spark the tinder; once housing picks up and US manufacturing picks up then net earnings will rise and it will all self-sustain.
    Except for dividend stock, investing in the stock market is a totally speculative enterprise. The speculation is that someday someone will be euphoric enough about the US economy to buy your stock from you for more than you paid. The signs increasingly indicate that this may be a reasonable hope… and so the market rises.

  33. eliz says:

    The Fed has made the richest richer, debtors less pained (than they would have been), the fiscally responsible poorer and more pained (than they would have been), and youth less hopeful (for good reason).

  34. ab initio says:

    it seems the deflation bogeyman dominates this discussion as it does since alan greenspan.

    is the deflation threat for real??

    deflation i thought was the walmart model of everyday low and lower prices. and what most american consumers spend many hours.

    i for one am quite happy that computer prices have deflated. i am still waiting for my healthcare costs to deflate not inflate 9+% every year.

    prudent savers would love deflation as the purchasing power of their savings would increase. who does not like deflation – profligate governments and people living high-on-the-hog on debt!

    the fed is a serial bubble blower. each asset bubble bigger than the next. y2k+ltcm—>tech bubble—–>housing+private credit bubble——>sovereign debt bubble.

    if ever there was a epic fail in an institution – it is the fed!!

  35. fedwatcher says:

    It is so simple. The Fed works for the banks that own it. The banks want to play in the markets rather than make boring loans to business and individuals, thus the Fed drives up the equity and bond markets.

    So far the Fed is running out of its ability to drive up bond prices, but is continuing to drive up equity prices. Eventually the Fed will not be able to support bond or equity prices, but we don’t know when that will be as this is new territory. It is always a question of the unknowable ‘when’.

  36. LostnRanter says:

    Since waking up to the public and private delusions of economics, I recognise there is no science whatsoever behind money markets. It is all about asymmetries and opportunities – creating them and destroying them. Since it’s inception, the Fed’s mandate is to do both, but not on it’s own. Currently it is portrayed as the provider of ‘optimism’ in an ocean of apathy, but it needs to be understood what time enduring cyclic asymmetries are being created (this time) by ZIRP following Paulson’s gun to the head bailouts and TARP/TALF. Chasing high yields in low growth are a no brainer, but bubbles (asymmetries) still form, and various spreads are widening to the middle and poorer class of stocks in the equity market. Diminishing utility (lower returns) will dictate when the powerful money starts to shift behind the curtain of popular hysteria. Market asymmetries are the ball, the FedRes is just one player. Nothing has changed in the mechanics of generating competitive investment returns for 300 years and a healthy shot of bullsh*t goes a long way to dividing interests. Hence the Fed cheerleading in the centennial year will be extremely lucky to see true pricing mechanisms, if there is even such a thing. Price is only ever what someone else is willing to pay – and the Fed is currently helping to assemble people who are still willing to pay.

  37. MikeNY says:

    Timely post on the IIF’s warning wrt easing.

    And I agree w/ this argument: the Fed’s interventions will almost assuredly exacerbate America’s wealth inequalities, which are already dangerous, while only generating low-quality, likely ephemeral growth. Under the banner of restoring unemployment, they are protecting the plutocrats and corporatocracy. They are enabling Congress’s fiddle-playing as Camden and Detroit burn. This is why they need a mandate to prevent asset bubbles.

    The Fed is now complicit in the US Congress’s dereliction of duty.

    Still, I don’t see that changing soon, so I’m riding some part of the wave.

  38. MikeNY says:

    obvs, I mean “restoring (full) employment” in the post above

  39. Moss says:

    The monetary policy unleashed by the Fed was necessary due to the dereliction of duty by the Congress.

    The ‘market’ is now almost a complete representation of the Corporate sector. The real economy is represented by the high unemployment/underemployment, wage stagnation, income and wealth concentration. Massive student debt.

    I think the Fed is hoping that both housing and equity prices (valuations) go up and stay up together.

    To accomplish this they can’t sell what they have on their balance sheet for a while if ever. It may be possible for them to cease buying, providing ‘flow’ into the ‘market’, but I suspect they will do this very slowly and not until after the 2nd QTR.

    Of course all along the GOP will trying their hardest to throw a money wrench into the works so they can gain seats in the mid-term and ultimately get the White House.

  40. cuprous says:

    I doubt you’ll read this but at any rate..

    1) History will tell if the Fed saved us from anything. They prevented Mr. Market from stepping in and cutting out the tremendous excess in both financial industry and risk that had built up over the years. But not much has changed and we’re back to our old tricks, happily getting drunk on whiskey by the fire while the wolves pace about just out of view. The Fed prevented reality. We *needed* to clear distortion and to do so in a way that didn’t lead us back into another depression. Instead Mr. Fed called down lightning in the form of Trillions of bogus money to keep the party going.

    2) Historically that is NOT true. Unfortunately we live in a society where the top 10% own the majority of equities so LOL who cares about unemployment. That’s for poor people. As to corporate profits — we shall see. They’re ok now, riding the wave of massive liquidity but it doesn’t necessarily reflect health.

    3) BS – QEternity is certainly about keeping the markets up. Bernank has said keeping 401ks etc up is a primary objective. Yes it’s helpful (primarily for the government) to keep borrowing costs down but at what cost to the countless people who scraped together $150k over their working lives and were counting on an additional $7k income over their retirement based on this nest egg? In other words the people who did everything right. Instead the Fed is allowing a profligate government to continue spending money it doesn’t have at rates that would make a degenerate gambler blush.

    4) Again, let’s see what happens.

    5) I call that lunacy ala Japan. When do we say “enough”? When does this policy prove itself ineffective? Are you like Krugman of the “What’s a quadrillion debt anyways?” camp? Can we not aspire to get back to a world of ledgers? One where money is a commodity in finite supply and not some vaporous numeric that goes racing through algorithms and markets to no beneficial end other than the enrichment of the money changers who waste their lives participating in this endless game of three-card-monte?

    6) Lehman – “one of the most respected investment banks” — that had teams of risk analysts who .. failed miserably. I guess it wasn’t so “top tier” after all. These guys wanted to play fast and loose and they lost their bets. Why should they not pay the consequence? ALL of them? If the government had the money to make them whole the government had the money to cauterize system risk while letting them fail. Instead we socialized their losses while their back to their private profits amidst a floundering economy.

    Once you get past an adequate supply of banks for a functioning economy and an adequately liquid market for price discovery I see the rest of the financial sector as being nothing but dead weight that only serves to skim the top and impede worthy GDP growth. We had a chance to fix this in 2008 but thanks to the revolving door of Fed / Treasury / Goldman Sachs we ended up keeping them all whole. It is, in a word, disgusting.

  41. b_thunder says:

    It’s all rather very simple: Watch what the FOMC does, not what it says. Most people see the differences, but are scared to acknowledge what’s in front of their eyes.

    For instance, if the FOMC wanted more lending to businesses as they claim they do, they’d give loans to businesses. Surely they wouldn’t pay interest on excess reserves. What they do is the opposite of what they say they want to achieve.

    If the FOMC wanted to create jobs and support housing, they’d take $3 Trillion they will have printed by the end of 2013 (that’s roughly $10k per person, $40k for a family of 4) and offered that in a form of a gift or a interest-free long-term balloon loan to prospective buyers on a condition that it’s used for down payment on a personal residence (and those that don’t wish to buy a house would get the same $10k over 10 years in small installments.) What the Fed actually does only supports the banks by overpaying them for MBS, and the only jobs it’s creating are the MBS trader jobs.

    The Fed talks about the positives that the “wealth affect” causes, but since the top 1% controls 50% of all stocks and the bottom 50% only 0.5% (see this: )
    it’s impossible for the Fed to claim with a straight face that the stock market “pump” will drive any sort of meaningful consumption binge. But Ben keeps making this claim with a straight face, and for that I’d nominate him for the next Oscar for an extraordinary male performance.

    In conclusion, what is clear is that the only two things the Fed and other central banks are concerned about are:

    1. A massive and continuing bailout of the largest banks. The stock market is but one of the bailout conduits.
    2. Printing USD, EUR, Euro, Yen and GBP for the governments in exchange for the governments’ implicit promise of “non-intervention” in the central banks’ bailout affairs; a payoff for keeping the public/Occupy Wall St at a safe distance.

  42. Global Eyes says:

    We are in a Fed-fueled rally that includes a never-ending bank bailout. But you have to think about the future, so I grabbed this:

  43. The_Dumb_Money says:


    Suffice it to say I think the following. I’m not going to respond to everything again:

    1) All of the puritan logic you are using about “clear[ing] distortion” and how the Fed “prevented reality” is exactly the same logic used by Hoover and his team at the beginning of the Great Depression. Exactly. There is no evidence we “needed” a Second Great Depression, which is basically what you are saying without saying it. I too would have loved to hang the bank witches from the gallows and paint them with a Scarlett Letter, but you are willfully ignoring the second-order effects of that, the 25% unemployment, the increased suicide, the greater loss in productivity. The Fed’s actions, and our inability to prove a counterfactual, in my view have given you that luxury. Enjoy it.

    2) The distortion IS clearing. It is just clearing more slowly and methodically, and less disastrously. We are not back to the trough. In 2007, 50% of all loans were to subprime borrowers with credit scores of less than 620. Last year, 2%. Your problem is you don’t have any actual data. You are simply regurgitating the thesis statements of various commentators you have read, who themselves are motivated more by ideology than by facts.

    3) Your perhaps justified hatred of banks and the banking system is blinding you to “the big picture.”

    4) While Lehman is not respected now, for obvious reasons, our opinion of it now is not what is relevant when assessing the decision that was made to let it die in real time.

    5) You don’t understand money, and agreeing with the Fed’s monetary policy is not the same thing as agreeing with Krugman’s fiscal policy opinions. Krugman himself in 2001 thought the debt was a problem, in fact. Krugman is not always terribly consistent with himself. That Krugman really means is that the debt is not a problem right now at this moment. But again, you have again veered totally off topic.

    6) Japan has all kinds of problems we don’t have. Japan buys more adult diapers than it buys baby diapers. Japan has a sclerotic, nepotistic, caste-based corporate culture. It is hyper-simplistic for your to exclude everything else different about Japan and focus only on one similarity. Japan also already has debt-to-GDP of 200%. Ours is 70%. Facts, man, facts. And moreover, again, when I agree with Fed monetary policy I am not saying I agree that our national debt is hunky-dory forever. Your irrelevant foray into national debt issues shows that you are unable to de-link the two issues in your mind. You should try. Boehner has a point that the Fed’s actions have somewhat reduced the pressure on Congress/President to reduce the long-term deficit. But that is only because Congress is a bunch of cowardly, pathetic, venal jerks. Everyone knows the long-term structural deficit has to be dealt with. They are just too afraid to fix the problem. But the solution to that, and to your bank-hatred, was not and is not a monetary policy by the Fed that allows deflation to take hold and for us to have 25% unemployment.

  44. The_Dumb_Money says:


    Also, let me just go ahead and present and then debunk the what is really the best and most intelligent counterargument to me, which you have not even made.

    That argument is: why should we trust the Fed, when the Fed caused this bubble and had a disastrous monetary policy, particularly in 2002-2006?

    The answer is as follows:

    1) Many things caused the bubble. The Fed contributed. So did the Bush Administration’s disastrous 12 CFR 560.2 preemption of all state unfair lending laws. So did good-old-fashioned greed — that idiot “Rich Dad Poor Dad” author stoked individual belief in the never-ending-increase in home prices thesis early in the cycle. So did the repeal of Glass-Steagall. So did government efforts to increase “access to credit” for low-income borrowers. So did the private mortgage securitization system. So did the idiot/corrupt rating agencies that rated top-tranches of trash AAA. So did the idiot portfolio managers who bought the crap for years because of those ratings, thus keeping up a market for the insanity. Etc. Barry has blogged extensively about all of the causes, and he’s right. So to say it’s all the Fed’s fault is another ludicrous oversimplification. A significant portion — not all, but a significant portion of that stuff is fixed. In fact, Dodd-Frank even ended 12 CFR 560.2 preemption for loans originated after its effective date. I’ll bet you didn’t know that, or even what 12 CFR 560.2 is, though feel free to look it up on Google and then pretend you did.

    2) As to the Fed’s role, Bernanke is not Greenspan. Greenspan was an ideological Ayn Rand devotee who believed in a hyper-simplified Larry Kudlow/Hoover Foundation (which, as Barry has said, is only called that because “Clusterfuck Foundation” was taken) version of the world where cutting government spending always causes growth no matter what the broader circumsntances in the world are, and that there are no diminishing returns, ever, on cutting taxes beyond a certain point. These people are like chess players who never think more than one move ahead. He was also deeply invested in Bush being reelected, and actively campaigned for the Bush tax cuts. He was, in short, not an objective evaluator of facts. He was a fitter of facts to ideology. I have seen absolutely no evidence that Bernanke is similar. Bernanke is a good man. Bernanke cares about facts. Like any man or woman, he gets things wrong. But he knows there is risk to his actions. He does not try to hide the ball with Greenspan-speak. He got wrong the impact of the subprime crisis on the broader economy, yes, but so did 99% of the world, and it does not mean he caused the problem, and, frankly, if the Fed had taken more drastic action in 2007, it likely would have just precipitated the crisis even more quickly, because the sees were already long-since sown. By 2006, 2007, there was nothing we could do, in retrosect. By then it was already too late, we just didn’t know it, because of the facts stated in paragraph 1 above.

    Have a nice weekend.

  45. cuprous says:


    I respect what you’re saying and believe it or not I actually do understand where you’re coming from. I feel you have pigeon-holed me a bit into being a rabid, fed-hating, burn-the-banks ideologue. While I do lay in bed at night clutching a silver bar I have some appreciation for what Bernanke is *attempting.*

    My main fault with the Fed is that it has no imagination, no ability to see a “good” beyond bringing things back to where they were. We still have these massive financial institutions which are practically above the law due to their size (and political connections). I watched his testimony to congress — all of it — and when Warren prodded him about the “too big to fail” and what he was doing about it he gave a mealy-mouthed reply to the effect of “ah, well, you see, ahem, these things.. these things take time to implement..” And that’s the last we’ll hear of that. I believe Bernanke, a student of the Great Depression, is both afraid of the abyss and overly confident in his own power and simultaneously beholden to the big market players.

    And yes, I totally agree that all participants were at fault in the housing bubble. Down to the idiot on the receiving side of the NINJA loan. I believe those people should lose their homes! Let the market take corrective action! I would gladly pick up a 3 bedroom home on a nice plot for $200k. Will someone take a hit on the chin for the discount? For sure. And if that bank goes down? Well so what. That’s what we have FDIC for. Let the Fed invent money towards the FDIC so that creative destruction can take place! Let the solvent community banks gobble up the assets of the foolish ones that made all the NINJA loans. And if someone bought the pile of shit that was a lot of these MBS then it’s on them. Cause and effect. The ledger. Sanity. How else will we learn? More to the point, it didn’t have to automatically be another Great Depression!

    You rightly lament the fools and cowards in congress and its inability to manage a budget but why should they? Why should they subject themselves to the discipline of the bond market when Uncle Bernanke will open his wallet and hand out interest free money forever (we’re not getting to 6.5% unemployment unless a whole lot more people roll out of the labor force)? Why? How does this possibly end well when, despite Trillions, the macro data is still basically flat-lined? Labor force participation – still down trending. Food stamps, disability – uptrend. Trade deficit? Still there (perhaps down a bit due to dropped demand). Consumer confidence? Basically at the nadir of the dot com crash. What’s up? The market. Hooray USA.

    I’m aware of Japan’s faults, its diapers, its ancient culture. At least they racked up their debts from the actual savings of the populace. Thanks to ZIRP there’s no incentive to save over here. Saving is for fools. Go into the market or become poor. When I watch the talking heads on TV and the grinning traders and the market going up, up, up!!! and everybody running around practically shouting “whee!! wheeee!” I can’t help but think “here we fucking go again.”

    Time will tell if your faith in Bernanke is justified. Keeping in mind, of course, that his term is up soon.

    No, I was not aware of 12 CFR 560.2. I will read up on it.

    Thank you for taking the time to make your arguments and have a nice weekend yourself.

  46. Frilton Miedman says:

    The_Dumb_Money Says:
    March 8th, 2013 at 1:25 pm
    “5) You don’t understand money, and agreeing with the Fed’s monetary policy is not the same thing as agreeing with Krugman’s fiscal policy opinions. Krugman himself in 2001 thought the debt was a problem, in fact. Krugman is not always terribly consistent with himself. That Krugman really means is that the debt is not a problem right now at this moment. But again, you have again veered totally off topic. ”


    You’re saying Krugman had two different stances in two different economic environments, though I agree Krugman’s economics isn’t Monetary, I also think it’s wrong to believe economic strategy should be fixed.

    This is why no one understands Keynesian economics, everyone just thinks Keynesian means to blindly spend all the time and tax all the time.

    It doesn’t, Keynes required austerity once an economy rebounded.

  47. The_Dumb_Money says:


    The main people who think Keynes means to “to blindly spend all the time” are the conservatives who tar Keynes and treat Keynesian spending during bad times as bad. They do this because they think government can never possibly do any good, ever. If they were to acknowledge increased government spending in bad economic times could actually be a positive, their simple little heads would explode. Their whole worldview is anti-nuance, and they get away with it because their base voters are a toxic combination of economic illiterates and hyper-cynical plutocrats.

    The problem with Krugman is he lets his politics get in the way of his economics. I’m not saying economic strategy should be fixed. I’m saying that in 2001 he was saying the future debt was a problem. Now he’s saying it’s not — the future debt, the expected debt, and it goes beyond his Keynesian arguments (which I agree with). While PRESENT economic circumstances have changed since 2001, the long-term future problem is basically the same now as it was in 2001, which is why his position is inconsistent. The only difference is then he was arguing against Bush tax cuts, and now he is arguing to protect the great liberal entitlements. I for one am perfectly capable of agreeing with Krugman that the entitlements are important and the risk is inflated (especially wrt social security), agreeing with him on Keynesianism in bad times, basically agreeing with him on monetary policy, and yet recognizing that he can often be a self-contradictory and manipulative git.


  48. justaluckyfool says:

    ” The idea that the Fed has nothing more accommodating to offer is another common misconception. The Fed could buy the bonds of foreign countries. The Fed could buy even more Treasuries. The Fed could buy way more mortgage bonds.”
    Perhaps that is correct, but the Fed is not presently a “CBWFTP” (Central Bank Working For The People) they are really just working to improve the profits of the “PFPB” (Private For Profit Banks).
    As for “buying mortgages” that would be ‘working for the people’ so what is the Fed doing ? BUYING MBS’ that’s working (using our money) for the gain or profit of the PFPB. The PFPB are insolvent. The Fed can save this nation from a “systemic failure”. It must mandate 100% capitalization for all PFPB but it must also (to prevent the total collapse of the currency) provide a means to deleverage “the incomprehensible amount” needed to capitalize this massive credit expansion.
    The solution is to start working for the people and separate the Fed from working for the PFPB.
    What IF… The CBWFTP were to lend the PFPB $200 trillion at 2% for 36 years while mandating 100% capitalization or receivership.
    Would that prevent a bust? Yes, but the new ‘fear’ would be deflation: this action would cause the Fed to pull out of the economy $11 trillion a year for 36 years. But tha is the good news and the better news would be : It would go to the US TREASURY as money for Congress to use, no, money it must spend to prevent deflation and make it possible for the note to be paid. And best of all :One great boost for the economy-No need for FICA or personal income taxes.
    Check it out !