Better late than never, I guess:
The Federal Reserve is preparing to put its credibility on the line as it rarely has before by taking dramatic new action this week to try jolting the economy out of its slumber.
If the efforts succeed, they could finally help bring down the stubbornly high jobless rate.
But should the Fed overshoot in its plan to pump hundreds of billions of dollars into the economy, it could produce the same kind of bubbles in the housing and stock markets that caused the slowdown. Or the efforts could fall short and fail to energize the economy, leaving a clear impression that the mighty Fed is out of bullets – thus adding even more anxiety to an already dire situation.
The meeting of Fed policymakers Tuesday and Wednesday is set to be a defining moment of Ben S. Bernanke’s second term as chairman of the central bank. Although he helped win the war against the great financial panic of 2008 and 2009, he now risks losing the peace if he fails to end the protracted economic downturn that followed.
They better act quickly, because the teahadists will be sponsoring bills to eliminate the fed on the way back to the gold standard in a couple of weeks.
how nice of them to wait until the GOP could take credit.
Yes. Far better to sit on your hands and do nothing, maintaining the illusion that the Fed can act but won’t. Gotta keep that powder dry for a real emergency. Or something. :-p
But John, isn’t that telling them to do something during a….gasp….lame duck session? Isn’t that tantamount to TREASON? What are you, an economic terrorist?! What about the WILL OF THE PEEPLEZ?!
The Fed doing this is pretty pointless, though. Quantitative easing doesn’t pump money into the economy, it pumps money into the banks and hopes that they in turn will pump money into the economy.
The problem as Bill Black has pointed out [one and two] is that some of our biggest banks are festering with fraud and may be already insolvent. That needs cleaning up.
A little while back I had suggested the slightly weird idea of the Fed buying state infrastructure bonds instead of treasuries as a way to fund infrastructure spending without going through congress. I was told that won’t work. I wonder if there’s a way around it – to have the treasury issue infrastructure bonds on behalf of the states and have the fed buy those up.
“. Although he helped win the war against the great financial panic of 2008 and 2009, he now risks losing the peace if he fails to end the protracted economic downturn that followed.”
No mention of his (and greenspan’s) responsibility for the financial panic in the first place by not stomping on the housing bubble.
I also agree that one of Obama’s greatest failures was re-appointing Bernanke – a republican fed chairman who disagrees with
Obama’s fiscal policies and will kneecap them – and who was also heavily responsible for the panic.
@cleek: That is EXACTLY what they did.
The American economy is and will remain in the shitter because we’ve managed to import third world labor rates into the country for a third of our workforce. There will be increasing income stratification and inequality regardless of fed action. Combine that with dwindling local government services and you get a local tax liability that outpaces wage growth.
I don’t think that there is anything that the government can do that will reinvigorate the economy to anything resembling pre-1980. And my guess is that oil will be $150/barrel by July 2011. China, India, and Brazil aren’t slowing down and capital is essentially borderless. The American lower middle and working class however has been deemed unnecessary and are getting their throats stepped on.
Fortunately, a not-insignificant portion of them will vote tea party tomorrow because they’re largely ignorant of the overarching economic forces.
Que Sera Sera
Didn’t Ezra and Stiglitz slice and dice this BS in the post today?
I am not paranoid by nature, but I would agree that the timing is highly suspicious. Its not like there was a sudden drop in unemployment. This could have been done months and months ago.
@soonergrunt: It likely won’t work anyway. I’d be shocked if it did.
Que Sera Sera
Bill E Pilgrim
At Fed Headquarters, they finally discover all of the piled-up back copies of the New York Times that the paperboy has been throwing onto the back porch by mistake. “Hey look, Paul Krugman has a column, let’s see what he’s been saying….”
and will kneecap them
It’s not Ben’s fault, the
peoplecorporations that mattered were protected and while the elite may have seen their balance sheets halved, it’s not like they had to sell anything to pay for an ER trip or had to declare bankruptcy and move in with a relative after being foreclosed on.
Ben’s friends are all right and that’s what matters, right? I mean they CREATE the jobs! They deserve everything they have.
Why does everything the media reports on have to crouched in terms of war?
And really…he won that? With nearly 10% unemployment, a fuckton of chumps living in Amana boxes and under awnings, and the Chinese owing half our country….that’s a victory? I hate to see defeat.
I already realize this writter is a bullshit artist when they say
Lets see, to prevent these bubbles the Fed just need’s to do its required job (which it utterly failed to do the first three major bubbles under asswipe.) Gee, end of problem – the Fed just does its required job after pumping in a few hundred billion dollars to the banks – and lets not forget that if the banks sit on the money, the Fed has powers to address that using public attacks on specific banks (that is really far more power than people think.)
@ChrisS: A Darwin moment for the American middle and working class. Really, with our chronic, long-standing trade deficits with not only China but also the EU, our economic decline is inevitable. The only things we export are money and jobs. Nothing the Fed does is going to change that.
I’m not sure about that. The best analysis I’ve seen says we’re headed for a deflationary depression rather than inflation. In which case oil will be $30 / barrel by the end of next year but will less affordable than now because purchasing power will have decreased by more than prices.
How dare you insult the entrepreneurs in our military-industrial complex by forgetting that they lead the world in weapons manufacturing and exports?
@Face: Yep. There was an unconditional surrender of the problem. Look, the stock market is back up. We must have won.
Beyond making sure the bills are paid and we keep putting away savings (In a credit union, natch) I’m an economic illiterate. I’d appreciate it if someone could explain how printing money to buy up billions’ (Trillions?) worth of Treasuries is going to help the unemployed or underemployed man in the street. All I can see is that a printing binge simply dilutes the value of the currency that’s already out there.
why would OPEC ever allow such a thing ?
More than diluting the currency it temporarily plugs holes in bank balance sheets while socializing their losses. Win win.
They won’t have a choice. Take a look at late 2008/early 2009, when oil was $30 / barrel. OPEC can’t do anything about a deflationary collapse. If they try to severely cut supply in order to pump up prices, then they price oil out of reach of those with already declining purchasing power and deepen the crisis. They’ve come to realize that what’s good for the US economy is good for OPEC.
So my feeling that “The dollar; it died for their sins,” isn’t so far off the mark?
I think it’s because the powers that be feel that the reason the american economy isn’t creating jobs is because
corporationssmall businesses don’t have access to capital because banks aren’t sure which of them are next to go under and credit is locked up. Plus small business, you know your average mom-n-pop operation, is burdened by excessive taxation and regulation. Therefore, in order to get America back on track we need to do more tax cutting. It’ll vastly increase the average income and America will be strong again.
I’m 36, I’m I too old to emigrate to a liberal country? I’m thinking New Zealand because of the trout fishing, but I’m not up-to-date on their political situation.
@Dennis SGMM: It would help a great deal if we were an export driven economy like Germany’s. As it stands now, all that will happen is that imports like gas and heating oil will get a whole lot more expensive which will make the cash-strapped consumer happy and eager to go shopping. Or something like that.
That was my first thought. Impeccable timing.
@ChrisS: New Zealand is next to impossible to emigrate to. Brazil, however, is an up and coming country that just elected a female president who is a member of the Worker’s Party. They also have great music and lovely beaches.
If I could only handle the winters, I would move to Sweden. They have their economy in order, a good social safety net, and are nearing energy independence.
In which case oil will be $30 / barrel by the end of next year
Not buying it. Peak oil is here and it’s just a debate on whether it’ll be a slow painful, but peaceful, decline or another decade of billion-dollar wars that turn into some dangerous saber rattling as nuclear-armed border countries start fighting over access to oil fields:
As someone who spent more than two decades in manufacturing I can’t understand why Germany is the world’s second-largest exporter while paying good wages and providing excellent benefits to its workers while we’re being told to suck it up because we can’t compete.
I agree and yet disagree. There are two factors at play – deflation due to the credit bubble which has still yet to pop and peak oil. The second wave of deflation (first wave being 2008) is likely to hit us faster than peak oil – probably within the next year or two. As we try to recover from that deflation is when oil prices will shoot the moon due to peak oil, causing another downturn.
Nicole Foss has been one of the best writers / speakers on this issue – this talk is very worth listening to:
Just to give you an idea of her track record, here’s an article she wrote in Sept. 2007 at The Oil Drum describing in detail the financial mess that would come:
Have they considered Soylent Octane?
Just remember that the fact that our CEO’s have salaries five and ten times higher than comparable ones in Germany and France and Japan has NOTHING to do with it.
@beltane: Yes, it’s going to be just like all that corporate hiring that will suddenly appear after the election. If in fact the corporate overlords have been sitting on job hires, we might get a tiny bump the first couple of months out, but the economic fundamentals will soon reassert themselves.
@Dennis SGMM: Maybe because the German government looks out for Germany. Maybe because the American government looks out for private corporations who couldn’t give a rat’s ass about the USA. Maybe because every bit of conventional wisdom we’ve been fed over the past 30 years is an outrageous lie.
You mean that all of the unemployed factory workers, textile workers, etc. aren’t going to get cool, high tech jobs?
@Dennis SGMM: Probably because too much of our population spends too much of its time praising beebee jeebus, denying science, chasing next quarter’s profit mark, and denigrating the acquisition of skills that allow you to do things.
The other day someone on NPR mentioned that American kids now rank 21st in math and 25th in science worldwide. NCLB is working, just as they wanted it to.
Thanks for the links. I guess I’ve got some reading to plow through.
Incidentally, reading through the comments at the Oil Drum (one of my favorite places BTW) regarding the end of the mortgage boom, a full year before the crash, is enlightening. I remember posting in a thread at TBogg’s old place about the perfect storm of spiraling housing prices, energy, and healthcare coupled with stagnating wages. Too bad I didn’t know how to profit from that misery.
Wow, she really lays it out. I actually feel like I kind of understand what happened much more clearly.
Yeah. I really wish I had read that post by her back in 2007 rather than last year. But I guess it’s better late than never. It’s still amazing to me, though, that the official line in Washington is that nobody could have predicted it.
people have been predicting QE2: electric boogaloo for some time now. and most all of them have been dreading it.
interesting times we live in.
I learned something in the Article at The Oil Drum.
“As the housing market was beginning to decline in late 2006, ” so the elections of 2008 and possibly 2006 were affected already by the housing decline. I keep posting that this election will be bad not because Obama is a kenyonesian whateverist, but because unemployment is at 9.6%. What I have been missing is how much the economy affected the 2008 election as well.
I thought most was due to McCain nominating Snowbilly to be a heartbeat away from the nuclear codes. But that does not really explain House and Senate races.
On its own, it doesn’t, nor will it likely affect GDP growth much in the current economic situation. That extra money is more or less just going to be doing nothing unless there’s a corresponding increase in federal spending to get that money out there, which ain’t going to happen because congress is stupid.
Contrary to a lot of people around here, I actually sort of feel for Bernanke here. Monetary policy isn’t what the economy needs. We need more fiscal stimulus, and all Bernanke can do about that is prod congress to do more. That’s his bigger failure (as opposed to waiting so long for another round of QE), although I’m not sure I’d call it much of a failure seeing as he has no power over fiscal policy.
Yeah, that’s a risk, but in the near term, I don’t think it’s too likely because I just don’t see that money moving around much. It might play more a role when the economy picks up again and inflation might jump a little faster than we might like.
Dean Baker was on my radio this morning explaining the many ways Obama has failed.
If only someone had predicted this would happen, if only.
Belated thanks ( I took the dog for a long walk on a beautiful morning). It looks as though the Fed can pour all of the money it can print into a closed system. As long as the money remains in that system it does the nation no good.
Phoenician in a time of Romans
I’d appreciate it if someone could explain how printing money to buy up billions’ (Trillions?) worth of Treasuries is going to help the unemployed or underemployed man in the street.
It doesn’t, much. Companies should already have access to capital (corporate profits are the highest they’ve ever been), and don;t need the Treasury to buy new bonds; those investers with bonds are the rich dealing with investments – they’re mostly not going to take the money and spend it.
You’re in a demand driven recession; you need to put money in the hands of people who spend it. meaning the unemployed, the poor, students etc. Which is fiscal policy and not monetary policy.
I imagine things like gold might go up ans invester stash their investment savings elsewhere other than bonds.
The proposed action by the Fed seems to ignore the larger problem, that banks have money but aren’t lending. Anyone see the latest episode of Sixty Minutes? Focusing on the slow economic death of a small community, the episode noted that even though small businesses are responsible for most job growth, even successful businesses are not able to get access to credit.
Obama has been relying too much on the Fed and the Treasury Department in trying to jumpstart the economy. While I understand that he needs to rely on Treasury for broad policy, he needs a strong Labor and Commerce Department for broader, more concrete solutions, and unfortunately the present heads of these departments are either being largely ignored or do not have many good ideas.
Denninger on the next round of quantitative easing:
He also spends some time discussing a recent investor letter by Pimco’s Bill Gross. Gross calls QE2 a “Ponzi scheme”, and predicts it will mean the end of a 30-year bond bull market.
Denninger is constantly arguing that we need to prosecute those who committed financial fraud (nobody has been prosecuted so far) to preserve rule of law and provide a deterrent in the future. Furthermore, the government needs to force banks to mark their assets to market, and those that are insolvent need to have deposit-bearing parts broken off, to be covered by bondholder equity. Otherwise all of the underlying problems that caused this crisis remain. And however much you like Obama, he has been a weak leader when it comes to challenging the powers-that-be on Wall Street. History will not look kindly on his handling of the economic crisis.
This post on the Tea Party also worth checking out
Stop the looting and start prosecuting!!
Krugman can help (shrill-ly) there.
Here’s the idea:
1. The current economic problems are caused by a failure of demand.
2. Companies have large cash reserves and they’re unwilling to spend.
3. Lowering real interest rates (to essentially zero) hasn’t done much to encourage companies to spend. Ordinarily this works because it makes cash less appealing.
The idea of QE is to (1) add money to the system to (2) encourage somewhat-higher inflation. Inflation erodes the value of cash, so (3) companies have more incentive to spend their cash rather than hoarding it, and (4) increased spending increases demand which fixes the underlying problem.
Krugman’s not convinced it will work. He endorses the idea because it may succeed and no other plans are politically viable.
The better course would have been to pass a larger and more effective (more spending, less tax cuts) stimulus in 2009. That approach goes (1) borrow money cheap (low interest rates) (2) spend that money to boost demand in the economy.
The gold standard is a product of European elites; real Merkins demand the wampum standard!
(If I were more dedicated I’d come up with an insinuation of antisemitic Teahaddist beliefs about powerful bankers, but every phrase I contemplated was just too sad)
But the question is what needs to be done next, not what should have been done in 2009.
And as much as I respect Krugman (and accept his assessment that we should give the Fed’s plan a chance), his thinking encapsulates the problem with giving economic advisors and theorists the primary responsibility for managing the economy:
Real human beings don’t live in an equation to be balanced, nor does anyone give a shit about aggregate income. Nor is economics adequate enough a science to be prescriptive.
If Krugman, or anyone else, has a magic formula that will consistently produce jobs and increases in individual income, then they are wizards, not mere economists.
Well, Krugman nailed this in February 2009. So it’s not just about hindsight.
The right course of action now is the same as the right course in 2009. Increase demand.
The available vectors include:
* Increased direct government spending
* Direct government employment of the unemployed or underemployed.
* Tax cuts for the poor (because they consume their entire incomes) or direct payment of money to the poor.
* Create a credible expectation of moderate inflation to encourage private-sector spending.
The first two are politically impossible now. The third would come packaged with a shitty compromise (either cuts to SS and Medicare or tax cuts for billionaires). So the fourth — which may not be possible — is about all that’s left.
Aggregate income is GDP or GNP (depending on what you aggregate). People give a shit about that.
@elm: Wow, fywp.
Well, yeah, it is, even allowing for what Krugman nailed.
Wow. You fail to connect the dots from “increase demand” to jumpstarting the economy. And it might be interesting to try an old style WPA employment scheme, but no one has seriously proposed it yet.
I have no idea what you mean when you talk about tax cuts for the poor. What about poor people who do not pay income taxes? There is already direct payment of money to the poor in the form of the Earned Income Credit and the Child Tax Credit. Are you talking about increasing these credits, and if so, by how much?
As for the part about “Create a credible expectation of moderate inflation to encourage private-sector spending,” this seems to be part of the Fed’s plan. It remains to be seen whether this really addresses the issue of banks deliberately holding back on lending.
And if some of your proposals are “politically impossible now” (which just seems to be echoing Krugman), then what’s the point of your making them? Is it really a choice between the politically impossible and a continued economic decline?
RE: nor does anyone give a shit about aggregate income
Funny. I don’t recall any voter ever mentioning their concern about this in any debate, town hall meeting, interview, news story. I hear people talk about fear of losing their jobs, their homes, being unable to send their kids to college, being unable to afford medical bills.
You don’t even hear Tea Party crazies talk about aggregate income.
@BR: FABULOUS SUGGESTION! Sorry I missed your comment the first time. By-passing the banks with direct help to the states. Incredible!