Showing posts with label Bernanke. Show all posts
Showing posts with label Bernanke. Show all posts

Thursday, April 11, 2013

An unprecedented move by the FED

In an unprecedented move, the Federal Reserve tied monetary policy to a specific social metric, an unemployment rate of 6.5%. Given stubbornly high unemployment levels, this new monetary policy target is entirely appropriate. Looks like its working.

Mr. Bernanke appears to be willing to risk his reputation as an inflation fighter in order to lower the unemployment rate. I think the Bernanke Gambit is good news for the unemployed and good news for the country as a whole.

Bernanke signaled that bondholders would no longer dominate monetary policy considerations. This is for their own good, since they will benefit, over the long term, from a fairer and more stable economy.

The majority of American citizens are bond sellers, not bondholders. In a downturn, government spending, required in order to get the economy out of a recession, is financed through the creation, by fiat, of new money. The resulting increase in the quantity of money gives rise to inflation, assuming the quantity of goods remains constant. (“Inflation is always and everywhere a monetary phenomenon.”) Bondholders are impacted primarily, since long term bondholders, those with bonds that mature in, say, ten years, face an increased risk that
the dollars they will receive as interest payments and principal will be worth less than anticipated. Most American I know value day to day social stability more than price increases that may or may not occur at some point in the future.

This is also a nod to the electorate and to political reality. There is no question that, had Romney won, this would not have happened. Romney's monetary policy supported capital owners. Capital owners fear inflation above all else (except a popular revolt by well informed citizens), since the spending power represented by investment cash flows, like those generated by bonds, decline in an inflationary environment.

Our Fully Adjusted Return ® Models show that societal benefits generated by higher employment far outweigh negative impacts of a potentially elevated inflation rate. Our models incorporate the new reality that sustained, high levels of unemployment contribute to social instability in a way we have not seen before. The ability of an
increasingly literate, technologically savvy population to coalesce and act quickly is new. We have seen, in Egypt, Syria, and Libya, the influence that rapidly forming communities have.

In the US, both the Tea Party and the Occupy Wall Street movements reflect this reality. The growing risk of a total breakdown in the ability of the US Government to function in the way that governments must in order to be considered legitimate is the big concern here. In other words, growing income inequality combined with new communication technology that increases the ability of activists to, well, act, have significantly lowered the rationality of traditional monetary policy targets and heightened the risk that normal economic policy mechanisms will fail. This is why the Fed has turned to unconventional monetary policy tools, like Quantitative Easing. Unemployment targeting is simply an acknowledgement and extension of this work.

This may also be a contributing factor to Germany’s recently announced move to reclaim and repatriate $36 billion in gold reserves. As the political side of the US Government fails to anticipate and manage risks associated with growing income inequality, the monetary side of the government finds itself unable to manage policy in a rational way. Hence the growing risk of default. If the US Government defaults on its debt, creditors could try to seize assets, including gold reserves belonging to others but held in the US. The risk that an extremist domestic political faction might support these efforts, previously unthinkable, has also grown. The sensible thing for any foreign government to do  in anticipation of  this situation is to reclaim their assets, quickly and quietly, using whatever excuse they need to do so. Thus, Germany’s recent  action.

That the unemployment rate has become the primary measure used to evaluate the effectiveness of monetary policy is significant. It sends a strong, unmistakable signal to corporations and investors that if they want to protect the value of their investments, they better start hiring. They can start by using some of the cash they have been hoarding, created by falling real wages and increasing productivity, resulting in record profits. This means that they, and the wealthy, now have one more incentive to drive the unemployment rate down. It also signals to politicians that if they want to protect wealthy contributors, they should solve the fiscal crisis now, since the
crisis threatens to increase unemployment.

Already, key corporate entities, like WalMart, have started moving production back to the US. As the New York Times noted, “A number of companies, including Apple, General Electric and Brooks Brothers, are..making more products in the United States.” Corporate social returns, materializing first as positive reputational impacts, will
increase as a result. This is not inconsequential. Expect an employment boom.

The move also doesn't hurt Mr. Bernanke’s chance of being reappointed for a third term.

Looks like we all win.

Bravo, Mr. Chairman.
William Michael Cunningham is an economist and social investing advisor. On June 18, 1998, he opposed the application, approved by the Federal Reserve Board on September 23, 1998, by Travelers Group Inc., New York, New York, to become a bank holding company.. In 2003, five years before the financial meltdown, Mr. Cunningham told the Securities and Exchange Commission that his economic models indicated a growing risk of systemic failure. He is the author of The JOBS Act: Crowdfunding for Small Businesses and Startups.
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Tuesday, July 21, 2009

Bernanke's History

Looks like they got that one wrong.

On January 17, 2008, the Chairman of the Federal Reserve Board, Mr. Bernanke, testified that "A recession is probably not on the horizon, but quick passage of an economic-stimulus package plus aggressive action by the Federal Reserve are the appropriate prescription for the ailing economy.."

What we got wrong.

We note that on June 18, 1998, in a letter to Betsy White, Senior Vice President at the NY Fed, we said:

"Finally, it is our continuing belief that the Federal Reserve Board should be designated a 'Superregulator,' with broad responsibility for overseeing the activities of banks, thrifts, pension funds, insurance companies, mutual fund companies, brokerage firms and investment banks. We note our belief that financial institution convergence, driven by recent advancements in financial and computer technology, requires the creation of such a 'Super-regulator.' "

We, and others, no longer believe the Federal Reserve independent or objective enough to serve as "Superregulator" or as "Systemic Regulator." They are, thus, unqualified for the role, which should be filled by an entirely new entity.

Friday, September 26, 2008

Cash for Trash (Revised)

President George W. Bush last week laid out a $700 billion Wall Street rescue plan ostensibly aiming at preserving the nation’s overall economy. Dubbed "Cash for Trash,” the plan has sparked a sharp debate. The House Financial Services Committee held a public hearing titled, “The Future of Financial Services: Exploring Solutions for the Market Crisis” on Wednesday, September 24th at Rayburn House Office Building. This was a legislative hearing to examine the Bush Administration’s financial services proposal. Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke explained the proposal at the hearing.

The hearing started at noon and included two parts. At the beginning, members of the Committee were given an opportunity to note their concerns and to comment on the bailout plan. Most did not endorse the plan: they thought it would be a mistake to rush such a huge expenditure, one that would boost the national debt to over 70% of GDP.

Committee members addressed four major sticking points. First, the lack of communication with the public before the plan came out. Members indicated that the Administration should tell the American people what happened and why the plan is needed. The second concern centered on benefits to the taxpayers, and members suggested that "people must be the first priority - we should protect taxpayers. It is absolutely unfair to use taxpayer funds to fix a hole Wall Street firms dug. Taxpayers should share in the benefits of this plan." Third, some members suggested that “robbing Peter to pay Paul” will not solve the problem. From a long-term development perspective, the country may experience a long and painful recession. Last but not least, members stated that public oversight of the Treasury rescue operation is required, especially in light of the lack of financial asset transparency. Members were concerned that someone may receive a unfair windfall using taxpayers’ money.

In the second part of the hearing, after 2:30pm, Mr. Paulson, and Mr. Bernanke tried to convince Congress that a $700 billion plan is the only way out of the current crisis. Mr. Paulson acknowledged the severity of the problem and stated that he understood the concerns raised, but explained the plan seeks to “avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of business both small and large, and the very health of our economy”. He clarified that the $700 billion program was an “asset purchase program” instead of a “government spending program” because these assets would ultimately be resold with proceeds coming back to the government. He also pledged to protect the taxpayer to the maximum possible extent possible and to ensure transparency and oversight while implementing the program. Moreover, he is convinced that, although this approach may look bold and risky, it would be a far less costly approach than other alternatives. Finally, he expressed a desire to have Congress and the Administration work closely together to get through the difficult period. “Many of you also have strong views, and we must have that critical debate, but we must get through this period first,” he said.

The Fed Chairman Mr. Bernanke outlined the threat to the economy from the home mortgage crisis and argued that inaction would produce an even larger catastrophe, hence, the Federal Reserve's strong stand in favor of Treasury’s proposal to buy illiquid assets from financial institutions. He argued that having the government steps in would help restore normalcy to the market. “It’s possible for the government to buy these assets, to raise prices, to benefit the system, to reduce the complexity, to introduce liquidity and transparency into these markets and still acquire assets which are not being overpaid-for in the sense that under more normal market conditions, and if the economy does well, most all of the value can be recouped by the taxpayer.” Mr. Bernanke said in his testimony.

One member noted her worries concerning the adverse impact of the current situation on women and minority owned businesses. Mr. Paulson replied that he got her message but would work through the Treasury plan first.

(Tian Weng, Master of Economics' 09
George Washington University
Washington, DC 20052)

Thursday, February 14, 2008

Treasury Secretary to Subprime Mortgage Victims: "I did not create this problem."

We attended today's Senate Banking Committee hearing on the State of the U.S. Economy and were surprised to hear the Secretary of the Treasury of the United States say, in response to a question from Senator Robert P. Casey (D-PA),

"I did not create this problem..."

Not only is this poor customer service (imagine a General telling you "I did not start this war," or your doctor telling you "I did not create the health issue you are having..." or a Chef telling you "I did not grow this corn...") but some will tell you that the statement itself may, in fact, be false. Several market analysts feel that Mr. Paulson may have, at some level, helped create the problem. They point out that the firm he once ran, Goldman Sachs, made millions by facilitating the creation and distribution of subprime-backed investments. We would point out that Goldman has not been implicated in the most egregious subprime mortgage market practices.

Still, the statement is especially troubling coming from the Administration's top economic policy official. Some will believe this statement reflective of the prevailing attitude within the Administration: those who are in trouble are, somehow, at fault for falling prey to sophisticated, well designed, well executed, misleading and fraudulent financial market practices.

As we noted on November 9th, 2007, most of the people losing their homes are low to moderate income people of color. Those with new ideas and solutions to the problem were carefully excluded from providing suggestions to help with the problem, due to the same bigotry that gave rise to it.

What some will see as even more troubling is the fundamental lack of understanding of the seriousness of the problem. We did not hear, from any of the witnesses (Federal Reserve Board Chairman Bernanke, Treasury Secretary Paulson and Securities and Exchange Commission Chairman Cox), any statement that would lead anyone to believe they know:
  1. How many subprime mortgage loans there are currently;
  2. The terms of the average subprime mortgage loan (interest rate, maturity, points paid to originator, who originated the loan, who owns the loan...and how it got to its current owner..), and;
  3. How many subprime mortgage loans might default over the next month, year, five years, etc.
  4. Who got paid? What were the total fees paid by subprime borrowers? Who got these fees?
  5. Who, and I mean who EXACTLY, owns these subprime mortgages now?
  6. How did they come to own them? By what mechanism? other words, a complete and stunning lack of relevant information that policymakers need to effectively address the problem.

Now we are worried....

Thursday, January 17, 2008

A Socially Responsible Economic Stimulus Plan

We attended House Budget Committee hearings today.

As the New York Times noted, the Chairman of the Federal Reserve Board, Mr. Bernanke, testified that "A recession is probably not on the horizon, but quick passage of an economic-stimulus package plus aggressive action by the Federal Reserve are the appropriate prescription for the ailing economy.."

Let's hope he is right on the first count. As Fed Chair, he is pledged to political neutrality, so he cannot be specific on the second. We, of course, have no such limitation. Our suggestions follow.

Any economic-stimulus package should target low to moderate income consumers. We suggest implementing a $30 billion dollar increase in food stamp benefits. Given new distribution technology (EBT), this part of the stimulus plan would hit the economy first and quickly and, as an added benefit, would go a long way toward beginning to even the income distribution in the country. Benefits should be expanded to include more and newer consumption necessities, like disposable diapers and low cost (not greater than $400) computers.

Further, we would include a significant tax credit, up to $5 billion total, for investments in community development banks. (Our reasoning: someone will need to take the place of the lenders who got caught up in the Subprime lending mess.) We might also include a significant rebate for the purchase and use of energy efficient technologies.

We would also implement at full rebate of tuition, books and fees for low to moderate income (80% or lower of area median income for at least the last four years) persons studying at any accredited four year college.

Finally, we would include $20 billion for infrastructure repair projects (vetted, of course, to eliminate all pork) focusing on bridges. We suggest the infrastructure work first target US counties with an unemployment rate at least twice the national average.

Aggressive action by the Federal Reserve should focus on repairing the regulatory safety net that allowed subprime lending to damage the markets. This includes working with States as they seek to uncover subprime lending fraud.

Part of the economic recovery plan should require the Federal Reserve conduct a complete census (not a survey) of all subprime loans and borrowers. This would include collecting information on loan terms and conditions, reported borrower income at the time of closing, property location, and other demographic information on the borrower. We understand that a complete census will not be cheap (we estimate this would cost at least $100 million) but it will allow a better understanding of the exact nature of the problem.