I enjoy your insightful observations, particularly your understanding that deflation is all about credit contraction. Does this mean that Federal Reserve monetary expansion, so long as it is less than private credit contraction, can have beneficial mitigating impact?
Thank you,
Alan
Fed QE Expansion Not Beneficial
Fed expansion is certainly not beneficial. It distorts the markets.
Commodities soared on QE2 yet it created no jobs and did nothing to revive housing
QE hammered those on fixed incomes
QE creates a potential exit problem for the Fed down the road
The idea the Fed can manage the economy is nonsensical. We have enormous bubbles of increasing amplitude to prove it.
Ben Bernanke and his Federal Reserve weighed in yesterday afternoon with their latest attempt to keep the U.S. economy from plunging back into the tank of despair. Their latest, greatly-anticipated program, known in trade jargon as "Operation Twist," aims to pull massive investments in short-term Treasury instruments and get them into riskier assets like long-term bonds, stocks, and mortgages by forcing these investments toward more appealing levels of return.
But the positive reaction the Fed probably sought was not forthcoming. After a short market pop yesterday after the Fed's announcement, the general stock market plunged. The waterfall effect was felt overnight in world markets and has returned to the U.S. market today with a vengeance, with the Dow Jones Industrials down over 400 points as of this writing. Commodities markets were hammered even worse, including the previously hot trade in gold.
Worse, as if on cue, the Republican Congressional leadership piled onto the Fed by publicizing an extraordinary, unusual, and highly critical letter they'd just sent to the Chairman. To read it, parsing your way through the government-speak, you'd think Bernanke was the FBI's Public Enemy Number One.
Stated the letter in part, "It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate.'' Right answer as far as it goes. It didn't.
But the problem here is not Ben Bernanke or the Fed. The problem is that, roughly since the beginning of 2009, Washington's political leadership has entirely failed to do its part to work in concert with the Fed to right the nation's tottering economy. And this is something that politicians on both sides of the aisle find painfully inconvenient to share with the public. It reflects badly on their politicized and self-serving antics. So they blame the Fed.
In point of fact, whether the Fed's efforts to provide monetary stimulus to the economy are Keynesian or post-Keynesian is not the real issue here. In the case of an economic emergency (such as 9/11) or an increasingly deflationary environment (such as our current era when plunging housing prices at least initially began to lead to a disastrous decline in the value of commodities), the classic initial fix is to flood the market with liquidity, gradually withdrawing the excess as soon as practicable to avoid the opposite problem of an inflationary environment.
That's what Bernanke's Fed has been doing for roughly three years now, yet it hasn't seemed to have done much good. But the reason is not that the Fed's policies are necessarily wrong. It's just that there's always an implied support expected from the Federal government, courtesy of a competent, concerned Congress that tailors new legislation to aid and abet the efforts of the Fed. In other words, when all the wagons are pulling together, the U.S. can usually extricate itself from any mess—and that means even the current morass.
It's time to stop the Fed-bashing. It's time to respect Bernanke for having done what he's done. And it's time to give him the hand that he'd been politely requesting all along for those who'd care to listen.
Fed To Blame
Quite frankly that's total bullsheet. History shows the Fed is responsible for blowing bubbles of ever increasing amplitude over the years. The only winners have been banks and Wall Street.
Bernanke deserves no respect. He is an academic wonk with no idea what caused the great depression, and is clueless as to what to do now.
Terry Ponick correctly bashes Democrats and Republicans in his article, but to say the Fed's polices are not wrong is ludicrous. There should not be a Fed in the first place, thus any policy of the Fed can logically be considered wrong.
The only thing that is true is the way in which Perry blasted the Fed is wrong, and I hope that costs Perry the nomination in favor of Chris Christie.
Aaron Task at the Daily Ticker had an interesting interview with Mark Greene, CEO of FICO regarding a "Sharp and Deep Turn to Pessimism" by risk managers at lenders.
FICO's quarterly survey of bank risk managers shows a "sharp and deep turn to pessimism," as CEO Mark Greene details in the accompanying video.
"Across the board [there's] unhappy news" in the survey, most notably in housing, Greene says.
According to the survey, 73% of bank risk managers expect mortgage foreclosure to rise in the next 5 years and 49% predict housing prices won't return to 2007 levels until 2020, at the earliest.
If true, America could be looking at "a decade of housing disaster," which will prompt more and more homeowners to 'walk away' from under-water mortgages, Greene says.
Unfortunately, the bad news is not limited to housing. Among the survey respondents — basically, the people who decide whether consumers can get loans — there are signs of increasing concern about the health of U.S. consumers, across all areas:
Auto Loans: 30% expect delinquencies to rise.
Credit Cards: 40% expect delinquencies to rise.
Student Loans: 48% expect delinquencies to rise.
"Consumers had been doing fairly well — paying off credit card balances. Even student loans were doing well," Greene says. "All of those have turned negative as well in the outlook of risk managers."
To make matters even worse, the survey suggests banks are starting to tighten lending standards and restrict the amount of capital available to consumers, particularly in mortgages, the FICO CEO notes.
This is another sign the economy is already in a recession, not just headed for one.
Addendum:
Patrick Pulatie at LFI Analytics pinged me with this comment: "I have spoken with many lender risk officers. Most will admit off the record that recovery in housing will be much longer, two decades plus. However, they cannot admit that openly."
Mish: It depends on the reference. If one is looking for 2006-2007 peak pricing, then I agree. Furthermore, in "real" terms it may never happen.
However, the bottom in price will be in long before that. Some areas may have bottomed already. Just don't expect prices to go much higher for a long time after the bottom is reached.
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