Great Recession

Bernanke Fails Again

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Ben Bernanke: Person of EVERY year

The Federal Reserve Bank's plan to buy longer-term government debt has been greeted by a stock market plunge, mixed employment data and negative commentary from experts whose confidence in Fed wizardry has vanished. 

After yesterday's Fed Open Market Committee meeting, the central bank announced its plan for a repeat of the Kennedy-era "Operation Twist," in which then-Fed Chairman William McChesney Martin, Jr. sold shorter-duration debt while purchasing longer term debt: 

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

Last week I discussed the twist strategy and its attendant uncertainty risks. The new/old strategy and many more of the supposedly smart tools Fed Chairman Bernanke has at his disposal make the effects of Fed strategy much harder to predict. They do, however, make the Fed's intentions clear. Bernanke, as I noted months ago, is trying to micromanage a reinflation of the real estate market, ignoring the mountain of evidence that real estate remains overvalued. 

The failure of the twist strategy has already begun. The Dow lost 500 points today and closed down nearly 400. International stock markets have also tanked. Although new jobless claims are down slightly (an announcement related to but not caused by the Fed's new policy), there is no evidence suggesting this will reduce unemployment, which grew and remained high during the previous two episodes of quantitative easing. 

I think Ann Landers and Dear Abby update their author photos more frequently than William Greider does.

This has not stopped various stooges from defending the failed Fed chief. In The Nation, William Greider accuses "right-wingers" of "attacking Ben Bernanke for "taking modest steps to bolster the economy." 

Meanwhile, never-informed D.C. princeling Matt Yglesias says Republicans who recently sent a critical letter to Bernanke were "urging him not to take any steps to help the economy" – a mischaracterization that charmingly recalls David Horowitz' 2002 slander against opponents of the invasion of Iraq: "100,000 Communists March On Washington To Give Aid and Comfort to Saddam Hussein." 

Beyond the religious faith implicit in these claims – it bears repeating that there is not a shred of evidence that any of Bernanke's or Treasury Secretary Geithner's actions over the last 36 months have "helped" or "bolstered" the economy – there's an added irony. I'm old enough to remember when leading liberal lights took pride in opposing the machinations of central banks and the international financial consensus. In 1999, after protesters smashed a few Starbucks windows in Seattle, Greider said the riot "woke up America and maybe the world." I don't know what's changed since then to make Greider want to stand up for a "private club for deal-making among the most powerful interests, portrayed as a public institution searching for international 'consensus.'" 

You can expect more such intramural bickering as the intellectual bankruptcy of the Keynesian consensus becomes more clear. Reuters has a sampling of negative responses to the twist: 

The Fed's grim outlook for the U.S. economy and data showing China's contracting factory sector drove U.S. stocks down 3 percent on Thursday on fears of a global recession.

"Investors seem to be waking up to the fact that monetary policy is pushing on a string," said Capital Economics analyst John Higgins. "The stock market and commodities are likely to continue to struggle, given the gloomy outlook for the economy that the Fed openly acknowledged on Wednesday."

Thomas Lam, OSK-DMG chief economist, put the economic impact of the Fed's "twist" operation at less than half a percentage point of added growth—slightly below a Goldman Sachs estimate.

Even the Fed does not know exactly what to expect, saying it is "difficult to estimate precisely" how much of an economic boost the program will deliver.

And here's an interesting update [pdf] on Kenneth Rogoff's 2008 study [pdf] putting the current recession into perspective.

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  1. Wow, William Greider looks like he stepped out of the grave to take a piss.

    1. Note to would be adventurers: when you slay his mortal form, be sure to find and destroy his phylactery as well.

      1. Sweet. I’m about to wrap up Dragon Age 2 this weekend. It felt kind of light compared to the first one.

        Next up: Deus Ex!

  2. “were “urging him not to take any steps to help the economy”

    Tony lives!

  3. Bernanke’s faux pas yesterday, was a major contributing factor to yesterday’s drop, but I don’t think the drop today was entirely attributable to Bernanke.

    The market’s reaction is basically, “So you’re scraping the bottom of the barrel, and now that’s all you got left?”

    He basically just broadcasted the Fed’s irrelevance…

    What’s the fed’s solution to fiscal irresponsibility by European governments? What’s the fed solution to fiscal mismanagement at the White House and Congress?

    Answer: Operation Twist?!

    Europe today is our future if we don’t get our entitlements and budget under control. And the sad news is: that isn’t Bernanke’s fault.

    1. Thanks for your support, buddy. I’ll come over and suck you off any time.

      1. That wouldn’t make the fed relevant again either!

        The only thing that might make the fed relevant again?

        QE3 or raising rates.

        Either one would be profoundly stupid–I’m just sayin’…that’s what it would take to make the fed seem relevant again.

        I think this may be the one situation Bernanke can’t begin to fathom–the one where the fed is irrelevant to what’s going on in the markets. The one that’s going on right now…

        It’s kinda a dangerous situation because he may do anything and everything he can just to seem relevant again. It’s hard to do something about the economy–when the world only bothers to notice him when he’s making a fool of himself.

        Oh…when will they just let prices fall? They’ve spent years and trillions trying to keep housing prices from falling, trying to keep Greek/Italian/Portuguese/Spanish debt prices from falling…

        You know the old adage about how you should never try to catch a falling knife? Bernanke’s tried to use his nonexistent superpowers to make that knife levitate–for how many years now?

        It’s gonna hit the floor like a sack of cannoli anyway.

        1. QE3? Really? Why, because QE1 and QE2 worked so spectacularly?

          What’s the definition of insanity again?

          1. “Either one would be profoundly stupid–I’m just sayin’…that’s what it would take to make the fed seem relevant again.”

    2. Without the Fed buying T-bills the political branches would have been penned up by much more dire economic straits. He may not be responsible for our fiscal situation, but he’s been an enabler of those who are.

  4. OK, a question:
    AFAIK, it continues. It is a policy of ‘loaning’ banks money and then paying interest on that money to hold as reserve.
    I’m not sure exactly what you’d call that, but I’m suggesting M-1/2; it sure ain’t M-1. Regardless of what it is called, it is a drastic change in the concept of time-value, and it was done with (AFAIK) no theoretical base; simply an ad-hoc response.
    I can see how that might distort the lending market, but…….
    Comments?

    1. I guess the policy of paying interest on reserves is has a pretty minor effect on loans but still its bad policy, it rewards banks for sitting on their hands, not loaning money which is what they’re for.

      1. The problem is that M-1 (the money held by the banks) is also called ‘high-powered money’. According to Friedman, that’s pretty serious stuff, maybe even having the power to ‘multiply’ the actual value.
        If you ‘multiply’ by .5, you aren’t going to see increased value or wealth.

    1. A nice sealskin sporran (hopefully, baby seal) always looks “fresh”.

      The recommendation about “boots” in the attached article? Right out. Clearly a wanker – NEVER. A nice pair of polished Ghilloe brogues with wool or cotton hose, a regular button-up dress shirt (NOT one of those gauzy fag pseudo Braveheart tunics) and a proper jacket is perfect. You’ll look like a bandsman and a native.

      Oh – don’t forget a good waist belt! Headgear optional – I prefer the Glengarry over the Balmoral, but either is OK.

      Welcome.

      /Scottish Style Guy

      1. /Scottish Style Guy

        Contradiction in terms.

        1. Surely you jest. Nobody wears tartan and argyle like the Scots. Nobody.

      2. What, no claymore?

  5. Ben Bernanke should enlist Magic Johnson to sell these predatory loans.

  6. So if this was too feeble to be QE3, what was it? QE2 SP1?

    1. QE2 Summer School

  7. So, the stock market telegraphs failure or success? The best rally in the last 3 years was during QE2. I look forward to your next post calling for more QE2 (or apologizing for finding what you want in market movements)

    1. “So, the stock market telegraphs failure or success? The best rally in the last 3 years was during QE2. I look forward to your next post calling for more QE2”

      “During QE2”. How, uh, interesting……

      1. Rally or just an inflation adjustment?

  8. If he said, I’m printing money until we get our damn 2% inflation and catch up to the past 3 years of 1%, you’d get a 1,000 point jump in 2 weeks. Dunno if that’d be good, but that’s Tim’s logic, not mine.

    1. “but that’s Tim’s logic, not mine.”
      Uh, no. Brain-dead inference is not logic.

      1. Perhaps he could just read some sheep entrails….

  9. The Federal Reserve Bank’s plan to buy longer-term government debt…

    From itself.

    Let me try that. I pick up a rock in my back yard and sell to myself for $1. Then I sell it back to myself for $2, and again for $4. If I get nervous about this I sell it to kids for $8.

    Lord have mercy on us. A = A times 2, A = A squared, A = A plus interest, A =’s whatever your kids can slave away at paying back, A = whatever.

  10. While recent shitty monetary policy may cause markets to fall, earlier fiscal and monetary policy have most likely created an asset bubble in equities. Which means we got a correction coming that may be stacked on top of a reaction to the monkey fucking a greased football show going on over in the EU.

    The key to this twist is to figure out where the QE is occuring. I don’t believe they are sanitizing all of their injection, “Helicopter” Ben fears deflation too much to allow something like that to happen.

    1. Maybe he should try flying that monkey around with that greased football show. When people watch they’ll stop thinking about the economy. Then they’ll feel better. Then everything will be fine.

      Except for the monkey.

      1. And the football.

    2. Shouldn’t it be a greased soccer ball?

  11. Come on, baby!
    Let’s do the twist!

    Come on, baby!
    Let’s do the twist!

    I’ll print more money!
    We’ll spend it right quick!

  12. Bernanke is doing this bizarre stuff because Congress and the President have completely given up on fiscal policy. How many years now without a budget?

    With no adults on the fiscal side for at least another year and a half, Bernanke is left trying to keep the economy out of Depression territory.

    1. The GOP has proposed multiple budgets in the last year and a half. It’s the prez and the Senate Dems who are swimming in the kiddie pool here.

      1. Agreed. Maybe in 2013 we will have functional government again.

        I don’t agree with what the Fed is doing – but I understand their desperation to get to 2013 with a functioning economy.

        1. The Fed is incapable of helping the economy, regardless of the fairy tales Keynesian clowns tell themselves.

  13. I don’t know what’s changed since then to make Greider want to stand up for a “private club for deal-making among the most powerful interests, portrayed as a public institution searching for international ‘consensus.’

    People he likes are in charge, so he figures his agenda will be advanced?

    Because to a statist consistent principles are so unpragmatic.

  14. it bears repeating that there is not a shred of evidence that any of Bernanke’s or Treasury Secretary Geithner’s actions over the last 36 months have “helped” or “bolstered” the economy

    The purpose of QE is to to reinflate asset values.

    The market is now trading about where it was when QE was first rolled out.

    Ergo: failure.

    The housing market is about where it was when QE was first rolled out:

    Ergo: ditto.

    The key to this twist is to figure out where the QE is occuring.

    Its being laundered through the Euro banks, for now, as part of the “dollar capital support” that the central banks announced earlier this week.

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