American Central Bank Seen Reinflating Financial Bubble

Federal Reserve Washington
The Marriner S. Eccles Federal Reserve Board Building in Washington DC (Shutterstock)

Fear is rising that the American central bank’s expansionary monetary policy might be inflating another bubble. Having flooded financial markets with some $2 trillion in easy money since the summer of 2007, the Federal Reserve has hampered a necessary reallocation of resources that would have benefited the American economy as a whole in favor of propping up the baking industry. Read more “American Central Bank Seen Reinflating Financial Bubble”

Necessary Financial Correction Has Yet to Come

Empire State Building New York
The Empire State Building in Manhattan, New York (Unsplash/Gaurav Pikale)

The recent quiet in the eurozone and American politicians’ cavalier teetering on the brink of a “fiscal cliff” seem to suggest that the crisis is over. But the lack of urgency on the part of policymakers mustn’t be mistaken for an actual improvement in the economic prospects of both Europe and the United States.

The crisis that started in the American housing market in late 2007 and became a global financial panic in 2008 isn’t over. Rather the necessary contraction has been extended by government deficit spending and central bank financing. The former has seemingly run its course. The latter may go on for much longer, perhaps even as long as it takes for the economy to rebalance itself. Or it may not. In which case the collapse will be all the greater when it does happen. Read more “Necessary Financial Correction Has Yet to Come”

American Monetary Policy Doesn’t Stimulate Job Growth

In what is deemed (another) unprecedented step on the part of the American central bank to stimulate growth, the Federal Reserve announced on Wednesday that it would hold interest rates near zero and pump money into the economy as long as it takes for unemployment to drop to 6.5 percent.

The Federal Reserve is unique among central banks in that it has a mandate to promote full employment. Still, Wednesday’s announcement is something of a shock because the Fed has never so explicitly linked monetary policy to job growth.

There is one condition: the present policy will be maintained as long as inflation doesn’t go over 2.5 percent. It is unlikely to. Despite the Federal Reserve’s very best efforts, there is a deleveraging process going on — both natural and necessary after financial institutions and homeowners assumed far too much debt in the years preceding the crisis. Read more “American Monetary Policy Doesn’t Stimulate Job Growth”

Federal Reserve Chief Says Monetary Stimulus Worked

Since the start of the financial crisis in the summer of 2007, when the subprime mortgage market in the United States collapsed, the Federal Reserve has pumped some $1.9 trillion in the economy in an attempt to revive it.

Most of this money was created during the first round of quantitative easing since November 2008 when the Federal Reserve took over more than $1 trillion of the American banking sector’s mortgage exposure. The second round of quantitative easing saw the Fed purchase some $600 billion worth of United States Treasury bonds in order to reduce the country’s borrowing costs.

For all this printing of money, it can hardly be said that confidence in financial markets is restored. Unemployment — the American central bank is unique in that it has a mandate to promote full employment — hovers at 8 percent which is the same rate as when President Barack Obama took office. There’s no indication that the Federal Reserve’s monetary expansion has worked except for the ominous threat that “things could have been worse.” Read more “Federal Reserve Chief Says Monetary Stimulus Worked”

The “Giant Placebo” That is Monetary Stimulus

Federal Reserve chairman Ben Bernanke gave no indication of planning additional monetary stimulus when he testified before Congress on Thursday. As unemployment in the United States inched up a bit in May, there was an expectation in markets that the central banker would inject more money into the economy. He didn’t but he isn’t backing down on his expansionary money policy either.

Despite two rounds of quantitative easing from the Fed, unemployment still hovers over 8 percent and it can hardly be said that confidence is restored.

The policy has not fundamentally improved economic conditions in the United States either. Indeed, it may have undermined a sense of urgency on the part of lawmakers to do so. That is why Detlev Schlichter, author of Paper Money Collapse (2011), likens it to a giant placebo. “It is not true medication as it evidently does not address the economy’s fundamental ills but a tool for nationwide mass hypnosis.” It does so by driving down interest rates and cajoling investors into economic activity. Read more “The “Giant Placebo” That is Monetary Stimulus”

Bernanke’s Money Printing Spree Continues

The Federal Reserve last week announced that it expected to keep interest rates near zero well into 2014 in an attempt to stabilize markets and help the American economy recover. It hasn’t so far but Chairman Ben Bernanke seems to believe that there just isn’t enough cheap money in circulation yet.

The central bank has kept short-term rates below .25 percent for over three years and purchased some $2.3 trillion in long-term securities during two rounds of “quantitative easing” since the financial panic began in December 2008.

When the Fed initiated its second round of quantitative easing, effectively printing $600 billion, Chairman Bernanke took to the pages of The Washington Post to explain how the “easier financial conditions” he created would stir economic growth.

Lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

That was twelve months ago. Homeowners are still struggling. Investment has stalled, in part because of the regulatory uncertainty that the Obama Administration has created. Stock prices do move up every time the Fed injects more money into the market but the effects aren’t felt in the real economy because it’s a game of smoke and mirrors and everyone knows it.

You cannot create money out of thin air and expect it to solve a crisis that was made by too much cheap money in the first place.

In his defense, Bernanke admitted that the Federal Reserve cannot save the economy on its own. But it can make prolong the slump by trying to stave off the contraction that must happen if the massive misallocations of credit and investment that were built up in the years preceding the downturn are to be filtered out of the system.

More Cheap Money Won’t Fix Our Economy

On Wednesday, the Bank of England, the Bank of Japan, the European Central Bank and the Federal Reserve announced a plan to boost liquidity in financial markets. Under the plan, private banks will have access to cheap dollars for as long as the global debt crisis rages and they aren’t borrowing from one another. Stock indices responded favorably to the news, but the plan will, at best, only provide short-term relief.

The lack of confidence in financial markets hasn’t dissipated since the Fed printed nearly $2 trillion, so why does anyone expect the latest, actually more modest central bank intervention to have any long-term effect?

Maybe they don’t and they’re just buying time (what an appropriate expression) for politicians to come up with the answer. Given their unwillingness to seriously cut spending and not just restrain the future growth of government, it’s no surprise that investors are increasingly weary of lending these people money. Even Germany, that bastion of frugality, is struggling to sell its bunds at an affordable rate.

It’s not just the Greeks and the Italians who are bankrupt — although their debts are so colossal, one wonders how any financier could have justified loaning them money in recent years. It’s the mixed economy, that contraption of public-private entanglement known as the welfare state, that has run its course. The spectacle of Portuguese mass transit workers striking because their Christmas bonuses were cut in half is ample evidence of the moral bankruptcy of the progressive fantasy that markets could be made to work “better.”

Even in the face of sovereign default, a calamity that is virtually unprecedented in modern times, there are economists, politicians and union leaders who won’t recognize that the game is up, let alone that the average public-sector worker would be told honestly by their representatives what’s at stake. It’s not just their pensions but their livelihoods that depend on the assumption that governments cannot go broke and that central bankers and politicians can stop the contagion if only they push this button or pull that lever, as if the economy were a machine that can be “kickstarted” into growth mode.

We will not have growth in the West unless and until the massive misallocations of credit and investment that have been built up in the last ten years are filtered out of the system. This can only happen if the market is left to its own devices so worthless debt can be written off and firms can fail.

It’s a somber prospect that our leaders are trying desperately to avoid, but all their efforts to contain the damage of the credit crunch have only made things worse. Cheap money got us into this mess and it’s not going to get us out. Now is the time to repent.

This story first appeared in The Daily Caller, December 3, 2011.

World Anxious for Last-Minute Debt Deal

Governments and banks around the world are anxious for lawmakers in the United States to reach an agreement that would raise their nation’s debt ceiling before the Treasury exceeds its legal ability to borrow on Tuesday.

“The world is watching the United States with trepidation,” Christine Lagarde, the managing director of the International Monetary Fund, told CNN this weekend. Read more “World Anxious for Last-Minute Debt Deal”

Federal Reserve Considering More Stimulus

Federal Reserve Washington
The Marriner S. Eccles Federal Reserve Board Building in Washington DC (Shutterstock)

Federal Reserve chairman Ben Bernanke told lawmakers on Wednesday that his central bank was preparing additional stimulus measures if the American economy fails to recover at a faster pace. Further monetary easing would include additional asset purchases to encourage banks to invest. Read more “Federal Reserve Considering More Stimulus”

Fed Sees No Reason to Reverse Stimulus

Federal Reserve chairman Ben Bernanke signaled on Wednesday that he was in no rush to scale back his bank’s expansionary monetary policy as the labor market remained in a “very, very deep hole.”

During the central bank’s first ever scheduled press conference, Bernanke said that the Fed intends to keep interest rates near zero for “an extended period.” It will also complete its multibillion dollar bond buying program as planned and not let its balance sheet run down immediately thereafter.

In November, the Federal Reserve announced plans to buy some $600 billion worth of United States Treasury securities, effectively injecting hundreds of billions of dollars of “easy money” into the fragile American economy for a second round of quantitative easing.

Since December 2008, the Federal Reserve has financed nearly $2 trillion in government debt. Before the start of the recession, the Fed held no more than $800 billion of Treasury notes on its balance sheet. Read more “Fed Sees No Reason to Reverse Stimulus”