Matt Taibbi Blows Whistle on S.E.C August 25, 2011
Crisis, Second Dip, Underlying Fraud August 22, 2011
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The Fed is right to turn on the tap
By Martin Wolf
Published: November 9 2010 20:19 | Last updated: November 9 2010 20:19
The sky is falling, scream the hysterics: the Federal Reserve is pouring forth dollars in such quantities that they will soon be worthless. Nothing could be further from the truth. As in Japan, the policy known as “quantitative easing” is far more likely to prove ineffective than lethal. It is a leaky hose, not a monetary Noah’s Flood.
So what is the Fed doing? Why is it doing it? Why are the criticisms ludicrous? What should the Fed be doing, instead?
The answer to the first is clear. As the Fed stated on November 3, “to promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the [federal open market] committee decided today to expand its holdings of securities. The committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the committee intends to purchase a further $600bn of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75bn per month.”
Ben Bernanke, the Fed chairman, gave the rationale in a speech last month. He pointed out that US unemployment is far above any reasonable estimate of equilibrium. Moreover, prospective economic growth makes it unlikely that this will change over the course of 2011. This is bad enough, but what makes it worse is that underlying inflation has fallen to close to 1 per cent, in spite of the expansion of the Fed’s balance sheet, over which so many tears were shed. Expectations of inflation are well anchored, he added, but that might change once deflation gripped. Given the slack, that might not be far away (see charts).
The Fed, added the chairman, has a dual mandate, to foster maximum employment and price stability. Doing nothing would be incompatible with this obligation. The only question is what is to be done. The answer is the proposed purchases of Treasury bonds. This simply extends classic open market operations up the yield curve. It would also only expand the Fed’s balance sheet by about a quarter, or around 4 per cent of gross domestic product. Is the US really on the same road as the Weimar Republic? In a word, no.
It is hardly a surprise that Wolfgang Schäuble, finance minister of Germany, thinks differently. He describes the US growth model as in “deep crisis”, adding that “it’s not right when the Americans accuse China of manipulating exchange rates and then push the dollar exchange rate lower by opening up the flood gates”. Presumably, he believes that, in a proper world, the US would be forced to follow the deflationary route imposed upon Greece and Ireland, instead. This is not going to happen. Nor should it.
Boiled down, the criticisms of the Fed come down to two: its policies are leading to hyperinflation; and they are “beggar my neighbour”, in consequence, if not intention.
The first of these criticisms is not just wrong, but weird. The essence of the contemporary monetary system is creation of money, out of nothing, by private banks’ often foolish lending. Why is such privatisation of a public function right and proper, but action by the central bank, to meet pressing public need, a road to catastrophe? When banks will not lend and the broad money supply is barely growing, that is just what it should be doing (see chart).
The hysterics then add that it is impossible to shrink the Fed’s balance sheet fast enough to prevent excessive monetary expansion. That is also nonsense. If the economy took off, nothing would be easier. Indeed, the Fed explained precisely what it would do in its monetary report to Congress last July. If the worst came to the worst, it could just raise reserve requirements. Since many of its critics believe in 100 per cent reserve banking, why should they object to a move in that direction?
Now turn to the argument that the Fed is deliberately weakening the dollar. Any moderately aware person knows that the Fed’s mandate does not include the external value of the dollar. Those governments that have piled up an extra $6,800bn in foreign reserves since January 2000, much of it in dollars, are consenting adults. Not only did no one ask China, the foremost example, to add the huge sum of $2,400bn to its reserves, but many strongly asked it not to do so.
It is also simply false to argue that the weakening dollar is due to Fed policies alone. Indeed, anyone with half a brain should realise that the US can no longer combine a large trade deficit with a manageable fiscal position. Those who want their US bonds to stay sound should welcome anything that helps the US expand domestic demand and rebalance its external position. Current US monetary policies are, contrary to Mr Schäuble’s views, simply the yang to the yin of east Asian mercantilism.
More fundamentally, market forces, not monetary policy, are pushing global rebalancing, as the private sector tries to put its money where it sees the opportunities. The Fed’s monetary policies merely add a twist. Instead of all the futile bleating, what was needed was a co-ordinated appreciation of the currencies of the emerging economies. The fault here does not lie with the US. I sympathise strongly with a Brazil or a South Africa, but not with China.
The sky is not falling. But this does not mean the Fed’s policies are the best possible. It is probable that any impact on the yields on medium-term bonds will have a modest economic effect. It would be far better if the Fed could shift inflation expectations upwards, by issuing a commitment to offset a prolonged period of below-target inflation with one of above-target inflation. A decision to monetise additional government spending might be an even more effective tool. Equally necessary is a plan to accelerate the restructuring of the overhang of excessive debt. But, in the absence of co-operation with the newly elected Congress, what the Fed is doing is, alas, about the most we can now expect, though it should have dared to do more. Meanwhile, “sound” people will shriek that the sky is falling only to be surprised that it is not. We have seen this play before – in Japan in the 1990s. Japan fell into chronic deflation, instead.
Yes, it may be reasonable to call for a reconsideration of the global monetary system, as Robert Zoellick, the World Bank president, has done. But gold? Does anyone expect politicians to put placating the world’s most speculative commodity market before worrying about a slump? Whom the gods wish to destroy they first make mad.
NY, S.E.C Destroyed Document Evidence Of Banker Ponzi Scams August 18, 2011
In Defence of PIGS – Telegraph Blogs – PRITCHARD
Readers have asked for a quick verdict on the Merkel-Sarkozy deal.
I have nothing to say. There was no deal. It was a vacuous restatement of clauses that already exist in the Lisbon Treaty, or an attempt to pass off retreads such as the Tobin Tax and harmonization of the corporate tax base as if they were new.
No eurobonds, no fiscal union, no boost to the EFSF rescue fund, no change of policy on the ECB’s mandate. Zilch.
More fiscal austerity for laggards, without even the Marshall Plan we had on July 21. It is all a step backwards into the black hole.
As for appointing EU president Herman van Rompuy head of a eurozone panel, I find it remarkable that anybody should take this seriously (much as I like the poet Van Rompuy, among the best of the lot). There is already a Eurogroup, headed by Jean-Claude Juncker.
The emptiness of the summit – coupled with Sarkozy’s deliciously absurd theatrics – tells us all we need to know. Neither Merkel nor Sarkozy seem capable of rising to the occasion. Europe is drifting towards its existential crisis.
The ECB can hold the line for now by purchasing €20bn of Spanish and Italian bonds each week. But once the ECB nears €150bn or so, the markets will brace for the next crisis.
Italy alone has to raise or roll-over €68bn by the end of September. You can be sure that a great number of investors will take advantage of ECB intervention between now and then to lighten their holdings, and switch the risk to eurozone taxpayers. The ECB may have to buy at least €100bn of Italian bonds alone by late September to cap the 10-year yield at 5pc.
Perhaps the Chinese and Gulf states will keep buying. Perhaps not.
So enough on the summit.
What is exercising me more is an interview by George Soros in the German press calling for Greece and Portugal to prepare for an “orderly exit” from the eurozone. “The EU and the euro would get over it,” he said.
(”Mit dem griechischen Problem ist so grundlegend falsch umgegangen worden, dass jetzt ein möglichst geordneter Ausstieg vielleicht wirklich der beste Weg wäre. Das gilt auch für Portugal. Die EU und der Euro würden es überleben”).
This is of course music to German ears. It conforms to the Bild Zeitung narrative that Europe’s crisis is a morality tale, a debacle caused by Greco-Latin debt addiction and fecklessness. It is the Big Lie of EMU.
Mr Soros does Portugal an injustice. The country has behaved OK over the last eight years (having had its credit bubble in the late 1990s when the EMU effect caused rates to drop from 16pc to 3pc, destroying Portugal’s economy).
It has worn a hairshirt for since 2003, no little avail. By then the country was trapped in slump with chronically low productivity, the victim of an intra-EMU currency misalignment against the German bloc and an extra-EMU misalignment against the Chinese yuan.
Yes, Portugal made plenty of mistakes – didn’t we all – but it did not violate the Maastricht rules or lie about its budget figures or persistently break the EU Stability Pact.
Nor did Spain violate Maastricht. It ran a fiscal surplus of 2pc of GDP during the boom (So did Ireland). It had modest public debt. The Bank of Spain tried heroically to stop the ECB’s uber-loose monetary policy (double-digit M3 growth) from fuelling a property and credit bubble. It pioneered `dynamic provisioning’.
Italy has a primary budget surplus, mid-level total debt at 250pc of GDP, and a reformed pensions system. The European Commission estimates that on current policies Italy will have the lowest public debt to GDP ratio in Euroland by the middle of the century. I kid you the not. The lowest.
We all agree that these countries should have shaken up their labour markets. No doubt the boom-busters (Greece, Ireland, Spain) could have done more to “lean against the wind” – ie, by copying Hong Kong, which gets around the problems of the dollar peg by slashing mortgage ratios to choke property booms – but neither the ECB nor the European Commission pushed particularly hard for such measures, if at all.
The complacency was endemic in the entire EMU system. So there is something unpleasant about the attempt to blame the victims now.
The German claim that Euroland’s crisis is caused by Club Med profligacy is intellectual chutzpa. None of us should give this self-serving argument any credence.
The problem is deep and structural. These countries were thrown together into monetary union by high-handed politicians before there was any meaningful convergence of productivity, growth patterns, wage bargaining, inflation proclivities, legal systems, or sensitivity to interest rates. The Maastricht rules targeted one variable (debt) but missed all the others.
The damage was compounded by the ECB. It ran a loose monetary policy in the early Noughties, breaching its own M3 and inflation targets year after year, in order to help Germany when Germany was in trouble (for cyclical reasons, obviously)
This greatly aggravated the credit bubbles in Ireland and the South. There are no innocents in this story. All countries share blame. Germany is a sinner in all kinds of ways, not least because it seems to think it can lock in a permanent structural trade surplus, and then order others to stop running deficits.
Dr Merkel, you have a PhD in nuclear physics. You must know there cannot be good imbalances (your surplus) and bad imbalances (the Spanish, Italian, French, Portuguese deficits). The maths have to add up within a currency union.
In the old days these intra-EMU imbalances would have corrected naturally. The D-Mark would have risen. The lira and peseta would have crashed. The drachma would have crashed even more. Problem solved.
That corrective mechanism has been jammed by political forces.
We now have a remarkable situation where Merkel is pushing Southern debtors into drastic fiscal tightening without offering any offsetting stimulus in the North. This is so stupid (within a currency union) it leaves you breathless. German policy risks a self-feeding implosion of the whole system, much like the early 1930s Gold Standard – unless the ECB counters this with QE a l’outrance, which is also against German policy.
Yes, I know, a lot of readers favour fiscal austerity as an end in itself. Fine up to a point. But don’t conflate the morality of family finances (saving is good) with the entirely different imperatives of macro-economics (too much saving is extremely bad, and leads to depression).
Sarkozy has not shown much imagination or leadership. Instead of acting as Chancellor Merkel’s sidekick, he might usefully take charge of the crisis and lead a Latin liberation.
If all else fails, he should draft a letter from the leaders of France, Italy, Spain, Portugal, Ireland, Cyprus (plus Belgium, Malta and Slovenia, if they want) requesting the withdrawal of Germany and its satellites from monetary union. Germania would get the strong currency it wants and needs.
If the German bloc thought the new super-Mark would rise too far – and cause huge losses to Teutonic banks with Club Med exposure – they could peg the currency to the Latin euro at a 30pc premium and use capital controls until things calm down.
My guess is that Europe would start to recover remarkably fast once the boil had been lanced. The Latin bloc would become the growth region, and eat Germany’s lunch for a decade or so. The debt crisis would fade away like a forgotten nightmare. Sarkozy would walk tall, so to speak.
Germania can accept this or keep stumping up rescue loans and pay transfers for year after year until their citizens revolt. What they cannot expect is to have it all their way by retaining export share through a rigged currency system forever.
Ah, but what if Germany refuses either to back fiscal union or leave EMU?