On the Failure of Ben Bernanke's Non-Standard Monetary Policies...
No More Mister Nice Blog Reads Politico So We Don't Have to

Noted for June 23, 2013

  • Evan Soltas: Ben Bernanke Flunks Communications 101: "If on days that rates are rising, the stock index also rises, then we can assume that both are driven by changes in the economic outlook. If on days that rates are rising, the stock index is falling, then the 'economic outlook' story doesn't hold up -- and a 'monetary policy' story fits. I calculated the 90-day correlation coefficient of their daily percentage changes. I find that it has been plummeting since May, which is when interest rates began to jump. See how it's falling off a cliff at the right end of the chart? That means the first story ('happy days are here again') is wrong, and the second story ('the Fed is tightening') is right…. Here's my editorial comment: If the Fed doesn't intend for all of its talk since the start of May to be perceived as pushing forward the schedule for monetary tightening, independent of the economic recovery, it needs to start clarifying its intentions. Now." Screenshot 6 21 13 7 44 PM

  • Martin Wolf: The toxic legacy of the Greek crisis: "Greece suffered a calamity – and others’ fear of following it justified the shift to austerity. The result has been a feeble recovery from the post-crisis recession, notably in the eurozone and the UK. Greece, alas, had the wrong crisis, at the wrong time…. [Greece's experience] tells us depressing things about the politicisation of the IMF and the inability of the eurozone to act in the best interests of its weaker members. But the Greek crisis, alas, also had two global results. First, inside the eurozone, the fact that Greece was the first country to fall into trouble gave weight to the view of northern Europeans that the crisis was fiscal. For Greece was, indeed, a case of remarkable fiscal profligacy…. But elsewhere the position was quite different: private borrowing was the root cause of the crisis in Ireland and Spain and, to a lesser extent, in Portugal…. By deciding that the crisis was largely fiscal, policy makers could ignore the truth that the underlying cause of the disarray was irresponsible cross-border lending…. Second, the Greek crisis frightened policy makers everywhere. Instead of focusing efforts on remedying the collapse of the financial sector and reducing the overhang of private debt, which were the causes of the crisis, they focused on fiscal deficits. But these were largely a symptom of the crisis, though also, in part, an appropriate policy response to it…. What looked, until mid-2010, to be a burgeoning recovery from the nightmare of the 'Great Recession' was aborted, notably so in the UK and eurozone. The greater success of the US in surviving austerity was probably due to its more aggressive clean-up of the financial sector, greater acceptance of deleveraging by households and its more aggressive monetary policy…. What makes this story depressing is that it was unnecessary…. In brief, the Greek crisis proved a triple calamity: a calamity for the Greeks themselves; a calamity for the popular view of the crisis inside the eurozone; and a calamity for fiscal policy everywhere. The result has been stagnation, or worse, particularly in Europe. Today, we have to recognise that the huge falls in output relative to pre-crisis trends may well never be recouped. Yet the reaction of policy makers has not been to admit the mistakes, but to redefine acceptable performance at a new, lower level. It is a sad story."

  • Jared Bernstein: By Pivoting Away From Stimulus, Is The Federal Reserve Making the Same Mistake as Congress?: "Years ago, Congress and the administration pivoted too soon from the jobs deficit to the budget deficit.  That left Bernanke along with Janet Yellen, his vice-chair, and others on the board (e.g., Charles Evans), as the only policy makers in this benighted town speaking out about the plight of the unemployed and explicitly criticizing the Congress for creating fiscal headwinds against their monetary tailwinds. Now… they too are talking about pivoting, even though most forecasts, including the IMFs, are for slower growth this year than last year… they’re only forecasting growth of between 2.3 and 2.6%… they’ve been consistently optimistic and have had to mark down every one of their prior guesstimates…. As long as the broader economy remains in the residual gravitational pull of the great recession, the benefits of the Fed’s aggressive actions outweigh the costs. I get that they’re planning their pivot, which isn’t the same as pivoting.  But they’re doing so too soon."

  • Mark Thoma sends us to Tim Duy: Hilsenstory: "While great pains were taken to lock up expectations of the path of short-run interest rates, the Fed may be underestimating the importance of the flow of asset purchases…. The pace of the flow says something about the expected future stock of the assets.  One way to interpret this week's events is that market participants now see that the stock of assets held by the Fed is reaching its peak, and while the Fed may not sell those assets, they will let them mature off the balance sheet…. Only one person who was in the room Tuesday and Wednesday has spoken about the meeting - St. Louis Federal Reserve President James Bullard…. The Fed shifted toward calendar objectives this week.  It is the only way to reconcile Bernanke's plan for ending QE with the data flow…. Bullard was in the room and concluded the same thing markets concluded:  The Fed shifted in a hawkish direction this week.  Bernanke might have tried to cushion the blow, but you can't avoid the reality that he he laid out a plan to end QE - and that plan involves a shift toward a calendar component."


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