The Fed to push harder on the rope?

[Larry Gude]

Hmmm... I think doing a good job of explaining it might require me to explain a fair bit of how the Federal Reserve System works, which I doubt you want me to do since it's somewhat involved (not as in hard to understand, just as in taking a bit of time to get enough detail to make the whole picture resolve right). Let me think about how best to do that, or in the alternative find something that does it better than I can.

But, as a simple answer and then a conceptual answer: First, it's a good thing in that it's somewhat necessary for the Federal Reserve to be a clearing house of sorts in order for it to be able to effectuate monetary policy.

Second, have you ever wondered how it is that the bank account system works? I mean, for instance, how can some guy in Powdunk, UT want to buy something from someone in Leonardtown, MD, and be able to do so so quickly and easily (either by pressing buttons on a computer or writing something on a piece of paper and mailing it). In this day and age, non-currency transactions process, in so far as consumers are concerned, just about as fast as currency (i.e. actual greenbacks) transactions do. The guy in Leonardtown doesn't know anything about the guy in Powdunk. He's not actually getting anything from the guy in Powdunk (i.e. actual cash) that he can be sure has value. For that matter, the bank he is trusting to handle his non-currency money for him doesn't know the guy in Powdunk or even the bank that the guy in Powdunk uses to pretend to send something to the guy in Leonardtown. Yet, everyone involved does this pretend thing and accepts that real consequences (i.e. actual cash to be had if need be) attach to these pretend transactions. The bank in Leonardtown doesn't say, 'now wait a minute, who is this Powdunk People's Bank and how do I know they're actually gonna give me money - maybe I should wait for them to send an envelope of cash out here before I tell my customer that he's got money in his account and can come get cash if he wants?'

Well, the reason is that someone everyone trusts is saying 'yes, that monetary transaction actually happened, even though no cash changed hands.' Someone is affirming the transaction as real and keeping the resulting books. Someone is definining whether or not electronic transactions are real in the same way that the transfer of cash from one hand to another defines that that transaction is real. By and large, the Federal Reserve System is the who is doing that now. Member banks maintain accounts there and they 'have' money in them because the Federal Reserve says they do. There's not much issue of trust, because the insitution that defines what money is to begin with is the one saying whether or not you have it, whether or not you just got more of it from someone else, and whether or not you just gave some of it to someone else.

I'll follow up more later.

I shoulda been more specific. The day to day functionality of the Fed, the clearinghouse role you cite is not my concern.

There is a telling part in the Sorkin book where Hankie P asks congress for the power to take over institutions in order to prevent needing to, this leading up to the Freddy/Fanny take over. He described it to them as "If he has a squirt gun and people know it, he'll probably have to use it due to lack of fear of a squirt gun and if they give him a bazooka and people know it, he is less likely to have to use it...".

As I understand it, all this bazooka business was the Fed, so, to have agreements in place where Larry's bank in good standing is approved as 'having' X dollars on 'file' with the Fed so that Tilted's bank in good standing can have dollars transacted smoothly and efficiently, that is one thing. To even consider, let alone do what they did with Fanny and Bear before that and then the whole kit and kaboodle, the word thrown around was 'moral hazard' wherein no one's behavior would be changed because it was understood the taxpayers would pay for it all, just like Hank's bazooka analogy, the crossed the line, they approved the use of power and, well, they used it and that is where the problems lie in my book; You CAN'T do crap like that!

All they did was CYA one another, saved favored institutions, killed others, and congratulated themselves for preventing 1929 from happening again, as if that was ever remotely possible, and, to top it all off, all the boys behind the bad bets all got paid anyway, no pols had to pay the piper either and, AND everyone knows that now the Fed will always be there just so long as they all hang together, even moreso now that they are playing ever more by the governments rules as if they have a freaking clue as to risk and reward other than the raw horsepower of government force.

 

[Tilted]

I shoulda been more specific. The day to day functionality of the Fed, the clearinghouse role you cite is not my concern.

There is a telling part in the Sorkin book where Hankie P asks congress for the power to take over institutions in order to prevent needing to, this leading up to the Freddy/Fanny take over. He described it to them as "If he has a squirt gun and people know it, he'll probably have to use it due to lack of fear of a squirt gun and if they give him a bazooka and people know it, he is less likely to have to use it...".

As I understand it, all this bazooka business was the Fed, so, to have agreements in place where Larry's bank in good standing is approved as 'having' X dollars on 'file' with the Fed so that Tilted's bank in good standing can have dollars transacted smoothly and efficiently, that is one thing. To even consider, let alone do what they did with Fanny and Bear before that and then the whole kit and kaboodle, the word thrown around was 'moral hazard' wherein no one's behavior would be changed because it was understood the taxpayers would pay for it all, just like Hank's bazooka analogy, the crossed the line, they approved the use of power and, well, they used it and that is where the problems lie in my book; You CAN'T do crap like that!

All they did was CYA one another, saved favored institutions, killed others, and congratulated themselves for preventing 1929 from happening again, as if that was ever remotely possible, and, to top it all off, all the boys behind the bad bets all got paid anyway, no pols had to pay the piper either and, AND everyone knows that now the Fed will always be there just so long as they all hang together, even moreso now that they are playing ever more by the governments rules as if they have a freaking clue as to risk and reward other than the raw horsepower of government force.

Well, I completely whiffed on that one I guess (in terms of figuring out what the inquiry was and responding to it). I even found something that I think does a pretty good job of explaining the Fed's basic operations (thought it's surely longer than anyone would want to read).

So, forgetting my misunderstanding altogether and moving on - we're basically on the same page with regard to what you were actually talking about. I still disagree about the motivation to save particular institutions and the seriousness of the meltdown threat, but that's so much rounding error in the big picture - which is that, regardless, we just shouldn't have done what we did, and our doing it is uber-problematic for the long term.

I suppose one way of dealing with finding yourself immersed in a delusional state is to just hope you die before the delusional state necessarily bursts. However, being inclined not to hope to die any sooner than I need to, I'd prefer to take an approach that seeks to burst the delusional state sooner rather than later.

 

[Tilted]

Here are the minutes of the FOMC's December 14th meeting, which were released yesterday. Let me quote a portion of it:

Unemployment ... unemployment ... maximum employment ... unemployment ... maximum employment ... maximum employment ... unemployment ... maximum employment ...

Seriously though, by my count, the term unemployment appeared more than 30 times and maximum employment appeared 4. Such things have no place in a central bank's discussions regarding monetary policy (except ancillar-ily, which wasn't necessarily the case here).

 

[Larry Gude]

Well, I completely whiffed on that one I guess (in terms of figuring out what the inquiry was and responding to it). I even found something that I think does a pretty good job of explaining the Fed's basic operations (thought it's surely longer than anyone would want to read).

So, forgetting my misunderstanding altogether and moving on - we're basically on the same page with regard to what you were actually talking about. I still disagree about the motivation to save particular institutions and the seriousness of the meltdown threat, but that's so much rounding error in the big picture - which is that, regardless, we just shouldn't have done what we did, and our doing it is uber-problematic for the long term.

I suppose one way of dealing with finding yourself immersed in a delusional state is to just hope you die before the delusional state necessarily bursts. However, being inclined not to hope to die any sooner than I need to, I'd prefer to take an approach that seeks to burst the delusional state sooner rather than later.

I don't mean to argue Paulson specifically meant to save GS. I meant the monster they all created in general. When you are the Pope or an ex Pope, the way things are done at the Vatican can NEVER be the problem, so to speak.

Paulson headed into this, according to Too Big To Fail, Sorkin, stating he did not want to kick the can down the road and leave the mess for the next Sec Treas; He meant to fix it and fix it good. Noble sentiment.

From there, as the situation deteriorated and the pace accelerated, all the creative tension, the crisis moment Rahm says to never waste, all the energy, the necessity, all those great minds and experience just, day by day, rapidly went into the fetal position, sucked their thumb and cried "Uncle Ben! Save us from ourselves!" and sold it to congress as TEOTWAWKI which, while true, is not to say TEOTW.

It was an extraordinary moment, an at bat with the basis loaded and a fast ball right down the pipe and they chose to bunt it.

Everyone knew and still knows that the Community reinvestment act and the GSE's are THE root cause of the housing meltdown; they made the market. Non GSE lenders wanted in too. The pols wanted them in as well and everyone said "You can't lend money to people you know can't/won't pay it back and stay in business if you're not a GSE so, we can't do this. Congress and Clinton got rid of Glass, took all the handcuffs off of lenders and let them do whatever they wanted in order to deal with the risk they all knew they were digesting; congress gave them enough rope. They hung themselves.

And the rest of us.

Paulson went from wanting to fix it to just wanting to ride the storm out. And Bernanke wanted to prevent the last great depression. I simply do not get why no one ever told Ben that he was fighting the last war, that this was WRONG.

They still don't get it. It was and is about housing and energy and no one, D or R, is doing a damn thing about it. It is better to be getting 7% on a $200,000 mortgage paid on time than to get 4% on a $300,000 that isn't being paid. They have GOT to revalue the assets to ever end this chapter. Obviously, they are waiting on the economic growth fairy to turn housing around but, that's like sitting on a bird wondering when it's gonna fly.

 

[Tilted]

Fed Turns Over Record Profit $78.4 Billion to Treasury

The Federal Reserve will turn over a record $78.4 billion to the U.S. Treasury Department as swollen securities portfolios generated big profits in 2010, the U.S. central bank said on Monday.

The remittance to Treasury for 2010 is $31 billion more than a year earlier.

"The increase was due primarily to increased interest income earned on securities holdings during 2010," the Fed said in a reference to portfolios that have been fattened by buying that is designed to stimulate a slow-paced recovery.

Printing money (that the government effectively borrows) rather than making the government borrow it from elsewhere has its benefits.

 

[Tilted]

$600 Billion Bond Program May Backfire: Fed's Plosser

A Federal Reserve official says the Fed may need to scale back its $600 Treasury billion bond-buying program if the economy grows more quickly than expected.

Charles Plosser, president of the Federal Reserve Bank of Philadelphia and a voting member this year on the Fed's main policymaking group, worries that the Fed's program may soon "backfire on us" and spur inflation if "we don't begin to gradually reverse course."

 

[Tilted]

Another take on QE II - this is pretty good conversation about QE, currency wars, our trade relations with China, and neomercantilism in general.

Rolling out the Red Carpet - CNBC Video

 

[Tilted]

Checking Market Moves - CNBC Video

The head of a central bank touting how well the equity markets have performed in response to a question about how he knew his monetary policies were working?

FRICK! WTF? GMFDI!


I need to buy some cheap plates to throw against the wall, so that my Longabegers will be safe going forward.


On another note, you gotta love Santelli.

 

[Larry Gude]

Checking Market Moves - CNBC Video

The head of a central bank touting how well the equity markets have performed in response to a question about how he knew his monetary policies were working?

FRICK! WTF? GMFDI!


I need to buy some cheap plates to throw against the wall, so that my Longabegers will be safe going forward.


On another note, you gotta love Santelli.

If your toilet don't work and you can't figure it out, you call a plumber.

If the markets are ####ed up and you can't figure it out, you call Santelli.


Blanchflower has a future in sportscasting; if it goes for a TD, it's a great play. If it gets picked off, it's a bad play. If the rooster crows and the sun comes up, there you go.

 

[Tilted]

The latest FOMC statement was released today. Allow me to summarize:

Blah, blah, blah ... What? Are we going to stop pumping liquidity into the monetary system? Hahaha! Good one - but, NO! Blah, blah, blah ... Oh, and we still don't give a fig about headline inflation, it's all about core inflation BABY! Blah, blah, blah ... Oh, and our policy is now unanimous as that dork Thomas Hoenig that kept voting against it has finally rotated off of the Committee - buh bye.

 

[Tilted]

‘Too Early to Declare Victory’ Fed May Not End Bond Buying

Just because the U.S. economic recovery is looking up, don't think the Federal Reserve will necessarily stop its bond buying after its latest $600 billion program.

While financial markets have largely dismissed the possibility the Fed could extend the program past its end-June sunset date, officials are still wrestling with whether more might need to be done.

The idea of laying groundwork for an exit from the central bank's extraordinarily easy monetary policy has not yet entered into the equation.

You ever watch people doing stupid stuff and think to yourself: I wonder if they're getting ready to do X now, cause that would be even stupider? Nah, they couldn't possibly be that stupid... Oh, wait... WTF... LOL... You've got to be kidding me! Is this one of those hidden camera things where someone appears to do something really stupid and they try to trick you into thinking it's real to see what your reaction will be...

The reality that anyone is seriously talking about the possibility that they might print even more money is... I don't know what. It's ridiculus. I mean, we already managed to cause a revolution and effective overthrow of a government on the other side of the world with our monetary policy, what else would we be trying to accomplish? (That's a bit of sarcastic exaggeration, I don't think it's all our fault.)

 

[Larry Gude]

‘Too Early to Declare Victory’ Fed May Not End Bond Buying



You ever watch people doing stupid stuff and think to yourself: I wonder if they're getting ready to do X now, cause that would be even stupider? Nah, they couldn't possibly be that stupid... Oh, wait... WTF... LOL... You've got to be kidding me! Is this one of those hidden camera things where someone appears to do something really stupid and they try to trick you into thinking it's real to see what your reaction will be...

The reality that anyone is seriously talking about the possibility that they might print even more money is... I don't know what. It's ridiculus. I mean, we already managed to cause a revolution and effective overthrow of a government on the other side of the world with our monetary policy, what else would we be trying to accomplish? (That's a bit of sarcastic exaggeration, I don't think it's all our fault.)

Let's think about this for a moment, shall we? We have been looking at this from the standpoint that, as we see things, this, QE, is not a good idea, right?

So, let's stand back and think about it. What if they DO just keep doing it?
For average folks, housing is still a disaster and energy is strangling the life out of the day to day pocket book, right?

Now, you ever grease something, a fitting on a tractor or car? You just keep pumping and it looks like nothing is happening yet finally, grease pops out somewhere signaling that the grease has made it's way through, pushed out the old and fully greased whatever it is?

What will QE look like if they just keep pumping? Will there be a point where Joe and Jane look in the pockets and find that, gee wiz, there is oooo much money that they just got a raise of, say, 1/3 or 1/2 again of what they were taking home so that paying $4 for gas, buying a new home at the still not bottomed out prices is affordable, milk and bread aren't a big deal? Buying again is fine because, finally, we have cash in our pockets again?

I mean, bear with me here. Everything Timmah and Hank and Bernie have done has completely missed what matters; consumers. So, maybe, they were right to save the system because it is necessary to have that backbone stable to be able to handle the coming mass inflation that will, somehow, be so full of cash that the cart WILL come before the horse and business WILL hire and give huge raises simply because they have nothing better to do with all that money and THEN consumer buying reignites?

It's dumb, but, that is the only logic I can make of this. Absent money in the pocket, so much so that energy, food and housing prices are no longer fearful, is the ONLY way the economy recovers. They, our fearless leaders, have been acting like companies having money but no customers is the goal. Maybe the goal is companies have SO much money, that they create customers simply because there is nothing else to do with the tidal wave of cash???

 

[Tilted]

Let's think about this for a moment, shall we? We have been looking at this from the standpoint that, as we see things, this, QE, is not a good idea, right?

So, let's stand back and think about it. What if they DO just keep doing it?
For average folks, housing is still a disaster and energy is strangling the life out of the day to day pocket book, right?

Now, you ever grease something, a fitting on a tractor or car? You just keep pumping and it looks like nothing is happening yet finally, grease pops out somewhere signaling that the grease has made it's way through, pushed out the old and fully greased whatever it is?

What will QE look like if they just keep pumping? Will there be a point where Joe and Jane look in the pockets and find that, gee wiz, there is oooo much money that they just got a raise of, say, 1/3 or 1/2 again of what they were taking home so that paying $4 for gas, buying a new home at the still not bottomed out prices is affordable, milk and bread aren't a big deal? Buying again is fine because, finally, we have cash in our pockets again?

I mean, bear with me here. Everything Timmah and Hank and Bernie have done has completely missed what matters; consumers. So, maybe, they were right to save the system because it is necessary to have that backbone stable to be able to handle the coming mass inflation that will, somehow, be so full of cash that the cart WILL come before the horse and business WILL hire and give huge raises simply because they have nothing better to do with all that money and THEN consumer buying reignites?

It's dumb, but, that is the only logic I can make of this. Absent money in the pocket, so much so that energy, food and housing prices are no longer fearful, is the ONLY way the economy recovers. They, our fearless leaders, have been acting like companies having money but no customers is the goal. Maybe the goal is companies have SO much money, that they create customers simply because there is nothing else to do with the tidal wave of cash???

Perhaps.

Perhaps they realize they've already screwed the pooch with regard to price inflation, so they even more desperately need to, somehow, force some wage inflation. And, pumping grease is about all they can think to do, so pump grease they will - and hope and pray that whatever's seized up in there (who knows what it is, but it's gotta be in there somewhere) will eventually break loose.

Price inflation AND wage inflation = we can live with that

Price inflation WITHOUT wage inflation = Egypt (well, probably not really, but you get the point)

 

[Larry Gude]

Perhaps.

Perhaps they realize they've already screwed the pooch with regard to price inflation, so they even more desperately need to, somehow, force some wage inflation. And, pumping grease is about all they can think to do, so pump grease they will - and hope and pray that whatever's seized up in there (who knows what it is, but it's gotta be in there somewhere) will eventually break loose.

Price inflation AND wage inflation = we can live with that

Price inflation WITHOUT wage inflation = Egypt (well, probably not really, but you get the point)

There it is. I mean, this is the first time I have an inkling as to what their thinking is and that is ONLY if this is how they are thinking. I mean, business NEEDS customers to make money. They have perverted that simple equation and simply made companies profitable absent customers.

 

[Tilted]

Yields are back down some.

3-month .10% (seems misreported to me)
2-year .58%
5-year 1.89%
10-year 3.26%
30-year 4.38%

Now:

3-month .14%
2-year .79%
5-year 2.32%
10-year 3.67%
30-year 4.73%

(1) Yikes, look at the 2Y-10Y and 2Y-30Y spreads.

(2) So, the 2Y, 5Y, and 10Y (where QE II purchasing is concentrated) yields are up 45, 117, and 104 basis points respectively since QE II was announced. Note to Fed frontrunners: Beware, despite reports, the Fed is not God, and the Universe doesn't always respond unquestioningly to its hand waving (or sledgehammer slinging, for that matter).

 

[Larry Gude]

N Note to Fed frontrunners: Beware, despite reports, the Fed is not God, and the Universe doesn't always respond unquestioningly to its hand waving (or sledgehammer slinging, for that matter).

I thought the whole point of quantitative easing was to create a new universe? Ben Bernanke studied the depression, don't you know?

 

[Tilted]

Propelling The U.S. Economy - CNBC Video (Rep. Paul Ryan as guest host)

At the risk of proving that confirmation bias exists: There's some good stuff in there.

I've been critical of Mr. Ryan in the past. But, I'm willing to wipe the slate clean, give him another chance, and judge him based only on his actions going forward from here. What other choice do I have?

 

[Tilted]

I thought the whole point of quantitative easing was to create a new universe? Ben Bernanke studied the depression, don't you know?

That's what I hear. He may have helped keep us out of the Great Depression II - unfortunately, he may also have helped doom us to the Great Stagnation. At the very least, he helped keep us comfortably encapsulated in the Great Delusion.

 

[Tilted]

The problem with troublesome inflation is that, much like the rest of nature's devastating diseases, you're not sure you've got it until after you've caught it. It's much better to have prevented it than it is to treat it.

 

[MMDad]

Now, you ever grease something, a fitting on a tractor or car? You just keep pumping and it looks like nothing is happening yet finally, grease pops out somewhere signaling that the grease has made it's way through, pushed out the old and fully greased whatever it is?

What will QE look like if they just keep pumping? Will there be a point where Joe and Jane look in the pockets and find that, gee wiz, there is oooo much money that they just got a raise of, say, 1/3 or 1/2 again of what they were taking home so that paying $4 for gas, buying a new home at the still not bottomed out prices is affordable, milk and bread aren't a big deal? Buying again is fine because, finally, we have cash in our pockets again?

The first time I was greasing an antenna rotator that was new to me, I was told to take the grease gun and grease it. Zerk fitting - ah, grease until grease pops out. One whole grease gun later - nothing. WTF? Was the gun full, or was there a huge air bubble in there? Hmmm.... So I open the door, and there is a big pile of grease inside, all over the motor and control circuits.

Lesson learned - before you start greasing something, find out how much grease to use, where it is supposed to go, and what else it might affect.

I have a bad feeling that this isn't a good year to be a guy named Ben - lose the superbowl, squirt grease everywhere, and cause the economy to go haywire. I guess the real question that affects me: will wages keep pace with inflation? In my situation, they can't.

I heard a talking head say that oil prices are up because the dollar has been devalued. If that's the real reason, is there anything that makes you think it won't continue?