Tag Archives: Fed

Why the Fed Is So Wound Up

There is endless talk about the Fed exiting from the QE-induced asset bubble on its balance sheet. We will show what the Fed can and cannot do to unwind its balance sheet. First some background data from its balance sheet in terms of assets and liabilities. The balance sheet is a wonderful tool for understanding what can happen, what can’t happen, and the corner the Fed has painted itself into.

The Fed’s Thinking and Policy Explained in Two Sentences

Our friend JR sent us this quote from the new Fed chairman Janet Yellen on Fed policy:

You know, a lot of people say this (asset buying) is just helping rich people. But it’s not true. Our policy is aimed at holding down long-term interest rates, which supports the recovery by encouraging spending. And part of it comes through higher house and stock prices, which causes people with homes and stocks to spend more, which causes jobs to be created throughout the economy and income to go up throughout the economy.

We are struck with admiration – and we sincerely mean this. We had 18 1/2 years of Alan Greenspan and people are still trying to figure out what he said. Eight years of Ben Bernanke gave us a lot of academic theory applied in real-time to the economy without any understanding of the outcome. Then the new Fed chairman, in two sentences, explains in plain, clear English what the Fed has been doing all along. Let’s step through it.

One Bear at a Time

Fresh from finishing Summa: The Great Myth, we came across a Dec. 13 blog entry by Doug Noland, “The Prudent Bear”, titled Q3 2013 Flow of Funds. In reading his blog we came across a section that we reproduce below adding numbering in square brackets and emphasis. We then discuss the errors in his thinking.

Summa: The Great Myth

Listening to an interview of Richard Duncan by David McAlvany we were finally motivated to explore an issue that has nagged at us for quite a while. What disturbs us is that we find ourselves alone in disagreement with the prevalent ‘wisdom’ regarding the Fed’s quantitative easing (QE) policies and their effects on liquidity and markets. This essay will explore our position.

Flash Point: If You’re American, You’re Now Really Screwed – Yellen’ About it Won’t Do No Good

ZeroHedge today reports: Yellen Timestamp: “No Bubble”. We have added emphasis below.

  • YELLEN SAYS FED DOESN’T SEE BUILDUP OF FINANCIAL RISKS
  • YELLEN SEES LIMITED EVIDENCE OF ‘REACH FOR YIELD’
  • YELLEN SAYS FED LOOKS OUT FOR ANY POTENTIAL ASSET PRICE BUBBLES
  • YELLEN DOESN’T SEE `MISALIGNMENTS’ IN ASSET PRICES

Since ZH doesn’t provide a source link we go to Fox Business: Yellen Senate Confirmation Hearings Begin. Quotes from this source areare:

  • Yellen in her opening statement credited the Fed’s interventionist policies with supporting the ongoing recovery and described the economy as “significantly stronger.” [The economy has not recovered to its pre-recession levels and may be rolling over. Contrary to what the Fed might believe, the business cycle remains, even if it is severely distorted by Fed intervention.]
  • Quantitative easing is intended to keep longer-term interest rates on loans such as mortgages low “to spur demand in the economy,” Yellen explained. [after an initial boost there is no ongoing effect. Indeed, the 30 year rate has been rising.]
  • Yellen, addressing questions related to potential asset bubbles, said Thursday she doesn’t currently see any “price misalignments” that “would threaten financial stability.” [compared to normal times, risk in the bond market and the stock market is totally mispriced.]

In short, Yellen will perpetuate the Fed policies that have so damaged markets, partly due to a blindness toward their ineffective and destructive nature.

David Stockman, in a King World News interview reinforced the above analysis:

The greatest danger is the Fed.  It has become a serial bubble machine.  We have seen this move three times already this century … and now they have inflated it even more fantastically for the 4th time.  And yet we now have testimony from Yellen, yesterday, in which she couldn’t even use the word, ‘bubble.’  She kept referring to it (the bubbles) as a ‘misalignment of prices.’

So we have a complete disconnect between the Main Street economy, which is struggling and floundering, and financial bubbles throughout Wall Street and the financial system that are clearly being fueled by the lunatic policies of the Fed.  And now we have a (Fed) chairman who can not see them, or even hear the word.

These comments crystallize the divide between private sector analysts and economists and the Fed. They represent the antithesis of what the private sector sees and in particular with QE, what academic research is beginning to dismiss as having any ongoing effectiveness.

How Effective Has QE Been?

under construction

We have written a number of essays on quantitative easing (QE) as practiced by the Fed. We also have just finished our series on Understanding Money with the publication of Understanding Money: Part 5 – It’s All Money. As we were finishing we realized that a number of questions in our mind about QE might be tidied up using our ideas on money. This essay examines the monetary mechanics of QE and attempts to quantify its impact on the money supply and hence the economy.

The Banks Are Not Lending ….

We began a note on this a year ago (Are Banks Afraid to Lend? unfinished), mainly to document our thoughts and correspondence on the issue. At least as far back as 2009 we were considering the possibility that lending was not occurring, a common critique of the system at the time, because there was lack of demand or lack of willing credit-worthy borrowers. This was certainly not a common viewpoint. Unfortunately, the ignorance that produces this viewpoint remains. We summarize the issue below.

Flash Point: Think! Please!

The $1 trillion dollar platinum coin (hereafter referred to as the 1T) has been burning up the media bandwidth of people who are either unable or unwilling to think deeper than their last tweet. Unfortunately, the 1T is a non-starter – or should be. We would love to see the government attempt it as it would be so entertaining. We confess we have ignored most of the discussion, but have caught a few points and comment herein.

Flash Point: Fed Math

Bloomberg has printed a summary of today’s FOMC meeting: Fed Expands Asset Buying, Links Rates to Joblessness, Prices. We will preempt the usual misinterpretations of a summary of the now and future position of the Fed’s balance sheet.

Flash Point: QE3 and the Fed’s Balance Sheet

An article today in Bloomberg, Fed officials laud stimulus, quibble over future plans, reminded us of the new Fed stimulus program, QE3. As the article states:

In September, the Fed announced an open-ended bond buying scheme that began with $40 billion per month in mortgage-backed securities [MBSs].

We should see the impact by now on the Fed’s balance sheet. Consider the graph of Total Assets from FRED®:

In the 3 months since Sept. 5, the balance sheet has only increased by about $30 billion. Admittedly we haven’t done the homework to see when the program actually began, but if it’s operational we don’t see the result. Taking a look at the fed’s purchase of MBSs over the same period we get this graph:

We see the increase in MBSs was about $40 billion accounting for the balance sheet expansion but well short of the $40 billion per month expected. We will monitor this graph in case there is a delay in purchase completion.

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