Why The (Obvious) Discomfort Ben?
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Courtesy of Karl Denninger at The Market Ticker
Snippets this time, since I’m on vacation….
The economic expansion that began in the middle of last year is proceeding at a moderate pace, supported by stimulative monetary and fiscal policies. Although fiscal policy and inventory restocking will likely be providing less impetus to the recovery than they have in recent quarters, rising demand from households and businesses should help sustain growth. In particular, real consumer spending appears to have expanded at about a 2-1/2 percent annual rate in the first half of this year, with purchases of durable goods increasing especially rapidly. However, the housing market remains weak, with the overhang of vacant or foreclosed houses weighing on home prices and construction.
Uh huh. Note the word appears. In political circles this is known as a "weasel word", and gives the speaker an out if the claim turns out to be pure nonsense down the road (and it will.)
The most-important part of this paragraph, however, is the fact that it recognizes that the government has stepped in and replaced 11% of final demand with borrowed money.
Inflation has remained low. The price index for personal consumption expenditures appears to have risen at an annual rate of less than 1 percent in the first half of the year. Although overall inflation has fluctuated, partly reflecting changes in energy prices, by a number of measures underlying inflation has trended down over the past two years. The slack in labor and product markets has damped wage and price pressures, and rapid increases in productivity have further reduced producers’ unit labor costs.
Note the direct contradiction with the above paragraph (does Ben really think we’re dumb enough not to notice?)
Specifically, slack labor markets and increased output demands per unit of compensated labor means consumer income, that which should be driving spending, is trending downward.
Never mind the "machinations" of the "inflation" statistics. Since Ben uses the government’s cooked numbers, he can always point to them and say "See! See! They said it was less than one percent!" without ever taking responsibility for relying on knowingly bad data.
One factor underlying the Committee’s somewhat weaker outlook is that financial conditions–though much improved since the depth of the financial crisis–have become less supportive of economic growth in recent months. Notably, concerns about the ability of Greece and a number of other euro-area countries to manage their sizable budget deficits and high levels of public debt spurred a broad-based withdrawal from risk-taking in global financial markets in the spring, resulting in lower stock prices and wider risk spreads in the United States.
Damn those "investors" who got gang-raped twice in the last decade and are refusing to take another one for the "team" – that is, Dimon, Blankfein, myself and, of course, Obama.
Like financial conditions generally, the state of the U.S. banking system has also improved significantly since the worst of the crisis. Loss rates on most types of loans seem to be peaking, and, in the aggregate, bank capital ratios have risen to new highs. However, many banks continue to have a large volume of troubled loans on their books, and bank lending standards remain tight.
"This box contains AAA credits!"
"Why does it smell like dogcrap?"
"It really IS AAA credits! Honest! Here, I’ll pledge it as collateral for this $1 billion loan I want!"
"Go to hell."
Yeap.
Small businesses, which depend importantly on bank credit, have been particularly hard hit. At the Federal Reserve, we have been working to facilitate the flow of funds to creditworthy small businesses.
God forbid that a business would choose to finance off operating cash flow instead of bank loans! Why that would make them more competitive, reduce their operating expenses and reduce or even eliminate fixed costs like interest, which in turn would make it possible for them to respond to changing economic conditions without going bankrupt. (It would also, incidentally, mean that banks couldn’t suck the life out of said businesses.) Surplus capital = bad, bank loans = good. In the eyes of Ben, anyway (the average small businessman would be advised to do the EXACT OPPOSITE of what Bernanke counsels, I will add.)
In addition to the very low federal funds rate, the FOMC has provided monetary policy stimulus through large-scale purchases of longer-term Treasury debt, federal agency debt, and agency mortgage-backed securities (MBS). A range of evidence suggests that these purchases helped improve conditions in mortgage markets and other private credit markets and put downward pressure on longer-term private borrowing rates and spreads.
The hell it does:
Compared with the period just before the financial crisis, the System’s portfolio of domestic securities has increased from about $800 billion to $2 trillion and has shifted from consisting of 100 percent Treasury securities to having almost two-thirds of its investments in agency-related securities.
Never mind that under Section 14, which is the part of the Federal Reserve Act governing purchases, it is rather inescapable that these agency purchases were unlawful. (Yes, I know about your cite and claim of a CFR position for Section 13 – but that section deals with loans, not purchases. Nice try Ben.)
The FOMC plans to return the System’s portfolio to a more normal size and composition over the longer term, and the Committee has been discussing alternative approaches to accomplish that objective.
The Fed owns ~20% of the portfolios of two bankrupt GSEs, Fannie and Freddie, both of which would have utterly collapsed absent over $100 billion in cash infusions. The embedded losses in those notes still exist. Good luck unloading them – this will be fun to watch.
Within the Federal Reserve, we have already taken steps to strengthen our analysis and supervision of the financial system and systemically important financial firms in ways consistent with the new legislation. In particular, making full use of the Federal Reserve’s broad expertise in economics, financial markets, payment systems, and bank supervision, we have significantly changed our supervisory framework to improve our consolidated supervision of large, complex bank holding companies, and we are enhancing the tools we use to monitor the financial sector and to identify potential systemic risks.
You mean like all the prudent supervisory authority you wielded before the meltdown? And all the whistles that you did not blow for those institutions where you had no formal authority?
Was that stupidity or willful blindness Bernanke?
Mr. Bernanke said the recent large federal budget deficits are appropriate, considering the weak economy. He said additional fiscal support from Washington could help, given weak private spending, but acknowledged concerns that markets might react adversely if the nation’s deficit is not brought under control.
"The best approach, in my view, is to maintain some fiscal support for the economy in the near term, but to combine that with serious attention to addressing what are very significant fiscal issues for the United States in the medium term," Mr. Bernanke said. "I don’t think it’s either/or. I think you need to really do both. If the debt continues to accumulate and becomes unsustainable … then the only way that can end is through a crisis or some other very bad outcome."
Remember, it was Bernanke that originally counseled all this "stimulus" and "fiscal measure" in the first place. Now he says "well, if you withdraw it you’re fooked, but if you can’t in the medium term you’re also fooked."
Again, can you identify from the below graph when, since 2003, the government has been able to "withdraw" any sort of fiscal stimulus, and for extra credit, please identify the number of years that defines "medium term."
Thanks in advance Ben.
PS: That last sentence is such a bland way of implying outcomes like the collapse of government funding models occasioning an immediate 60% reductions in government spendable funds. That in turn implies the immediate and unavoidable collapse of all transfer payments, including Medicare, Medicaid, Social Security and other welfare programs, and that strongly implies outcomes like riots, looting, burning of cities, zombies in the streets, etc.
Short form of all of the above: He knows.
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Ben Bernanke photo courtesy of Jr. Deputy Accountant.
