Archive for the ‘Federal Reserve’ Category

Threat of inflation sky high

March 22, 2009

The Fed’s announcement last week to flood the financial markets with $1.2 trillion in new money stunned many. True, governments often print money as a cheap way to buy off their debt. Governments also find that instead of paying off their debt they can simply reduce the value of the currency so much that earlier debts are not worth anything. But the shear size of the current change to the world’s preeminent currency is unprecedented.

Washington Times
Editorial

More money means that each dollar falls in value and can purchase less than it did previously. Think of it this way: If the number of apples suddenly doubled tomorrow, what would happen to the price of each apple? It would fall. Same with dollars, whether American or Zimbabwean, where the current inflation rate is 230 million percent annually.

The size of this $1.2 trillion increase is breathtaking, and the U.S. monetary base has already more than doubled so far, from $800 billion to $1.7 trillion. One normally needs a microscope to see past yearly changes in the money base, and the current change already jumps off of any chart – look at the one on the right from the St. Louis Federal Reserve Bank showing the blastoff. As the chart illustrates, even before the last infusion of money, we have already seen a huge increase in the money supply (M1) this year.

Devaluating our currency and our debt is a dangerous game. It may cure short-term ills but, in the long run, countries won’t want to hold U.S. government bonds or other investments if they think they risk losing a lot of money this way.

With the Fed’s announcement, the value of the dollar has started dropping precipitously. On March 12 it took $1.27 to buy a Euro. By last Thursday it took about $1.37. It is surprising that the size of the drop hasn’t been even larger.

The Fed seems to think that it is battling what might be a massive deflation and wants to protect against the unemployment that might result from sticky wages and prices. But instead of deflation, these huge increases in the money worry us that the opposite, a hyper-inflation, will be more likely the case and there will be real costs. And while this huge increase in money will undoubtedly be the one thing that the federal government has done that will lower unemployment, it is just the wrong way to lower it.

As Milton Friedman was well known for pointing out, inflation will cause some workers to think some jobs are offering higher real wages than they actually are. The problem is that once these workers realize their mistake – that the slightly higher wages they accepted were eaten up by inflation and did not represent a real increase – they will leave the jobs they took hastily to look for positions offering a real increase, ones they should have pursued all along. It is a solution, but a false one.

There are other bad consequences from this huge increase in the money supply. Interest rates will go up, simply because lenders will have to be compensated for the fact that any money that they get back a year from now will be worth less because of inflation. With the rates up, investments will fall.

However, the interest rate will actually go up by more than the inflation rate because our tax rules don’t adjust taxes on interest rates for inflation. If inflation goes from zero to 10 percent, the interest rate doesn’t simply go from, say, 5 percent to 15 percent – it has to go up by more than that to keep the after-tax return to investors the same. In fact, if someone is paying a 50 percent tax rate, increasing inflation from 0 to 10 percent would require increasing the interest rate to 25 percent to keep even!

This huge increase in the money supply may provide a short gain, but the long term costs are going to be huge. The notion that the Federal Reserve is capable of smoothing out the impact that such a change has on inflation is hubris at its worse. The Fed has a difficult enough job controlling inflation under the best of circumstances, and the Fed has never had to be asked to control this type of increase in the monetary base before.

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For Obama, Crisis is a Really Good Thing

March 16, 2009

After Pearl Harbor, Franklin Roosevelt didn’t also declare a crisis in health care, the environment, education, our energy supply and other fibers of the national fabric.

Obama did.

Suddenly, when faced with a huge financial and economic crisis, we needed a total overhaul of health care in order to survive.  Health care costs are the reason the economy is a mess.

Same for education: without a better (and much more costly federalized) system, our future is bleak.

“Never waste a good crisis” has become the semi-official motto of the Obama administration.

Rahm Emanuel and Team Obama say: Open that can of worms.

But when Obama’s gloom and doom about the economy prompted others to say maybe we should prioritize and focus more on the economy and wait on health care and these other projects, President Obama now says the crisis is “not as bad as we think.”

He even trotted out Rosy Romer and a bunch of others on the Sunday talk shows to tell us so.

So lets wait.  Lets’s wait to see if the economy is improving before we bet the kids’ future by spending all the borrowed money we can muster to fix health care and everything else.

If Bernanke is right and the rebound is ahead this year: show me.

Or tell me how, when and by whom this humongous tax and debt bill will be repaid?

The thing about a crisis is: it really can be a can of worms if it is handled without measured steps.  By opening the current economic can of worms with a full throttle assault on America’s former self and proposing what is really a wholesale change to socialism, the president may have bitten off too many worms at once.

The “Tea Party Protests” are just the first sign of trouble….

http://michellemalkin.com/2009/03/1
6/no-duh-white-house-worried-abou
t-bailout-backlash/

Socialist Former CNN Reporter Wins Election in El Salvador; “Yes We Could”

Sun Setting On American Superpower?

On Bernanke: Recession Will End This Year
http://news.yahoo.com/s/ap/20090
316/ap_on_bi_ge/bernanke60_minutes

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Washington Times Editorial:
Crisis is Obama’s Mantra
http://www.washingtontimes.com/
news/2009/mar/16/obamanomics/

Obama Can’t Govern Until He Kills More Positions
http://online.wsj.com/article/SB12
3716137102835601.html

 Obama’s TV Talking Heads: Sunday Surrogate Disaster

U.S. Taxpayers Risk $9.7 Trillion on Bailouts as Senate Votes

February 9, 2009

The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.

By Mark Pittman and Bob Ivry
Bloomberg
.
The Federal Reserve, Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion over the past two years and pledged to provide up to $5.7 trillion more if needed. The total already tapped has decreased about 1 percent since November, mostly because foreign central banks are using fewer dollars in currency-exchange agreements called swaps. The Senate is to vote early this week on a stimulus package totaling at least $780 billion that President Barack Obama says is needed to avert a deeper recession. That measure would need to be reconciled with an $819 billion plan the House approved last month.

Only the stimulus package to be approved this week, the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates approved in 2008 have been voted on by lawmakers. The remaining $8 trillion in commitments are lending programs and guarantees, almost all under the authority of the Fed and the FDIC. The recipients’ names have not been disclosed.

“We’ve seen money go out the back door of this government unlike any time in the history of our country,” Senator Byron Dorgan, a North Dakota Democrat, said on the Senate floor Feb. 3. “Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?”

Read the rest:
http://www.bloomberg.com/apps/news
?pid=washingtonstory&sid=aGq2B3XeGKok

Dallas Federal Reserve Chief, China, Germany All Call Protectionism “Death”

February 2, 2009

Dallas Federal Reserve President Richard Fisher cautioned Monday that protectionist tendencies are dangerous, calling them the “crack cocaine” of economics.

Speaking on C-Span, Fisher addressed a proposed congressional fiscal stimulus law that would offer “Buy America” provisions in an effort to encourage the purchase of domestic goods. However, such provisions are dangerous, Fisher warned. “Protectionism is the crack cocaine of economics … (it) leads to economic death,” he said.

“We just cannot afford to go down that path,” Fisher added.

The Dallas Fed President just concluded his term as a voting member of the Federal Open Market Committee. Known as one of the most ardent inflation hawks in the nation’s policymaking body, Fisher added in his comments that failure to remove added liquidity from the system in a timely manner could result in serious price inflation.

The Federal Reserve needs to be cautious that their excessive lending and record low interest rates, set at a target range between zero and 0.25 percent, Fisher said, warning that an inflation problem could be “baked” into the country’s economic outlook.

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LONDON  — Visiting Chinese Premier Wen Jiabao on Sunday warned against protectionism in face of lingering global financial crisis.

Speaking at a meeting with former British Prime Minister Tony Blair, Wen said as international financial crisis is spreading, his visit to London was to send a message of confidence for Britain and China to join hands in overcoming current difficulties.

He noted that the two sides should further explore the potential for cooperation, and guard against trade protectionism, in particular.

Read the rest from China Daily:
http://www.chinadaily.com.cn/china/2009-02/02/conte
nt_7435205.htm

Related:
Economy Sparking Protectionism, Global Trade Disputes?

 Obama Forced to Rethink “Buy American” in Stimulus After Hits from China, Germany, Others

Fed Delivers Gloomy Economic Outlook

January 28, 2009

The Federal Reserve, gave a bleak outlook for the U.S. economy, saying that while it expected a “gradual recovery” to begin later this year, significant risks remain.

“Industrial production, housing starts, and employment have continued to decline steeply, as consumers and businesses have cut back spending,” the Fed said in the statement. “Furthermore, global demand appears to be slowing significantly.”

Fed Chairman Ben Bernanke and his colleagues are battling a three-headed economic monster: crises in housing, credit and financial markets that — taken together — haven’t been seen since the 1930s.

From CNN Business:
http://money.cnn.com/2009/01/28/news/econ
omy/fed_decision/index.htm?postversion=
2009012814

From the Associated Press:
http://news.yahoo.com/s/ap/20090128/
ap_on_bi_ge/fed_interest_rates

Federal Reserve Chairman Ben Bernanke before testifying before ... 
Federal Reserve Chairman Ben Bernanke before testifying before the House Financial Services Committee on Capitol Hill, November 18, 2008.(Molly Riley/Reuters)

Once Banks Are Nationalized, When is the Good Time To De-Nationalize?

January 26, 2009

Even though your government is in discussions and seriously considering the nationalization of U.S. banks, few smart people outside the government are in the mix.  And to find someone thinking about eventual de-nationalization we had to go to Asia and London….

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By Henry C K Liu
Asia Times

The notion that nationalization is only an emergency measure that can be undone as soon as the economy recovers appears to be wishful thinking. Discussing the US Federal Reserve’s market exit strategy problem, Fed chairman Ben Bernanke said in his London School of Economics Stamp Lecture: “The Crisis and the Policy Response”

Federal Reserve Bank Chairman Ben Bernanke replies to questions ... 
Federal Reserve Bank Chairman Ben Bernanke replies to questions after delivering his speech at the London School of Economics in central London January 13, 2009.(Toby Melville/Reuters)

….

De-nationalization will prolong the recession. Since nationalization of the financial sector had been necessary to save the financial system from imploding, it was not a Keynesian move to stimulate economic recovery, all the misleading euphemism notwithstanding. What the Fed did was to keep the critically ill patient alive with extraordinary measures, even if the cost is a drawn-out long-term recovery that requires hospitalization for the rest of the patient’s life. Small government cannot be restored by big government, even temporarily.

Also, near zero  interest rates can hardly be described as “unattractive” to borrowers.

Read the rest from Asia Times:
http://www.atimes.com/atimes/Globa
l_Economy/KA23Dj02.html

Related:
Obama Gives Nationalization of Banks a Serious Look

Obama team weighs government bank to ease crisis

January 18, 2009

The incoming Obama administration is considering setting up a government-run bank to acquire bad assets clogging the financial system, a person familiar with the Obama team’s thinking said on Saturday.

The U.S. Federal Reserve, Treasury and Federal Deposit Insurance Corp have been in talks about ways to ease a banking crisis that is once again deepening — and a government-run “aggregator bank” is among the options.

By Tim Ahmann
Reuters

Outgoing Treasury Secretary Henry Paulson and FDIC Chairman Sheila Bair both said on Friday a government bank was one of a number of ideas U.S. regulators had been discussing.

The source said advisers to President-elect Barack Obama, who takes office on Tuesday, were also considering the idea of an aggregator bank among a range of options that could be pursued.

 
Above: Printing Money?

David Axelrod, a top adviser to Obama, told Reuters the new administration would have something to say about a fresh approach to the financial crisis in “the next few days.”

“I’m not going to get into the structure of how we’re going to approach the revamped financial rescue package,” Axelrod said after speaking to a conference of mayors in Washington.

“What we have to do is approach this with a lot more transparency on the front end.”

Read the rest:
In Britain’s Bank Bailout, Taxpayers Face Years of Debt: How About in the US?

Read the rest:
http://finance.yahoo.com/news/Obama-team-
weighs-government-rb-14091318.html

Bernanke: Stimulus Good News, Bad News

January 13, 2009

“Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” chairman of the Federal Reserve, Ben S. Bernanke, said Tuesday.

Read: government spending is great for the economy but don’t bet on it for a long term fix.

Related from CNN:
http://edition.cnn.com/2009/POLITIC
S/01/13/transition.wrap/index.html

Obama Stimulus: Trapped Between Too Little Rock and Paul Krugman Nightmare

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By JULIA WERDIGIER
The New York Times

The chairman of the Federal Reserve, Ben S. Bernanke, said Tuesday in London that a fiscal stimulus package being discussed by the incoming administration would help revive the economy but would not be enough to lead to a lasting recovery.

U.S. Federal Reserve chairman Ben Bernanke delivers a speech ... 
U.S. Federal Reserve chairman Ben Bernanke delivers a speech to the London School of Economics in London, Tuesday Jan. 13, 2009. Bernanke said Tuesday the stimulus package being crafted by President-elect Barack Obama and Congress could provide a ‘significant boost’ to the sinking economy. But he warned that such a recovery won’t last unless other steps are taken to stabilize the shaky financial system.(AP Photo/Matt Dunham)

“The incoming administration and the Congress are currently discussing a substantial fiscal package that, if enacted, could provide a significant boost to economic activity,” Mr. Bernanke said.

But “Fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,” Mr. Bernanke said in a speech at the London School of Economics on Tuesday. “A modern economy cannot grow if its financial system is not operating effectively.”

President-elect Barack Obama is developing an $800 billion recovery plan that is a mixture of increased government spending, including infrastructure projects, as well as tax cuts.

While Mr. Bernanke said the Federal Reserve has already done a great deal to help stimulate the economy — like lowering its benchmark interest rate to virtually zero in December — it still has “powerful tools” at its disposal.

As the economic outlook continues to worsen even after the Treasury’s injection of about $250 billion into the banking sector, Mr. Bernanke said more capital injections and guarantees might become necessary.

Read the rest:
http://www.nytimes.com/2009/01/14/busi
ness/economy/14bernanke.html?_r=1&hp

U.S. Economy and the Printing Press Cure

December 22, 2008

The Federal Reserve as much as admitted last week that lowering the benchmark interest rate — even to zero — would not be powerful enough medicine to revive today’s ailing economy. And so it has opted for the printing-press cure, pledging for the foreseeable future to pump vast sums into banks, other financial firms, businesses and households.

New York Times Editorial
.

Economic history — of the Great Depression of the 1930s and Japan’s lost decade in the 1990s — suggests that the Fed is doing the right thing. Confronted then, as now, with the twin scourges of deepening recession and incipient deflation, governments did more damage with too little intervention than they would have done with too much.

But that doesn’t make such intervention “good.” It’s a big and unfortunate risk in itself.

Flooding the economy with freshly printed money may prevent a self-reinforcing downward spiral. But it may cause trouble long after the present danger has passed. One reason is that it could cause inflation later. In a worst-case scenario, inflation, or the fear of inflation, could dissuade foreign investors, who finance the United States’ debt, from buying and holding dollars. That, in turn, could provoke a disorderly decline in the currency, sending prices and interest rates sharply higher.

For the Fed, engineering the new rescue programs is a technical challenge. It will have to be remarkably deft in draining the system of excess dollars in a timely way. It will also need to be vigilant for signs that the dollar is being unduly pressured, and be prepared to react.

For Barack Obama, the challenge is one of leadership. As president, Mr. Obama will have to convey optimism without overpromising. He will have to inspire confidence, even in the absence of a dramatic turnaround — which is simply not in the cards. To his credit, Mr. Obama has already warned the American people that conditions will get worse before they get better.

In the attempt to make them better, the Obama administration will first face the question of the size of the stimulus. The latest numbers are in the $700 billion range. The economy certainly needs the help, but Obama officials will have to be mindful of the possible long-term negative effects of their outsized borrowing. They must also ensure that the money is not misused to benefit high-income constituents. To jump-start the economy requires getting money to those who will spend it fast and in full. That includes unemployed workers, low- and middle-income families, and state and local governments.

Read the rest:
http://www.nytimes.com/2008/12/22/opinion/22mon1.html

Could $14 Billion Auto Bailout Reach $40 Billion?

December 15, 2008

The Bush administration is trying to determine whether to push U.S. automakers to file for bankruptcy, or send them government funding that could be worth more than the $14 billion package that was rejected by the Senate. 

A brand new Chevrolet is displayed at Santa Rosa Chevrolet December ... 
A brand new Chevrolet is displayed at Santa Rosa Chevrolet December 12, 2008 in Santa Rosa, California. The White House said Monday it was studying options for a bailout of the US auto industry without indicating when an announcement would be made.(AFP/Getty Images/File/Justin Sullivan)
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In weighing a much larger rescue effort for U.S. auto makers than originally envisioned, the Bush administration faces a complex set of decisions over what terms to seek — including whether to push the companies to file for bankruptcy — and how to raise necessary funds.

The administration is trying to determine how much money it will take to help the car companies, and is discussing a rescue totaling $10 billion to $40 billion or more.

One possible source of funding is the Treasury Department’s $700 billion fund set up to rescue the financial industry. Only about $15 billion remains uncommitted from the first tranche of $350 billion, so the Bush administration could be forced to request the second half to cover the car companies’ needs, people familiar with the situation said.

That likely would compel the administration to outline its plans for a range of other needs, including foreclosure prevention for struggling homeowners and possibly aid for state and local governments. That could spark another confrontation with lawmakers, who are increasingly divided over industry bailouts. Senate Republicans blocked a proposed bailout for the auto makers last week.

With Detroit’s car makers facing bleak short-term prospects due to a collapse in consumer demand for vehicles, the Bush administration was rushing to determine the extent of the companies’ financial problems. Late last week, some officials thought the government might be able to provide as little as $8 billion to tide the companies over until early next year. On Sunday, a person familiar with the situation said the companies’ collective needs could range from $10 billion to more than $30 billion. The administration spent the weekend poring over the auto makers’ books to assess their financial needs.

The Bush administration must also figure out whether, and how, to try to wring concessions from affected parties, including factory workers, dealers and holders of the companies’ debt. Without such concessions, the companies are likely to need cash infusions long into the future, congressional critics say. 

Read the rest:
http://online.wsj.com/article/SB122930098160805305.html