New Economy Paper So Stupid Reuters Sees Inherent Stupidity!!!

Have climatologists decided to try their hands at economics?

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Fed should focus on mortgage buys, sell Treasuries: study

Right, or something like that. 

JACKSON HOLE, Wyoming (Reuters) – The Federal Reserve should concentrate its unconventional monetary stimulus on mortgage asset purchases, according to a new study released on Friday, ditching Treasury bond buys which the authors say have not had much of an effect.

You see, I don’t believe the authors know why the Fed is buying our bonds.  Back to that in a moment. 

The absence of concrete guidance as to the goal of asset purchases, which has been vaguely defined as aimed toward substantial improvement in the outlook for the labor market, neutralizes their impact and complicates an eventual exit, according to the paper’s authors, Arvind Krishnamurthy of Northwestern and Annette Vissing-Jorgensen of Berkeley.

“Without such a framework, investors do not know the conditions under which (asset buys) will occur or be unwound, which undercuts the efficacy of policy targeted at long-term asset values,” the authors write.

Minutes from the Fed’s July meeting, released on Wednesday, suggested policymakers had already considered such a step but, for now, decided against it.

Northwestern and Berkeley….. how utterly predictable. 

Well, timing is everything.  You see, now the Fed is looking for an exit they won’t find.  Maybe, when they started this idiocy that might have been a more successful strategy, if by success one means to create another bubble, increase personal debt, and encourage more bank insolvency, then yes, simply buy bad mortgages would have been the way to go.

The authors did have some parts right ……

In particular, Fed Chairman Ben Bernanke and others have argued that asset purchases work by taking safe assets out of the market and therefore forcing cautious investors to take more risk. In official parlance, this is known as the “portfolio balance effect,” affecting rates in markets well beyond those targeted by the Fed.

In that paragraph, above, they’re referencing bond purchases. 

The impact of asset buying is a lot narrower than Fed officials contend, according to the authors of the paper.

“It does not, as the Fed proposes, work through broad channels such as affecting the term premium on all long-term bonds,” the paper finds.

Instead, mortgage-buying has been more effective because, by targeting a specific sector that was under duress, Fed officials have been able to create scarcity of supply in the mortgage market, leading prices – and therefore credit availability – to rise.

“We find that (mortgage purchases) are more economically beneficial than Treasury (buying),” the authors write.

Recently, Fed officials have worried excess risk-taking may have gone a step too far, potentially leading to dangerous asset bubbles – hence all the talk of a ‘tapering’ in quantitative easing.

And, this, of course, is why dolts such as the authors and dolts such as Bernanke should not interfere with markets.  I mean, really?  We just got screwed by a housing bubble and this cast of idiots were trying to create the same environment which got us screwed!  And, had the economically illiterate Obama administration been even moderately successful with their economic policies, we would have had another housing bubble. 

But, all that is hindsight, even though there were people like me screaming not to do this idiocy.  What the authors are proposing is impossible now.  And, even Reuters gets why ……

Presented at the Kansas City Fed’s annual Jackson Hole conference, the paper argues rather controversially that the central bank should begin its exit strategy by selling Treasuries, something that is hard to conceive given the recent speedy selloff in government bonds.

As it turns out, no one wants our bonds which would probably be rated near junk if the Fed hadn’t started to buy all of them.  And, even still, there’s been a mass sell-off by foreign buyersBond yields are up to 2.82% after being under 2% for all of 2012.  No one wants them!  And, this is the quagmire the Fed has created.  All that QE was, was reality avoidance.  Now, if they stop the bond purchases, the yields will float to well beyond what we can service!  If they stop buying the crap mortgages, housing will drop again.  Already, after rumors of the easing we’ve seen this come into play

As it turns out, there is no substitute for growing a proper economy.  The more one prints, the more harm the eventuality will bring. 

Cd has shown what promises to be an interesting theory. 

Theory of Interest and Prices in Paper Currency Part I (Linearity)

I haven’t read it yet, but, just skimmed over the first few paragraphs.  But, I did note they were touching on prices and why we haven’t seen such drastic inflation as predicted. Again, I haven’t read it, but, one of the reasons that we haven’t seen hyper-inflation is because we don’t properly understand what is and isn’t in circulation.  All of this QE the fed has done, doesn’t mean that capital is circulating.  A very large part of the printed money is stuck in the stock markets.  We have seen inflation, but, it isn’t expressed as we typically conceive. 

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That’s a graph of the DJIA.  Does anyone honestly believe our publically traded companies have increased in value by 50% since 2010?  Or that the banks are now much more solvent and have changed their lending practices?  If they had, the Fed wouldn’t have all of those mortgages to buy, by now.  But, many of the banks have been recapitalized and as I’ve stated, the companies have increased their nominal value by 50% in just 3 years!  But, very little of this printed money is actually in circulation!  It’s just being held by different holders.  The magic of all of this is that if they sell this printed money, then it gets into circulation and we’ll see inflation.  If they don’t sell and get caught, then all of that printing magically disappears.  Poof!  Note, the DJIA is just an example.  Look at all the markets around the world.  There’s your currency/non-currency.  Look at all the capital sunk into the banks.  There’s your currency which is not circulating.  In order to have inflation, the capital must circulate.  It’s not that hard to understand.  In the US we have 8 million more people not working than we did in 2009.  Our wages have dropped by about 10%.  It doesn’t matter how much the fed prints, it isn’t circulating.  But, the danger is still there and all the Fed has done was to provide the fuel for the fire.  Something else has to light the match. 

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24 Responses to New Economy Paper So Stupid Reuters Sees Inherent Stupidity!!!

  1. philjourdan says:

    The power to screw things up has always been there, and indeed as Friedman showed, they did a good job in the 30s. But I fault Volcker for the new trend. Not that he did anything wrong. INdeed, he did it all right. But he showed that it could be done. SO the idiots took that lesson, not the how, and have been running with it ever since.

    • philjourdan says:

      The fed has a much greater capacity to do wrong, than to do right. When used as a scalpel, the fed is useful. But power tends to be abused. And in the abuse, only wrong comes of it.

    • suyts says:

      Agreed! It is human nature to want to do something. Especially if one is wielding power. But, in economics, it’s almost always best not do interject and let the markets take care of things. The more they meddle, the more harm is done.

  2. kim2ooo says:

    OT Watch your traffic numbers here… see if they jump, please.

  3. DirkH says:

    No inflation? Money just sitting there?
    Then why are retailers down and credit card companies up?
    asks Peter Schiff.

    • suyts says:

      Well, that’s another part of it. No one should pretend we’re measuring inflation anywhere close to how we should be.

      • cdquarles says:

        The thing is, to me, James, is that we *can’t* measure inflation by looking at prices. We *feel* it in the loss of purchasing power. That’s partly why I linked to that article. If you use his definition of inflation and deflation; well, we can measure that, but note that ‘prices’ are not a part of it.

      • suyts says:

        Yeh, I have to take the time to read it. But, more often than not when I read such, they have errant underlying premises. The problem is that the more we get away from fundamental economics, which has proven to work effectively, the much more complex these things become.

        But, yes, purchasing power, that’s essentially a distinction without a difference. Yeh, the monetarists get it wrong because we’re not actually printing the money, so inflation gets expressed in different ways. I think that point is lost on many. When the fed buys crap, we don’t literally fire up the printing press and make more currency. And, so the quantity of currency isn’t really there, but, rather the potential is.

        Inflation doesn’t have to be seen as price increases in nominal currency. Yes, it can also manifest as a loss of purchase power. The underlying expected economic behavior doesn’t change. But, then we get into a semantic discussion with purists.

        • cdquarles says:

          Agreed, yet errant premises are common; and when we talk about economics, they’re endemic. Economics is counter-intuitive in the way quantum dynamics is. People have this idea that money doesn’t have a supply and a demand. They also get sucked into zero sum games, because they conflate wealth with money or things.

        • suyts says:

          Yes, maybe one day I’ll come out with a list of words and try to get an agreed upon meaning.

  4. Pingback: Where Have The Monies Gone? Bernanke’s Helicopter Took A Wrong Turn!!! | suyts space

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