Have climatologists decided to try their hands at economics?
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 buyers! Bond 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.
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.
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.