A Disturbing Look Inside the Mind of Ben Bernanke

I’ve long expressed my displeasure with the specific approach implemented by the Bernanke Fed.  I am admittedly hard on Dr. Bernanke at times, but I think much of their framework is based on a flawed ideology and misunderstanding of the way the economic machine works.  In today’s press conference Q&A Dr. Bernanke said something that I believe confirms this view.  Pedro da Costa asked how the transmission mechanism works and why QE is different than trickle down economics since it seems to boost Wall Street, but doesn’t do much else.  The Fed Chief answered:

    “The tools we have involve affecting financial asset prices.  Those are the tools of monetary policy.  There are a number of different channels.  Mortgage rates, other rates, I mentioned corporate bond rates.  Also the prices of various assets.  For example, the prices of homes.  To the extent that the prices of homes begin to rise, consumers will feel wealthier, they’ll begin to feel more disposed to spend.  If home prices are rising they may feel more may be more willing to buy home because they think they’ll make a better return on that purchase.  So house prices is one vehicle.  Stock prices – many people own stocks directly or indirectly.    The issue here is whether improving asset prices will make people more willing to spend.  One of the main concerns that firms have is that there is not enough demand…if people feel their financial position is better they’ll be more likely to spend….”

This is a terribly flawed approach to public policy and it underlines a serious flaw in the way the Central Bank is implementing policy today.  What Ben Bernanke just described in the paragraph above is the exact type of thinking that causes enormous distortions in markets and the economy.  This sort of thinking is a remnant of efficient market style thinking that assumes asset prices properly reflect the underlying economy at any particular time and totally ignores the reality that Hyman Minsky often discussed, which states that financial markets can become severely distorted by the effects of ponzi finance and financial instability.  The reality of the market is that asset prices do not always properly reflect their underlying values.  Asset prices reflect the summation of the decisions of the inefficient participants who are engaged in the buying and selling of those assets.  This has been borne out time and time again as irrational human decision making leads people to chase asset prices and underestimate the degree to which stability results in instability.  The recent housing bubble and chasing of assets should have made this more than abundantly clear, but myths persist….

Furthermore, the idea that an economic recovery should be driven by consumers who  spend out of today’s income based on the temporary increase in nominal wealth (which may or may not be higher in the future) is completely backwards.  As I explained previously, this idea is similar to a CEO who thinks she/he can improve her/his business by buying back her/his stock ad infinitum.  No, the CEO is there to generate growth in the underlying assets.  Not to jam up the price of stock traded on a secondary market.  The CEO who buys back stock and foregoes real investment in the firm is generating a temporary boost in nominal wealth that may or may not be backed by real growth in the firm.  What the US central bank is implementing is very similar.  It is an intentional attempt to distort the price of financial assets in order to generate a short-term gain that may or may not be justified by improvement in the underlying assets.  It is the very definition of ponzi finance.

In my opinion, the explicit defense of the ponzi financial policies that got us into this mess is totally indefensible.



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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. Amen, Cullen. I also like your balanced approach to criticism of this policy and efforts to not make the policy criticism personal or over the top in regards to Dr. Bernanke and the rest of the FRB.

    I’m pretty aghast at the enthusiasm about this program. [full disclosure: At the moment I'm holding some shares of a leveraged ETF that reflects this view (and getting spanked as a result).] I know that the economic situation is not good and the trend is looking ugly – globally and domestically in the USA. I am also not a wild gold bug or “END TEH FED!!1!1!!” type of guy. I try to be pragmatic and stay informed, willing to take my lumps where necessary and accept that there’s no silver bullet for this situation. I also can’t see this new program as anything but incredibly short-sighted and misdirected at best, and lunacy at worst. I know something must be done and I know the FRB has only certain levers to pull, but lord almighty these kind of resources seem to be wildly misappropriated if someone is trying to claim the effect of the asset purchases is to help as many people as possible. Goosing asset prices seems to be more like a gambler going back to the table for “One more hand.” Is “goosing asset prices” really the best we can do? Is that how we’re going to recover from this? We need new talent in a bad way.

  2. Bernanke is focused on reducing the real debt burden for a net debtor nation. I don’t buy the “it’s only reserves argument” because at some point when people become sufficiently worried about inflation that money will flood out of reserves and into real assets. The logic below, in my opinion, is unassailable.

    “Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

    The Fed will NEVER run out of bullets as long as Bernanke is in charge

  3. The beneficiaries will be well-off home owners, HNW 1%, corporations (via buybacks) and commodity trading houses. We’ll be getting stagflation, but this time for different reasons … not union labor cost but rather asset hoarding cost push.

  4. Be careful what you wish for, Bernanke is probably the best we’ve ever had. Scary thought, I know. Who in either administration would know how to pick a fed governor? It could easily get worse.

  5. Cullen, I hear what you are saying. But what I struggle with is that the *fundamental* value of any asset is in part determined by interest rates; it’s how we discount cash flows. We can’t escape that. If the Fed changes interest rates, which is primarily what monetary policy is about, they are then always affecting financial asset prices, and then by your argument, they are always ‘distorting’ the market. So it’s not just certain monetary policy decisions that do this; it’s any that affect interest rates. So why be selective about this instance being distortionary vs. any time the Fed changes rates?

  6. I agree that the Fed is in the business of distorting asset prices. But a few things here. I’ve stated that manipulating interest rates during a balance sheet recession, with the hope that the pvt sector would take on more debt, is misguided to begin with. Outside of a BSR, I would be more inclined to be in favor of countercyclical monetary policy. This sort of manipulation can have a stabilizing effect. But I think it’s very different when you stop targeting the interest rate channel as the Fed has and just start trying to jam any and all asset prices higher. Clearly, there’s some interest rate effect in QE, but he’s making it sound like he’s just as interested in driving assets higher as he in in the interest rate effect….Perhaps more so. Maybe I’ve misinterpreted, but his line about consumers buying houses because of some virtuous cycle, etc just wreaks of misguided policy….This is going above and beyond targeting interest rates. It’s far more reckless in my opinion.

  7. I don’t disagree with you. In my mind, I am just trying to separate the interest rate effect from the ‘jam prices higher’ effect. Because there is an element of the price effect in any interest rate effect. The interest rate effect also impacts credit creation, but so does the price effect, through collateral value. It seems you are making the distinction at ‘the wealth effect’ (i.e. higher nominal wealth spurring potentially unsustainable spending and/or borrowing). But isn’t this similar to one deciding to take out debt because of lower interest rates (it can be similarly unsustainable, as we have seen, and as Minsky has noted)? So targeting interest rates vs asset prices seems one in the same, or at least quite similar, in many respects.

    My next question would be, at the end of the day, what would you have done with interest rates during the BSR? Would you have kept interest rates where they were, lower them, or hike them?

  8. Cullen — I am 100% with on this. You nailed right in the head!

    It is a bit disconcerting that Bernanke has lost any sense of decency and is now openly admitting that he is trying to create an inflation in asset prices. I wonder if this is going to last just until the election, or if he is truly intent on destroying what is left of the economy.

    As an aside I am in the midst of reading Minsky’s “Can It Happen Again?”, and I am amazed at how he described with great accuracy what was going to happen and why, and this back the 70s. Ludwig Von Mises also had long recognized that the trick of printing money could create the illusion of prosperity, but only temporarily.

    And yet, the Neoclassical School of economics has trampled over any dissenter and prefers to stick to the most destructive “equilibrium” models in history. Either that or Bernanke is simply trying to keep is job …

  9. I think that Bernanke is afraid of the slowdown that is starting to engulf the world. With little support coming from Congress, there is really little left other than the same stale monetary prescriptions that have been in place for the past 5 years. I think that what really is scaring the Fed is their impotence in the face of current problems. The current policies are so week, if they are going to be effective at all, they need to be way ahead of the curve; which they are not.

    From a Monetary Realism perspective, what is the most likely outcome from this current (and on-going) round of QE?

  10. Again, if you don’t like it you should begin to take the site in a direction that actively proposes stripping them of the second part of the dual mandate – max employment.

    If you believe there is no need to micromanage the biz cycle then the only remedy is to remove their ability to act.

    Bernanke failing to act here because ppl are critical of the effects of this flawed thinking is like an exploration engineer at Exxon walking into work one morning and seeing environmental protesters picketing outside and then going straight to his boss and saying he’s not so enthused about looking for oil anymore because the “long-term consequences of oil exploration, drilling, transport and use are so destructive

  11. The are attempting to go at it alone without fiscal stimulus. Gridlock will prevent stimulus. The QE will have to get much larger to fill the void left by the retrenching consumer. 40 billion a month isn’t nearly enough unless the consumer start consuming, and that is the reason he is targeting employment.

  12. That’s a ridiculous analogy. But what if the Fed succeeds in maintaining asset prices? The point is that fundamentals will grow into justifying prices. You sound like someone who believes that we should have gone with austerity following the financial crisis (I know that’s not what you advocate).

    I think you’re becoming dogmatic in your purely mechanistic view of the economy. There are absolutely psychological factors that drive the economy. I’m sure you follow trucking activity. Have you heard how truck purchasing activity has come to a standstill because truckers are worried about the election? Nevermind that the sentiment is completely misplaced, it’s still affecting the economy.

  13. What if? We have policy options that don’t involve the what if. That’s the point. Instead, we implement this nonsense. I know Bernanke has asked for Congress to do more, but he has to be explicit. He keeps trying to make his communications clear, but he’s forgetting to ask for specific fiscal policy from the one group of people he most needs to clearly communicate with.

  14. The better question is – where is this “growth” going to come from? And will it come before asset markets realize it’s too late? Austrians like to discuss intertemporal structure of the economy. This is a nice example of trying to bring asset prices into the present with the hope that future fundamentals will justify the gains….The distortion MIGHT be temporary. It’s a big risk in my opinion. Bigger than I am comfortable with.

  15. He feels doing so would risk the Fed’s independence. Today he said doing so is not within the Fed’s province.

  16. Agree they fear appearing impotent, but that is exactly what they risk by making the policy open-ended. It seems to me they’ve started something they can’t row back from.

    If the unemployment rate gets worse – or merely does not improve – they have to escalate or the policy will have been proved to have failed. Yet the more they ‘print’, the greater the cost in inflation of gas and commodity prices, which puts the brakes on growth and…increases unemployment.

    So not only is the process ultimately self-defeating, the constant tap nullifies the psychological threat of the Bernanke Put and replaces it with potentially more dangerous fear of QE-withdrawal.

    All of which could end up destroying the credibility of the Fed. I think they’re nuts.

  17. If the Fed had succeeded, we wouldn’t discuss how to use twisted ideas for a recovery would we? If the Fed could succeed, why do you and I work at all? Just let the Fed do a QE for $100 in exchange for each pound of rock.

    Confidence is a condition. If confidence is your only route, in particular if it is based on illusion, it is not going to get us out of the mess.

    If you allude Cullen thought about austerity, you clearly have not come to this site often. All he said is the current Fed policy is the wrong one.

  18. He’s already said the Fed can’t go it alone. He’s specifically said the Congress needs to help. So why not be specific and state an opinion? I don’t see how being vague vs being specific would really change much. If anything, it would help the knuckleheads in Congress make up their minds….

  19. Fed buys MBS assets from the banks, and it will indirectly stimulate the mortgage lending, refi, and new construction which will lead to job creation. I thought it is the right way to create jobs. The short rate is zero, and what else can they do about zero? If you go with Ray Dalio’s analysis, we are in de-leveraging, ie, depression. you need a combination of austerity, debt write down and money printing to get out of the hole. It’s not up to Fed to do austerity, or debt write-down. The only thing Fed can do is to print money. I understand your argument about the swap and reserve or inside money, etc. But bank reserve is bank money, and they can use that money to settle transactions, like the money normally does. Am I really wrong about this?

  20. not sure that will happen – he will likely be congratulated.

    After all, the October meeting is far too close to the election for QE to have a meaningful “confidence’ effect that translates to votes. Best get ahead, hey? Though I’m sure Romney’s threat to sack him (and implicity a few others) had nothing to do with the timing.

  21. Heck, with so much national attention on “Monetary Policy” instead of “Fiscal policy”, should we revisit the Constitution?

    Is it just me or are we failing to expect more from our elected representatives to establish sound bipartisan “Fiscal Policies”?

    It seems that we are becoming lazy just looking for the next FED MEETING to decide our financial future…??? This seems kinda.. Urr umm Dumb.

  22. As I said earlier, the Fed is also a monopoly of truth.

    Bernanke’s Q&A is not really an explanation. It is his attempt to tell the public, “you have no clue how economics works. What I explain to you is the way it should work and ought to work. Just repeat it and trust me.”

  23. I’ll admit though that it’s not a great analogy since buying back a stock actually improves the balance sheet of the corporation by reducing its outstanding liabilities and essentially increasing the ownership of the current owners. So it’s not a perfect analogy, but hey, you get the message. Or maybe you still think it’s stupid. Oh well. :-)

  24. I disagree.

    What the Fed is doing here is to promise easing massively until employment or inflation picks up significantly .

    Cullen, such open-ended promises by central banks are of the strongest tools possible: economic actors can now invest, knowing that rates for investment won’t go up until the investments done today bring in the returns: I.e. serious, sustained growth.

    There’s a first-mover advantage as well: if a firm does not invest now then competitors will, helped by the Fed’s low rates. This makes investing the no-brainer choice.

    Think of it as the open-ended promise by the SNB to keep printing CHF until it’s too strong, at the current 1.2 peg. Those betting against that open ended promise by the central bank lost a bunch of money already.

  25. Anon, I respectfully disagree.

    Firms don’t invest because a central banker whips them in the back. Firms invest when their revenues are expanding at a rate that makes it profitable to leverage their operation. The current environment lacks demand. Not central bankers with whips. Besides, who is to say that this certainty doesn’t relax investment. The certainty does not give anyone a sense of urgency that they didn’t previously have. For instance, I am looking to purchase a home in San Diego. I now know that rates will be low until at least mid 2015. I have no urgency there and I am certainly not going to be a fool and buy a home just because other people are (which is what BB hopes people will do).

    I’m not saying there is no impact from this signalling effect, but I don’t think it’s everything it’s cracked up to be. And your example is flawed. The SNB set the price of the CHF. That’s very different than what they’ve done here. Central banks can always set prices by naming a price. They’re not naming a price here. They’re just saying vague nonsense. I have long said that CBs are powerful not because they can talk, but because they can set prices. The setting of prices is a necessary supplement to talking. This is all talk. No price setting.

  26. Pete,

    First of, in the current environment, borrowers need to pass some pretty high standards in order to qualify for home purchases. I work on the secondary desk for a mid-sized regional lenders (about $3+ billions in loan volume yearly). Of that volume we see about 80+% refi. Of the purchase volume we see about 25% coming from FHA. For the refis we see about 80% repeat borrowers, ie they did a refi 6+ months ago and are redoing it again. Not sure how much the borrowers are savings but it does generate volumes and fees for lenders, brokers and the support services. So essentially we get a very small pool of new blood into the housing market therefore I am not sure if lower rate will do anything other than help the serial refinancers to save a few more bucks a month.

  27. I respectfully disagree with you once more – and I don’t think the reasoning of the Fed contradicts MMR or in general I don’t think it contradicts the pragmatic understanding of economics which I enjoy so often in your articles.

    What the Fed is doing here is an “irresponsible” open-ended promise to ease massively to the tune of 1 trillion dollars a year until employment or inflation picks up significantly.

    The efficiency of the MBS and financials transmission channel is poor, as you have mentioned it many times in the past: it’s barely more than an asset swap combined with psychology.

    But it does not matter as long as it’s nonzero and perceived to be ‘infinite’ (open ended), because the root problem is psychology: lack of overall demand due to damanged balance sheets, people and firms looking at each other: “you first!”, in a mutually destructive fashion. Now the Fed has blinked and has said: “me first, the last one to sit down loses”.

    Such open-ended promises by central banks are of the strongest tools possible, and I don’t know of a single example in the past where open-ended promises on the side of easing failed. (I don’t think Japan counts – the BoJ never really went all-in on easing.)

    There’s the recursive first-mover advantage I mentioned as well: if a firm does not invest now then competitors will, helped by the Fed’s low rates. This makes investing the no-brainer choice.

    Such psychology can snowball and be self-reinforcing robustly – and there’s a lot of excess capacity in the U.S. economy today.

    Note how the quality of the Fed’s operation does not really matter – only its commitment to go against everyone who does not invest actively matters.

    So that’s how I understand it to be similar to the open-ended promise by the SNB to keep printing CHF until it’s too strong, at the current 1.2 peg. Today the SNB is probably not printing any CHF anymore, market participants are doing it for them.

    It’s all about “psychology” – as so many other things in finance – but that does not make it any less real.

  28. There is a very real structural problem to the employment issue. Firms now understand that they can do much much more with a leaner meaner workforce and coupled that with higher productivity return from technology mean a firm can grow its revenue without adding much to its labor force. Let’s look at Facebook or any of the new economy companies. They have lofty valuation, etc yet employed very small labor forces relative to their value. Even vaunted AAPL employed very few people for its size. If future companies are like this, where will this mythical growth comes from? I see no real disruptive technology or advances that will bring a substantial labor force into the market.

  29. Good thoughts. I don’t really agree, but I see where you’re coming from. I just don’t think the signalling effect is as strong as you think. To me, this sort of policy is like whispering in your son’s ear “you are gonna be the best basketball player ever” every night before he goes to bed. Meanwhile, fiscal policy is like forcing him out on the court every afternoon to shoot 100 jump shots. The confidence comes not from being told something, but from real fundamental change. In the economy, confidence mostly comes from real balance sheet changes and in a balance sheet recession I think that comes mainly from the govt changing balance sheets through fiscal policy. But we’ll find out soon enough… If I am wrong I’ll be buying a Scott Sumner textbook in a few years and worshipping his Nobel prize. :-)

  30. LOL :-)

    Yes, I very much agree that psychology does not matter much if you are dehydrating in the desert – but if you look at the data, much of the balance sheet recession is over already:


    Investments into durables such as transportation (cars) is still awfully low by historic standards. Ability by households to invest is at multi-decade highs.

    Time alone will trigger growth as well in general: structures and durables deteriorate to such a degree that the random noise of subsistence investment alone starts the next boom, all alone. The only question is the time frame.

    So the potential and ability for our hero to enter the MLB as a designated hitter is very much there, what is needed now is a powerful incentive to not “play it safe” by becoming a broker ;-)

    Someone powerful whispering the right “low interest rates forever” words might do the trick.

  31. I’m quite sure he also definitely mined the role of the dollar as a reserve currency. This may be good in the long term because a huge devaluation, that I’m expecting, will obtain 1) less oil imports 2) a more energy efficent economy 3) a much more competitive economy 4) a de facto limitation to imports from foreign economies and a fast rebalancing of the huge commercial deficit

    Who devalue first will win this great race to the bottom.

  32. I haven’t read the whole transcript but something I take away from the paragraph you have above is this small gem: Bernanke is subtly being honest with “One of the main concerns that firms have is that there is not enough demand” while also discussing the mechanisms that monetary policy could work, if it were to work.

    Combine that with this:

    ‘Interestingly, the Chairman said “I don’t think our tools are that strong” to substantially lower the unemployment rate, while adding that if Congress doesn’t solve the fiscal cliff issue, he doesn’t think the Fed “has the tools to offset” it.’ http://www.forbes.com/sites/afontevecchia/2012/09/13/bernanke-i-dont-think-our-tools-are-that-strong-and-the-fed-cant-offset-the-fiscal-cliff/

    What I see is Bernanke dropping hints and Congress not picking up on them. It’d be nice if he’d come out and just say we need expansionary fiscal policy, but I understand why Fed charimans don’t do that.

    At some point the conspiracy theory needs to be considered: is there a concerted effort to crush Labor and social safety nets and undermine democracy?… something like Neo-Feudalism… The new royalty being international banking.

  33. “I think they’re nuts”

    yes and that would equate with being very desperate. What you have just outlined is the same reason China is backing off further stimulus, they are afraid of the cost push effects (Which Ben did not comment on in his press conference). They are more exposed to a Arab spring type effect than the US is, but maybe we will see this having effects other places around the world first as they face higher cost and slowing growth.

  34. Agree Cullen.
    If we were in a housing bubble that went bust. Why are we trying to reinflate it. Bubbles are a missallocation and it takes time to work off, why throw more money on that fire ???. He shold be fired just on that point alone.
    Would have been better if he held off, did nothing and forced congress into a corner to act. Doing nothing would have been better, letting the commodities come down to earth and easing the cost side of things, a much better stimulus for main street and producers.

    But should be interesting if the slowdown bites, to see what he some up with next. I remember markets rallying when Greenspan cut back when rates could be cut, same thing now just further off the lunacy scale. How ill this end.

  35. I think CMDEBT/PI somewhat pessimises the potential for a sustained boom, but yeah, it’s a valid view as well.

    It all depends on whether households are making spending decisions based on their month to month balances (FODSP) or based on their decade to decade balance (CMDEBT/PI).

    I think there’s a mix of both: car sales and new home sales probably depend on the former, while recovery of existing home sales probably depends on the latter.

    My view is that just part of it is enough to start a self-reinforcing cycle (the next bubble if you will), as the economy is still artificially depressed right now, waiting to explode.

    We’ll see.

  36. Good metaphor.

    I did a quick calculation this morning that showed that $85 billion a month, if applied directly to job creation, would be enough to pay every single unemployed person a salary of $81,200. Instead it will be spent on financial assets owned by banks and investors in the vague hope that some of it eventually trickles down to the rest of us.

    I doubt very much there will be many unemployed people taking up $80K job offers as the result of this.

  37. Yes, but there’s a major difference. The asset swap is a temporary action which can and will be reversed (some day), or simply roll off over time. AS CR has pointed out many times the asset swap is not “new money” or an increase in net assets.
    The gov’t paying every single unemployed person $81,200 either to do some sort of “work”, or just to sit at home stuffing “Vote Obama/Biden 2012″ envelopes is a completely differnt action. That is new money, and it is highly inflationary unless that “work” is adding to the economy’s output.

  38. Obama will renominate Bernanke and hang one of those gold medals, or whaever they are, around Ben’s neck in a photo-op.

    Romney has stated emphaticaly that he would replace Bernanke. I suspect Romney has no idea why he says that but nevertheless there you go.

    In any case it is a moot point as Bernanke just ensured Obama’s re-election – and his own renomination – via today’s QE-infinity

  39. nice write Cullen.

    the scariest part of the cc was this:

    “highly accommodative stance of monetary policy will remain appropriate for considerable time after econ recovery strengthens”

    they haven´t learned a single thing from the two boom-busts of the last 15 years.

  40. Anon, what if bernanke is going to get you to invest in your company because of low rates, but actually it turns out the world doesnt need as much of your ‘stuff’ as you think. what happens if building more houses isnt what the world actually needs? what if 8% unemployment is actually normal. why do we have to have supercharged growth all the time?

  41. The Fed does not have fiscal bullets. Congress keeps those bullets. Currently like Barney Fife.

  42. “based on a flawed ideology and misunderstanding of the way the economic machine works”

    Cullen, i do not think you are correct here. This is very similar to the comments i saw regarding german hyperinflation episode: “central bank/government did not even undersand they are generating hyperinflation by {}, in their comments they stated repeatedly that their actions are unrelated to hyperinflation; they did not understand how money works” Of cause they understood! And of cause Bernanke understands how economic machine works!

    This is not the question about understanding, this is the question about his actions as politician. He sees certain economic developments (hello ECRI!!!), and certain tools to confront them. The tools, as you yourself noted many times, are limited. At the same time he has the interests to serve, and timeline, which determines the range of benefits/damages he inflicts on different groups of interest. This is quite simple equation, just put in the groups of interests and available instruments, and you would get exactly the same result we are getting now, absolutely unrelated to the “true” theory of money.

    Just believe me, when he retires, he would write/say all the right things about money theory….

  43. If a smart man tells you nonsense perhaps his actions give you some clues.
    By these actions possibly Bernanke is telling us that the holders of these debt assets have serious liquidity issues (at best), or are insolvent) at worse, and by buying these assets and driving up the price of similar worthless junk that he is making them whole with money that can be printed up later.
    Remember that he is a banker and in his mind his obligation is save the banking system.
    This is another reminder that banking policy is far too important to be left up to the bankers.

  44. ooh, anon – you’ve touched on a couple of topics that have bothered me previously… you wrote:

    “because the root problem is psychology: lack of overall demand due to damanged balance sheets, people and firms looking at each other: “you first!”, in a mutually destructive fashion. Now the Fed has blinked and has said: “me first, the last one to sit down loses”.”

    isn’t the problem really about SOLVENCY – not psychology? As you noted – damaged balance sheets – that’s a real problem, not a psychological one.

    But more importantly – I think that the problem is precisely that the Fed is telling everyone that they do NOT need to hurry up and borrow/spend! I brought this up previously, but never got a good answer.

    In other words, the Fed is saying “rates will be low for a long long time”… great – if you’re a prospective borrower, what does that mean for you? It means you do not need to be in any hurry to borrow and invest and expand! See what I mean? Thinking about buying a house? Well if Bernanke told you that in 6 months mortgage rates would be going up, you’d have incentive to do some borrowing (and house buying) now, right! Bernanke is removing that incentive. Same with business expansion. Do I need to borrow and expand now? Nope – no hurry – rates are going nowhere fast…

    bernanke is killing the expansion by discouraging exactly the kind of economic activity that he wants to foster.

  45. Great comments, Cullen. I was interested in any ideas why BB chose to buy mortgages rather than Treasuries. Is it because the Fed can’t buy many more long-term Treasuries without owning so much of the market as to make it not a market? (If the Fed owns say, 70% of all the long-term Treasuries out there, then there is no more liquid market and the Fed is essentially committed to buying all the long-term Treasuries issued in the future, i.e., monetization? I’m skipping a couple of steps there, but if the Fed prevents the Treasury market from functioning by owning too many of them, won’t it then be forced to buy whatever debt is issued?)

    This leads to the hypothetical question of what happens when 30 year mortgage rates drop below 30 year Treasury rates.

    And one more thing–if the Fed is so darn convinced that higher equity prices will bring about a recovery, why don’t they just buy equities?

  46. The point is, what are the options? Most of us here know that what is happening is sub-optimal policy, but besides The Beard telling congress what to do (which is pointless because Congress is a scourge), the man has no options, right? I might be missing something, but I don’t think so.

    Cowpoke: This is something you see all the time in a stock market. A stock can be overvalued and not decline because the fundamentals are improving, and eventually the fundamentals will justify the valuation.

    Cullen is right to question where the growth will come from, but I offer that we’ve already seen businesses capitulate into longer-term planned spending. Once everyone (that isn’t a financial company) had fortified their balance sheets, most companies almost reluctantly began discussing Capex. Shale gas is a big driver in the U.S., but the fact is that innovations and disruptions still happen.

    I’m not attacking Cullen, but I feel that focusing purely on the mechanisms of monetary policy reaches short-sighted conclusions on issues where psychology becomes more important.

  47. George, it’s called a thought experiment. It’s based on THE FUTURE. QE is not giving me money. Maybe you got something out of it. But the risk the Fed is guarding against is asset price deflation, which is damaging in a fragile economy.

    The problem is, reality is not the dominant perception of the world right now. People have their beliefs on what is happening, and that skews business conditions because that skews their actions.

    “You sound like someone who believes that we should have gone with austerity following the financial crisis (I know that’s not what you advocate).”

    I said I know he does not advocate austerity. I’m referring to the rhetoric.

  48. Exactly! To Anon and other cheerleaders above,

    This has never been about job creation….Bernanke isn’t dumb, he knows the lack of transmission mechanism as well as the readers of this site…..its been about keeping the banks upright. Don’t forget Bernanke and Geithner were driving this bus at the fed and ny fed when the banks had a toga party and took the global economy over the cliff…..the biggest collapse in 80 years and they never saw it coming! They will now do ANYTHING to sweep that under the rug. Bubble blowing and the “wealth effect” to drive job growth is terrible public policy……..it actually exaggerates the wealth/income gap…..its nothing but a rationalization of their primary, bank centric goals. And its terrible policy whether a dem or rep sits in the white house. The Bernanke Geithner cabal has gone rogue and needs to be reined in…..we cheer this behavior at our own peril. krb

  49. Ha, I know, I just decided to be a little more direct with the rhetoric.

    Cullen, I worry for you. All this internet-based interaction (read: with trolls) can do bad things to one’s psyche. I’ve concocted an image of you working feverishly in a basement, struggling to maintain the moral high ground while combatting the vitriol you face. Here, I would link to an image from the Southpark episode on WoW, but it would be lost on too many internet minds.

  50. I wonder if Ben is simply treading water hoping Obama will be re-elected. If Obama gets back in and the Dems hold the Senate, they could push through a WPA-type jobs program. That would lower unemployment by force, increase demand, and give Ben the political room to ease off QE(n), as he has explicitly targeted the labor market this time. In other words, Ben has placed the bazooka on the table, but if we get the unemployed on makework jobs, he may not have to use it.

  51. Cullen,

    How does buying back stock reduce outstanding liabilities? The accounting entry when buying back stock is debit treasury stock-equity and (credit) cash. Am I wrong?

    –Stock buyback entry–

    Treasury stock xxx
    Cash xxx

  52. The most flawed thinking of Bernanke is that the idea that the Fed can directly increase peoples stock portfolios with no regard to the fundamentals or underlying cash flows or productive capacity of specific businesses. Bernanke has stated in no under certain terms that HIS policy his responsible for peoples stock market gains. We should all be sening him thank you cards I suppose. This type of hubris will be Bernanks downfall. When has hubris like this every panned out well..its Shakespearean. At least in public his expresses too much arraogance regarding the efficacy of his monetary policy. I hope pivately that his destructive policies keep him tosssing and turning at not, but I fear that he sleeps like a baby…

  53. I believe the Federal govt has the right to set the price of its own product. Therefore, I don’t have a problem with the Fed controlling Treasury securities. However, when it strays into other areas, like mortgages, that is indeed distorting private markets.

  54. I agree with KD. My famillymobile has 150K+ miles on it. I will need to replace it withing 3 years, but there’s no rush. Since rates will stay low until 2015 I can wait. If they were going up I’d buy today.

    I just refinanced my house because rates were 3.625 (30yr fixed 0 points), I figured that was as close to a bottom as they would get. If I had know the fed would actually pull the trigger on QE3 I would have waited.

  55. Problem is the real solution lies with the government. Sadly they are more incompetent than nuclear irradiated vegetables. Therefore Bernanke is the only show in town. His toolbox is limited.
    Driving down interest rates is his only option it would seem.
    If that distorts things so be it.
    Better the gov invests in infrastructure and perhaps targeted tax cuts. But common sense options are not available to those without common sense.

  56. Cllen:

    QE3 is different from QE1 and QE 2 in two dimensions:

    1. It’s open ended and fits well forward guidence; and

    2. It comes at a time when deleveraing has gone a long way.

    The second dimension may be a good time for QE3 and might blur its efficacy to the favorable side.

    Dimesion 1 will test the hypothesis that higher inflation is good during liquidity trap. If you more, have a look at this post which was available last week:

  57. “because the root problem is psychology: lack of overall demand due to damanged balance sheets, people and firms looking at each other: “you first!”, in a mutually destructive fashion. Now the Fed has blinked and has said: “me first, the last one to sit down loses”.

    Damaged balance sheets arent a psychological problem…. they are a real problem. Too much debt, not enough income or assets. Yes it makes us uneasy psychologically but we dont JUST feel bad, our balance sheets ARE bad. And the Feds proclamation are doing almost nothing to help. Most people dont own enough stock to be affected by the wealth affect. Those that do (like myself) arent decreasing our consumption. I cant increase my consumption any more. Its the over 60% of Americans who have had too little growth of their incomes the last couple decades while their debts have continued to grow who are the key to getting our economy back to where most (except Boehner and Co) Americans would like to see it.

  58. “Bernanke is focused on reducing the real debt burden for a net debtor nation”

    Not true.

    Extending my payments out longer at a lower monthly rate often leads to more interest payments. The real burden is the principal which he is not offering to change at all

  59. I don’t understand, Cullen. From an accounting standpoint, common stock is equity of the company. Can you please explain how it is a liability? Common stock/treasury stock is part of equity on a trial balance, no?

  60. “In any case it is a moot point as Bernanke just ensured Obama’s re-election – and his own renomination – via today’s QE-infinity”

    He also may have put some cross hairs on his shiny little dome. I fear for the guys life! I dont think many on the hard right will take too kindly to the “money printing to get Obama reelected” strategy. Thats probably how Rush is gonna spin this whole thing.

    Not trying to be morose but I get a sense of some real itchiness out there

  61. Your analysis couldn’t be more clear or more correct. And surely Mr. Bernanke has trouble believing his own statement. Isn’t this a naked attempt to save the election for Obama?

  62. but if housing prices and other assets start going up the “buy now” mentality kicks in. and thats definitely happening in my area and with stocks

  63. lower interest rates mean more of your payment goes to principal… and sooner

  64. If I make the same level of payment, but then how is that giving me more to spend today?

  65. Mik

    I’ll 2nd your opinion regarding mortgage activity. Purchase volume is moving up, but oddly there is insufficient good (and attractively priced) product out there. Employment confidence and wages need to grow a bit more.

    Banks are holding too many homes, and the homes are deteriorating from their inadequate management. Folks bidding on short sale properties are waiting 6 months to complete the purchase.

    However, I disagree about the serial refinancers: they are saving more than a few bucks a month. Most I see are in the $200/mo plus range, and if they chose to keep the payment the same (prepaying principal), the interest savings are in the $40 to 100K range.

  66. $81k salaries to every unemployed normally will stimulate increased production unless there is a supply shock/shortage of raw materials or price-fixing by a monopoly/cartel.

    Businesses increase production & hire more staff unless they are at max full employment/production –they can’t just raise prices because of competition & the desire to capture more marketshare.

    Look at autosales, they went from 16 million new cars/yr in 2007 then crashed to 8 million per year after 2008..

    price of cars didn’t drop 50%… car manufacturers just cut production/supply instead & layed off thousands of workers

    when economy improved with more people hired, production & sales increasd to 14 milliion car/yr —prices didn’t jump 50% either…

    instead, car makers just increased production & hiring by thousands to increase supply/production of cars to keep prices about the same

    more inflation data from Fed Reserve in my link/name

  67. Exactly, I very much agree w/ Cullen & what MR/MMT says just from history as well as personal experience.

    I’ve worked as a Oracle business analyst/software consultant at a corp for 10+ yrs consulting for hundreds of private businesses implementing & designing information systems/software/IT for their business/production/sales operations software

    –and in all that time, NEVER once was the decision to hire or fire people or increase/decrease production at any of those companies depended on the government budget, gov deficit, or interest rates.

    The primary thing that mattered for hiring/firing was INCREASING(or decreasing) SALES of their products/services
    if expanding into a new market, the previous/current sales of would-be competitors the sector/market they were expanding into
    anticipated new sales projections (which are based on current sales history)…

    all of which is based on current/previous sales (demand), which depends on getting money into the hands of the 99% so that they can spend
    the 99% depends on going into debt to fund their spending, which is unsustainable for everyone but the federal goverment since they own the printing press)

    The only exception were the TINY minority of municipal govs & finacial service companies that needed software to calculate their incomes & projected incomes from changes in interest rates & finacial asset prices –but they are on the tail-end of the demand-driven economy, not the drivers of it.

    ie, as Cullen & others in the MR/MMT world repeatedly point out, asset prices & interest rates do NOT reflect the underlying economic activity or health of the economy
    can’t drive the economy –ie, just because stock/commodity/asset prices are high & interest rates low does NOT mean hiring & economy will pick up..

    HIRING (spending demand) has to come first & that has to come from fed gov FISCAL policy

    The internet boom of the 1990s (of which I was a part of where banks were creating money/loans left & right to fund every internet startup) spurred the hiring of millions despite decreases in fed gov deficit spending(money creation) but when the banks stopped creating money to fund internet companies, layoffs happened & the economy crashed

    Same with the 2000s housing boom with banks creating money left & right to fund purchases of homes into the bubble (and studies showed that over 50% of purchases by subprime loans were by people who owned MULTIPLE homes & middle-to-higher incomes –it was a huge speculative bubble –home ownership rate only went up by 5% to about 65% from 60%)

    Economies depend on a growing money supply to fund the hiring of millions of people (whether it’s internet companies or housing)… it is the reason why the Soviet Union & old Communist China had slow stagant economies that collapsed because they were on a gold-standard & had very little money creation because they had no banking industry creating money to fund projects/businesses & hiring

    Nowadys, China has mixed gov-state/private fiat currency banking system while Russia has a mostly private banking system like the US/Europe (but they peg their currency to foreign currency board) to crete money to fund their businesses/projects & hiring.

  68. First of all, Cullen…excellent. I wanted to bring up the subject of Shadow Banking, and some may remember my rebuttal on “Are Shadow Banks, really Banks?”

    Mortgage backed securities are created at the SPV (special purpose vehicle) of TBTF banks. The SPV acquires our mortgage documents (contracts – which are debt overhead), and creates a security. The security is a child of the former mortgage documents, yet the security carries some of the Federal housing Insurance that underlies home mortgages – the parent. The child carries some of the dna of the parent, but is not the parent.

    In other words, shouldn’t we also be talking about the Shadow Banking system that creates the MBS’s. They were responsible for the fraud with tranching, liar loans, robo signing scandal, and the like. Also, Shadow bankers are big banks with at odds cross duties, such as Primary Dealers, Derivitive Contracts, as well as SPV shadow banking.

    The MBS’s have risk assigned at the SPV, and who knows what level is assigned, it is subjective. For sure, we know they over-assigned risk, in order to extract rents (unearned income), before the crash.

    It seems to me that swapping reserves for MBS, puts ready cash on hand for refinancing loans, or making new housing loans. The loan originating bank, writes up the house – making a new mortgage document. That document is then quickly offloaded to the Shadow Banking system.

    It will create asset inflation which is then capitalized into the new loan. A small amount of personal debt is transformed with lower interest rates, but the housing asset remains overvalued and still requiring debt service, meaning ongoing debt deflation. Subsequent loans ensare the young with overvalued housing, meaning ongoing debt deflation. Those that don’t transform their personal debt, will extract some of the false wealth gains and then spend to maintain a standard of living. Perpetual motion Ponzi finance must come to an end as the underlying economy cannot sustain the rents.

  69. What policies should the FED adopt to try to boost employment given that Congress is not willing to work w/ them to boost demand? They can only use the available tools to realize their mandates whether or not there is a clear transmission mechanism. The government decides the rest through taxes, regulations, and incentives.

  70. Why would it be. He was hired by Bush. Obama kept him and Romney and the Rand Paul wing-nuts would audit the bank, take his clothes and throw him—and the rest of the world—off the bus to implement a gold standard that would starve your children and your children’s children.

    Cullen, I don’t really get your constant criticism of Bernanke. His policy is not public policy. His policy is all that he can do from his perch in order to fulfill the dual Fed mandate. It doesn’t seem that complicated.

    And, to echo something you noted in another post–yes, the Fed clearly understands the MMT/R vision of the banking system and the money system better than it lets on.

  71. Consumer demand is the missing ingredient for recovery, but the new jobs today and the forseeable future are low-pay service work that isn’t exportable and not computerized. Without more higher paying jobs low consumption constrains producer investment despite low interest rates. Almost all hiring notices reported are for annual salaries of $17 to $19 thousand a year. Even with a married couple both working, with kids, I don’t see them making a plus in the housing market. And the attraction of importing third world medical doctors and engineers, working for much less than equivalent Americans, is no help.

  72. The FED is a defender of the status quo. They have tremendous money power. Even their rebates to the Treasury are “after expenses” and those expenses are not audited.

    The FED is meek about Fiscal Policy. They only mention it from time to time, and they certainly don’t explain it to the public with a strong voice.

    Even alternate systems that will work better….not a peep from the FED. All money systems require monetary policy and fiscal policy. Monetary policy and Fiscal policy are flip sides of the same coin.

    But, monetarist banker’s and their captured economists do not want to admit there is an important poltical dimension. At its root, the ownership of private money power is being jealously guarded, at heavy expense; as it has been for centuries.


  73. REN, Cullen should make you a regular columnist/writer here.. your insight & analysis is superb.

    Out of curiousity, hHow did you get your knowledge in banking/economics/finance, especially that of China’s? I’m ethnically Chinese & have relatives in China still & read Chinese news outlets so that’s how I know them besides my 10+ yrs experience as a business analyst/Oracle devloper for hundreds of businesses.

    My micro/macoeconomics classes at UCBerkeley were nowhere near enough since they were written by ignorant economists like Greg Mankiw who are ignorant of MR/MMT

  74. Spain & Italy do NOT issue their own currency so they are at the mercy of the market.

    As MR/MMT notes & as Fed Chairman Marriner Eccles who invented FDIC says, it’s actually the Federal Reserve that ‘sets target interest rates’ because the market in US, Japan, & other currency-issuers (not EURO!) will goto the interest rate set by the central bank as long as the country issues it’s own currency (whether directly or indirectly via Primary dealers).

    take it from one of America’s best central bankers – former FED Chairman Marriner Eccles (1934-1948),

    “If Congress appropriates more money than Congress levies taxes to pay, then, there is naturally a deficit, and the Treasury is obligated to borrow. The fact that they cannot go directly to the Federal Reserve bank to borrow does not mean that they cannot go indirectly to the Federal Reserve bank… ”

    “if the Treasury has to finance a heavy deficit, the Reserve System creates the condition in the money market to enable the borrowing to be done, so that, in effect, the Reserve System indirectly finances the Treasury through the money market… ”

    “So it is an illusion to think that to eliminate or to restrict the direct borrowing privilege reduces the amount of deficit financing [by the Federal Reserve]. Or that the market controls the interest rate. Neither is true.”–Marriner Eccles, Fed Chairman

  75. Cullen, it’s not as if most politicians understand enough about how our monetary system works that they’d take offense at an opinion from ANY Fed member anyway. They go beyond intransigent. They simply won’t admit to the things they don’t adequately understand.

    Very good article, by the way. The CEO/capital investment analogy is delivered with simplicity and clarity.

  76. I agree completely.

    You wrote: “The CEO who buys back stock and foregoes real investment in the firm is generating a temporary boost in nominal wealth that may or may not be backed by real growth in the firm.”

    That, it seems to me, is what being a CEO is all about these days: get in, boost the price by any means necessary to boost your own bonus (including, if you’re the CEO of a bank, by making a bunch of absolutely terrible “high yield” loans that will never be paid back, but for which you can book the profits today, with some sketchy accounting (yes, the CFO will have to be in on it too!)), and then get out while it crashes and burns… or again if you’re a bank, while you get on the horn to Treasury and demand another bailout… oh, and demand that you stay immune from prosecution.


  77. CR is right on the money as always – if you pardon the pun.

    But what is Bernanke to do if the state does not want to issue more bonds? Last I checked, they’re not allowed to drop free USD in people’s bank accounts.. unfortunately.

    Personally, I parse this as an attempt to induce some positive expectations in people holding the money. It might lead to some investments. Maybe. Hopefully.

    If I was in Bernanke’s position, I could certainly see myself lying through my teeth and hoping that enough market lemmings buy it that SOMETHING positive happens with the economy.

  78. Oh and if nothing else it might depreciate the USD somewhat, which isn’t as bad as many believe.

  79. ya, depreciating your own currency is how countries on a ‘gold-standard’ traditionally increased their money supply.. the depreciated currency would make domestic companies’ goods cheaper on the open market, thus increasing their sales vs. rival foreign companies & foreign imports

    –this thus would increase demand for domestic goods/domestic companies vs. foreign competitors & thus spur increased production & increased hiring .. the influx of sales (more gold in a world of gold-backed currency) & currency thus is helpful for domestic economy
    at the cost of depreciated dollars vs. FOREIGN IMPORTS

  80. Bernanke is just trying to find excuses to buy toxic assets from the Super Banks. Wealth effect on main street is just an excuse to provide liquidity to these banks. QE is all about improving banks balance sheets. period. Bernanke is hoping once the banks have better balance sheets they will start giving out loans to firms and he is also hoping that banks will be prudent this time to give loans to productive firms.

  81. Sure, if housing prices start going up. What is going to make housing prices go up?

    I believe the point is that deciding to make an expensive purchase like a car or house is based on total cost (price + interest). The fed is keeping interest rates low hoping prices will rise when they could directly make the cost rise by raising the interest rates.

  82. Wrong! A strong currency is a sign of a country’s economic strength…..always has been and always will be. It’s only been in my adult lifetime (I’m a baby boomer) that this economic FACT has been turned on its head…..and it’s been turned, and a dumbed down electorate taught to accept it, to achieve POLITICAL goals. krb

  83. You may want to read up on how foreign exchange works.

    Here’s how it normally works:

    If an American company exports and a Canadian one buys, the Canadian company needs to go out on the foreign exchange market (via intermediaries of course) and go “I have CAD and want USD” and find someone that wants to sell USD and get paid in CAD.

    So, export from USA results in increased demand for USD and – in this case – surplus for CAD.

    As always increased demand leads to higher prices.

    The reverse is of course also true, if there is a surplus of USD because the USA is running a trade deficit, you get increased demand for e.g. Yuan.

    Now, if this would have been allowed to play out like FX normally works, USD would have hit rock bottom a long time ago, and Yuan would have been ridiculously strong. Noone would want to buy from China anymore.

    The PboC of course does not desire this, so it’s merrily buying foreign currency – lots and lots of USD, and paying in other currencies, like, oh, Yuan.

    This has nothing to do with “Strength of economy”. If that’s all it took, the swiss franc would be a monster currency.

    This is all about China propping up the USD artificially and keeping the Yuan as depressed as they can. Because that’s good for China.

    Take away Chinese currency warring and the USD (and Euro) would drop like rocks. Which is not a bad thing for much other than gas prices.

  84. Also note that US corporations are sitting on 4 months worth of GDP in liquid assets at last count.

    Most of the big ones don’t need more money. They’re just hoping for demand to pick up.. without realizing their own role in it.

  85. You are COMPLETELY wrong about this. Strength of economy, strength of financial regulation, strength of financial markets…..if we still had these things…..would lead to demand for dollars, to allow participation in our economy and markets and to buy our goods, and lead to strength in the dollar.

    You can’t cite interventions by govt’s around the world, and the resultant artificial valuations and distortions of currencies around the world, to defend your claim that plummeting dollar values is a GOOD thing. It may be a good thing for segments of the population, for example a company with a majority of its sales overseas, or the portion of a person’s investment portfolio denominated in foreign currency that benefits in the conversion back to dollars, but devaluing dollars is NOT, and NEVER HAS or NEVER WILL be a good thing when viewing the economy and the impact on a country’s population in total.

    Despite their public lies to the contrary, our govt has adopted a weak and weakening dollar policy in order to make our now unaffordable debt load a little more affordable……which almost by definition undermines the “strength of economy” argument. They have decided that they, in their greater wisdom, will now pick the winners and losers within our economy. “Right” and “wrong, “success” and “failure”, has been completely turned on its head as a result.

    And by the way, the swiss franc WAS viewed as a “monster currency” until the SNB decided to join the global race to the bottom and intervene. krb

  86. And by the way…..with regard to your “You may want to read up on how foreign exchange works.”……I trade fx every day, have been employed by a foreign company that sold in the US, and owned my own company which sold overseas……I’m a little familiar with our it works. I hope you have as much experience in order to make such a claim. krb

  87. The more I re-read your post the more I disagree with it….I don’t mean to put words in your mouth, but it appears to me you accept huge trade deficits as an assumed fact or inevitability, and therefore defend weak dollar policies in order to address the trade deficit. BUT, what you take as an assumed just reinforces my point……when we were strongest, and our economy strongest, we were an EXPORT country. The fact that we now import more than we export and the dollar in a downward spiral as a result, reinforces the point I’m making…….strong economies, markets, regulation to insure fairness, will drive strong currency. krb

  88. If you by strength you mean regulation, then yes by all means I agree with you.

    But you also have to admit that the previous strength is exactly what makes imports from (or outsourcing to) countries with depreciated currencies so lucrative.

    Unfortunately when you are running a long term trade deficit, you also end up importing unemployment when demand can no longer increase. Which leads to lower demand. Which leads to higher unemployment.

    No, I do not see a trade deficit as something that must forever be. But allowing free markets in the face of a currency war does pretty much guarantee it, no?

    I would love to see higher import tariffs. But will international politics AND the wealthy and powerful that benefit from the status quo allow them? I doubt.

  89. “to allow participation in our economy and markets and to buy our goods”

    But why would the rest of the world want to buy US goods? They are so much more expensive than .. oh.. Chinese!

  90. Which is part of my point……and you don’t, and long term can’t, restore a country’s competitiveness by driving a currency war……that’s the short cut way, kick the can down the road way……which is why our politicians and fed make it the “way” of choice.

    Weak economies, trade deficits, weak currencies are symptoms of deeper rot…….that’s my point. Long term solutions involve making difficult, painful choices to address root causes…..not just treating symptoms with short term actions. So I come full circle to my original point……..strong economies, strong regulatory environments, strong capital markets and strong currencies go hand in hand. I also want to be clear about what I mean by “strong regulatory environments”……I do NOT mean oppressive regulatory environments, I mean regulatory regimes that insure fairness, consistency, that reward good behavior and good performance, and punish bad behavior and bad performance……..you’ll note that current govt oversight does just the opposite. All the symptoms we see, including a deteriorating currency, are indicative of decay, and we don’t ever seem to get govt leaders with the long term vision and backbone to make the hard choices needed to turn it around……just more short-termism, can kicking and perception management to get past the next election. krb

  91. We give Chinese USD to get their stuff. This is through multinational corps. The Chinese cannot circulate USD in china. They have to take USD to Chinese bank to change to Yuan. Bank of China will have to issue a lot Yuan in the past decade for change of USD cuz we bought a lot junks from them. The newly issued Yuan will circulate in china to pay wages and materials. Once they have USD in their hand, in large quantity, they cannot buy Chevron or Walmart, cuz the congress doesn’t let them. They buy oil, gold, and anything physical. There is not big enough market for the amount of USD they have in their banks except for US treasury. They don’t have much of choice to buy treasury. Those USD come back as cash through brokers and bankers to US. As long as USD is the reserve currency, US will be fine, cuz everyone still wants USD. It will get to a point that the cost to manufacture in China is too high and not profitable for the multinationals, then the flow of USD to china will stop. At present, the flow is not stopped. In a way, we are not producing as a nation to be wealthy, we are using our currency to be wealthy. That cannot last forever.

  92. I am only critical because it’s frustrating to see our govt implementing sub-optimal policy ideas. The current environment is like having a patient on the table for surgery and a Da Vinci machine at our disposal and we keep hitting the patient with a sledge hammer. I am surprised that an MMTer like yourself is so eager to defend his policies when you guys propose essentially chopping the Fed’s head off….As an MRist, I am at least open-minded about the efficacy of monetary policy in certain environments.

  93. Many wise words there.

    The “problem” of course is that even fair regulations are “oppressive” to some – especially to those that actually want things more unfair. And they have the money to drive home that point with the politicians. And the guile to dress it up as free markets and faux liberalism.


  94. Picking a bit more on one point: I never suggested that the US should _drive_ a currency war. But it’s been IN one for quite a while now without really shooting back.

  95. Wait… I’m not following. Are you saying that a currency becomes stronger if you import a lot?

  96. Everyone manipulates their currency. If your currency is strong, you import capital cuz others will buy your currency. If your economy is growing, the cost of capital will be up (interest rate), and your currency is more favorable on the market. This is not hypothetical abstract debate. It is happening everyday. Japan, Swiss, Chinese and our Fed, they all manipulate their currencies.

  97. How is that a remnant of EMH style thinking, Cullen? Targeting asset prices as a CB is to suggest markets went too low and aren’t fully reflecting the current “potential” of the US economy. So, bernanke is an interventionist. EMH folks shouldn’t advocate the Bernanke approach. Whether markets are themselves efficient or not, to what degree – we won’t really know, while we have a central bank that keeps altering the cost of one half of the transaction (money), the price of risk and risk-factors themselves. So I’m really not sure how you’re arguing Ben is an EMH guy here – he IS intervening to reach outcomes that he thinks are more desirable! Closer to being a price fixer than a believer in the EMH.