Posted by WARREN MOSLER on November 28th, 2008
Yes, he’s been calling for an economic collapse, that began in July. But looks like yet another case of ‘better lucky than good’ as he here demonstrates a lack of understanding of monetary and fiscal policy.
From Dr. Roubini: Desperate Measures by Desperate Policy Makers in Desperate Times: the Fed Moves to Radically Unorthodox Policies as Economy Is in Free Fall and Stag-Deflation Deepens
Another batch of worse than awful news greeted today Americans getting ready for the Thanksgiving holiday: free falling consumption spending, collapsing new homes sales,
They’ve been very low but relatively flat for a while, as actual inventories of new homes for sale fell to multiyear lows.
falling consumer confidence, very high initial claims for unemployment benefits,
Initial claims actually fell a bit, as did continuing claims. And personal income is still growing though at a modest 0.3%. For some reason he has turned to sensationalism. Must be the overdose of TV cameras.
collapsing orders for durable goods. It is hard to get any worse than this but the next few months will serve even worse macro news. At this rate of contraction as revealed by the latest data it would not be surprising if fourth quarter GDP were to fall at an annualized rate of 5-6%.
And Roubini concludes:
[T]he Fed, together with the Treasury, started to implement some of the “crazier” policy actions that we discussed last week: a) outright purchases of agency debt and MBS to the tune of a whopping $600 billion;
This is far from crazy. The treasury should have been funding the agencies from inception. The fact that the government is finally coming around to this after more than 30 years is a move towards sanity.
b) another $200 billion of loans to backstop the consumer and small business credit markets (credit cards, auto loans, student loans, small business loans);
OK, but he doesn’t point out that the securities must be rated AAA and appropriate ‘margining’ will be applied. That is very conservative banking by any measure. Not to mention the $20 billion first loss piece the treasury is putting up from its TARP funds. If any agent is ‘crazy’ in this case it’s the treasury, not the Fed.
c) an effective policy of aggressive quantitative easing as the balance sheet of the Fed ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ already grown from $800 billion to over $2 trillion ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ will be expanded further as most of the new bailout actions and new programs will be financed via injections of liquidity
When the Fed buys securities it credits member bank reserve accounts, which now pay interest. (Is that what he means by ‘financed via injections of liquidity?’ What’s the problem here?)
rather than issuance of public debt.
Interest bearing reserve accounts are functionally identical to one day treasury securities.
The Fed is buying financial assets and the sellers in exchange have interest bearing deposits.
What’s the problem?
This is all nothing more than convoluted rhetoric that has not been thought through.
Effectively the Fed Funds rate has been abandoned as a tool of monetary policy …
That makes no sense. The FOMC continues to set a target for the Fed funds rate which the NY Fed continues to be responsible for hitting. That’s Geitner’s main job- to keep the Fed funds rate at the FOMC’s target. The Fed funds rate obviously remains a tool of monetary policy.
the Fed is now relying on massive quantitative easing and direct purchases of private sector short term and long term debts to try to aggressively push down short term and long term market rates.
Yes, in addition to its Fed funds target, the Fed is also targeting longer term rates. In fact, the Fed has always had the option of targeting the entire term structure of rates.
But that is not how quantitative easing has been defined. It was defined in the context of Japan, where the BOJ bought JGP’s to sustain excess reserves in the banking system under the mistaken notion that increasing the quantity of reserves would somehow alter the real economy. It was about quantity, not price. And it did not work as they expected.
Desperate times and desperate economic news require desperate policy actions
The Treasury will be issuing in the next two years about $2 trillion of additional debt
It may net spend that much, and issue that much debt along with that net spending.
These policies ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ however partially necessary ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ will eventually lead to much higher real interest rates on the public debt
Maybe, but interest rates go up because the Fed raises them or because the markets anticipate the Fed will raise them. It is mainly about anticipating the Fed, rather than funding pressures, particularly for short term securities.
and weaken the US dollar
Yes, deficit spending that does not have positive supply side effects does have a weakening effect on the dollar, but it may simply stop it from getting as strong as it may have, rather than actually push it down vs other currencies.
once this tsunami of implicit and explicit public liabilities and monetary debt
What is ‘monetary debt’ as distinguished from ‘public liabilities?
driven by rising twin fiscal and current account deficits will hit a world where the global supply of savings is shrinking ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ as most countries moves to fiscal deficits thus reducing global savings
Government deficits in their local currency increase the savings of the non government sectors by the same amount.
Government deficit = private sector savings (net financial assets) as per national income accounting.
ÃƒÂ¢Ã¢â€šÂ¬Ã¢â‚¬Å“ and foreign investors start to ponder the long term sustainability of the US domestic and external liabilities.
Start to ponder???
To continue to attract massive inflows of capital, the U.S. might have to start paying higher interest rates on the public debt.
Totally inapplicable with a non convertible currency and a floating exchange rate. The causation is domestic credit expansion funds foreign savings, not vice versa. Loans create deposits. He’s probably got that backwards as well.
This is one of the concerns that Volcker (previous post) expressed in early 2005.