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August 17, 2011

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Blinder: The FOMC Majority is Very Worried

Posted: 17 Aug 2011 01:08 AM PDT

Alan Blinder says the Fed is very worried. and likely to take further action:

Meeting on Aug. 9, the Federal Open Market Committee (FOMC) downgraded its near-term assessment of the U.S. economy sharply. Since the Fed's code of conduct mandates the use of Fedspeak instead of English, let me offer a quick translation: "Yikes! Things have sure deteriorated quickly!"
The Fed expressed its alarm in two ways, both remarkable. The first was Mr. Bernanke's willingness to push ahead despite a level of discord that is almost unheard of...: on a far-from-resounding 7-3 vote. Second, his policy innovation stunned veteran Fed watchers (including me): The Committee more or less promised to maintain the current rock-bottom federal funds rate for almost two more years.
In so doing, the Fed violated one of the most revered canons of central banking: Always keep your options open. ... A booming economy by, say, Christmas 2012 doesn't look too likely right now, but it could happen. And if it does, the Fed won't want to keep the federal-funds rate near zero. So why risk the loss of credibility?
The answer is that the FOMC majority was so concerned about the health of our economy that they felt a duty to offer some support... But they had used up all their good ammunition long ago. The two-year interest-rate commitment is based on a wing and a prayer. ...
What all this says to me is that the FOMC majority is very worried. So unless the storm clouds lift quickly, there is probably more easing to come. That could mean another round of quantitative easing, such as the Fed buying more Treasury bonds. Or it could mean paying a lower interest rate on excess reserves. Or the brilliant and creative Mr. Bernanke could pull another rabbit out of his oft-used hat. So stay tuned...

If the Fed is so worried, why 'wait and see' yet again, especially given the lags in the process? Why not take stronger action now? It seems to me the answer must be that a majority of the Fed isn't that worried.

I suppose one of these days the Fed could end up marking up a forecast instead of marking it down, but so far monetary policy has been based upon an overly hopeful outlook at every stage along the way.

links for 2011-08-16

Posted: 16 Aug 2011 10:04 PM PDT

"The Need to Make Employment the Top Priority of Our Government"

Posted: 16 Aug 2011 08:46 PM PDT

It's nice to see some senators pushing for job creation. But let's hope there's more to this than just a letter to a committee:

August 11, 2011
Hon. Mitch McConnell
Republican Leader
United States Senate
Washington, DC 20510
Dear Leader McConnell:
Given that the single best deficit reduction strategy is economic growth, we urge you to ensure that your appointments to the new joint select committee ("JSC") created by the debt limit bill are committed to a policy of job creation.
The recent spate of discouraging economic news underscores the need to make employment the top priority of our government. For families across the country, the biggest economic problem is high unemployment. As you know, the lack of jobs and anemic growth rate of the economy are not only enormous problems in their own right, causing great pain for millions of Americans, they are a major component of our deficit. Indeed, the loss of revenue resulting from the recession accounts for nearly $4 trillion of the projected deficits over the next 10 years.
At the same time, jobless workers put additional strain on our critical social safety net programs. As more and more Americans rely on unemployment benefits, food stamps and Medicaid, our deficits go up. Getting those individuals back to work not only allows them to be self-sufficient, it reduces federal government spending.
It is therefore appropriate and important that the JSC explicitly embrace job creation as a part of its mission. Targeted investments in economic growth and job creation can complement and even enhance long-term deficit reduction efforts and should be a priority that the JSC embraces. Indeed, failure to make such investments could have a serious negative impact on our fiscal situation.
Just as we can all acknowledge that reducing our deficits over the medium and long term is a national imperative, we would hope that all 100 Senators could agree that sacrificing job creation in the near term to pursue that imperative would be a grave mistake. Over the course of the last few months, the default debate sounded to many Americans as if it was taking place in a vacuum that did not include enough discussion of the recession and its aftermath. Let us be very clear: our fiscal challenge is directly linked to the jobs crisis and we cannot solve the former without tackling the latter.
We look forward to working with you and the Republican conference towards both objectives and hope the JSC can help advance policies that get America back to work.
Sincerely,
Sen. Jeff Merkley (D-OR)
Sen. Daniel Akaka (D-HI)
Sen. Mark Begich (D-AK)
Sen. Richard Blumenthal (D-CT)
Sen. Barbara Boxer (D-CA)
Sen. Sherrod Brown (D-OH)
Sen. Dick Durbin (D-IL)
Sen. Dianne Feinstein (D-CA)
Sen. Al Franken (D-MN)
Sen. Kirsten Gillibrand (D-NY)
Sen. Tom Harkin (D-IA)
Sen. Tim Johnson (D-SD)
Sen. Frank Lautenberg (D-NJ)
Sen. Robert Menendez (D-NJ)
Sen. Barbara Mikulski (D-MD)
Sen. Jack Reed (D-RI)
Sen. Bernie Sanders (I-VT)
Sen. Charles Schumer (D-NY)
Sen. Debbie Stabenow (D-MI)
Sen. Mark Udall (D-CO)
Sen. Tom Udall (D-NM)
Sen. Mark Warner (D-VA)
Sen. Sheldon Whitehouse (D-RI)

Discussion Question: What Caused the Financial Crisis?

Posted: 16 Aug 2011 10:17 AM PDT

I have blogger's block today. It's like being at a nice restaurant, yet nothing on the menu looks appealing. With time, I'm guessing I'll get hungry again and it will work itself out, but while I continue to try to find something to talk about let me turn things over to you.

I have wondered for awhile now if one of the problems facing policymakers and regulators who are trying to make the financial sector less likely to suffer a major breakdown is that we haven't converged on a reason why the financial crisis occurred. Was it the Fed's interest rate policy, the ratings agencies, the false promise of financial engineering, the way executives are paid, the bad incentives associated with too-big-to-fail bsnks, banks and mortgage brokers with "no skin in the game," a savings glut and a dearth of productive investment, inequality, poor regulation and captured regulators, a change in attitude toward credit, a perfect wave where a variety of factors come together, etc., etc., etc.? So I'm curious how much agreement/disagreement there will be in the answer to this question:

Discussion question: What caused the financial crisis, and how can we reduce the chances of it happening again?

Click on the question to answer.  (The answers to previous questions are in the outermost sidebar.)

The Not Ready for Prime-Time Players

Posted: 16 Aug 2011 09:54 AM PDT

Steve Benen:

Republican presidential candidate Rick Perry raised a few eyebrows yesterday with borderline-violent rhetoric about the Federal Reserve and Ben Bernanke. "If this guy prints more money between now and the election, I don't know what y'all would do to him in Iowa, but we would treat him pretty ugly down in Texas," the Texas governor said. "Printing more money to play politics at this particular time in American history is almost treacherous, or treasonous, in my opinion."

The comments have drawn bipartisan criticism, but as of this morning, the Perry campaign isn't backing down.

A spokesman for Mr. Perry said Tuesday the governor "got passionate" in his remarks about the Federal Reserve, but he did not disavow the comments.

"He is passionate about getting federal finances under control," the spokesman, Ray Sullivan, said in an interview here. "They shouldn't print more money, they should cut spending and move much more rapidly to a balanced budget."

Apparently he thinks the Fed has the ability to cut spending and balance the budget. What a clown.

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