Bankrupt you Bernanke SOLELY caused our Great-Recession

[pappyjohn99]

Do you follow Martin Armstrong sir? He states on his blog that the banks have been warned that there will be no more bailouts. Do you have any thoughts on that?

[bimetalaupt]

Feb 22, 2014 20:30:50 GMT -5 pappyjohn99 said:

Do you follow Martin Armstrong sir? He states on his blog that the banks have been warned that there will be no more bailouts. Do you have any thoughts on that?

Pappy,

I have not seen Martin Armstrong's Bog. EU is a mess and there problems with banking has yet to be solved. There banks need capital. ECB is a joke with my family in Luxemburg. Many do now realize that Baxia Bank got the largest bail out of any bank in the world from the Federal Reserve.  They had been a wholesale bank that lent to governing bodies that had AAA rating. They keep zero capital charge against these asset for losses. Remind you of Credit Anstalt crash in 1931. House of cards..EU came closer they you know of crashing again.  Read the notes for 2008..Close to a full world financial melt down..solutions more capital and better lending requirements. 

Bruce

Credit Anstalt Bank Collapses

When Credit Anstalt, Austria's biggest bank, failed in the spring of 1931, Germany was badly affected as well. This resulted in the strengthening of the anti-democratic Fascist and Nazi movement in Austria and Germany respectively.

Credit Anstalt faced troubles when it swallowed a debt-ridden rival bank, but found it could not solve dissolve the debts during the era of Depression. 70 percent of Austrian trade and industry was dependent on the bank but the government could not help because it was also facing financial woes itself.

Nervous customers of Credit Anstalt and other Austrian banks rushed to withdraw their funds. Fear spread to Germany, causing a bank crisis over there. In July, the giant German Danat-Bank collapsed; other banks followed before the German government had to declare a two-day bank closure, to prevent further withdrawls. In fact, most of the banks remained shut for weeks. Millions lost their life savings.

Meanwhile, Austria had obtained international loans, but in exchange for French help, Austria had to cancel its planned customs union with Germany. This dash both countries’ best hope for economic recovery.

In Germany, the financial panic led many to join the Nazis, from youths bitter about the failure of old-style politics to middle-class Germans, afraid of a communist takeover sparked by the country’s failures.

[flow5]

Cardiff Garcia: 

Bernanke: "Again, to distinguish between the balance-sheet, quantitative-easing, liability-side approach and the asset-side approach that we have been using"

..."Quantitative easing is an adaptation for when rates hit the zero lower bound that’s meant to closely mirror the normal functioning of monetary policy (interest rates down, lending up). Credit easing is meant to target the specific problems that would be immune to help from (normal) monetary policy.

An even simpler way to distinguish between the two is that pure QE involves purchasing government assets, while credit easing involves buying or lending against private-sector assets (commercial paper, agency debt and agency MBS, money market fund backstops).

...You might say, if somewhat simplistically, that monetary policy has gone from CE to QE and back to CE, though the later CE obviously didn’t require battling existential threats to the financial system, and has consequently been a lot milder"

-------------------

Creating a preferential interest rate differential (BOG's .25% remuneration rate), that favored the commercial banking system (money creating depository institutions), over the non-banks, both interrupted and impounded voluntary savings from circulation & investment.  The cessation in circuit income initially created a contractionary economic environment. I.e., Bankrupt you Bernanke destroyed non-bank lending/investment (the non-inflationary matching of savings with real-investment).

[flow5]

See: www.themoneyillusion.com/?p=26229

TheMoneyIllusion - Scott Sumner

 
Transcripts post #1: Reasoning from price changes

You don’t have to trust real-gDp data. Besides, the data’s reported too long after the fact. But you must trust money flows (where roc’s in MVt = roc’s in nominal-gDp). And you can’t re-examine the data ex-post. The data’s impact can only be seen ex-ante (via distributed time lags).

For a century the Fed has always inadvertently “covered up” their policy making errors. That’s why Joe Sixpack hasn’t lynched Bankrupt you Bernanke.

[flow5]

Information Transfer Economics

informationtransfereconomics.blogspot.com/

Friday, February 21, 2014

The Fed caused the Great Recession

"With the release of the Fed transcripts from the September 16th 2008 meeting, a narrative of the Fed worrying about commodities inflation distracted it from the worsening economic situation is forming. Here are e.g. Matthew Yglesias and David Glasner. In general this is part of a larger monetarist narrative that the Fed caused the recession and the financial crisis with tight monetary policy prior to September 2008. Here fore example is Scott Sumner.

The Fed was effectively raising interest rates gradually from well before the onset of the financial crisis by having the base grow more slowly than NGDP. Short run rates followed long run rates up until the first rounds of QE. If we use the IS-LM model, we can get an estimate of the impact of this interest rate increase. Begin with the IS market equation:

logr=logY0κISISref−κISΔYY0

If we have a small change in r=r0+δr , then we have
logr0+δrr0+⋯=logY0κISISref−κISΔYY0

So that
δrr0≃−κISΔYY0

Essentially the percent increase in the interest rate r is equal to κIS times the percent decrease in output. Now we don't know what κIS (it is effectively the slope of the IS curve, and estimates tend to cluster around 1, but can be as high as 5, see e.g. here [1]), but if we assume κIS∼1 then our approximate 10% change (about 50 basis points) in the 10-year interest rate (which was averaging 4.7% for the two years prior to the financial crisis) would result in a shock of 10%. Coupled with the 3% shock due to the base adjustment above, this would account for all of the shock that caused the Great Recession. (The 25 basis point adjustment referred to as Alternative A at the last meeting would have reduced the impact by about half.)

So according to this analysis the Fed is to blame, acting through the interest rate channel. An exogenous shock from the financial crisis is not necessary to account for any additional shock to NGDP. This is effectively Sumner's view above, however I don't think he'd agree with my use of the IS-LM model! The unfortunate thing is that after the shock occurred, we ended up mired in a liquidity trap."


 

[Aman A.K.A. Ahamburger]

Looking at the situation in the manner like the article you posted flow is so simplistic, it's kind of hilarious to me. What the minutes show is that, just like the Chinese right now, all the FRB members faild to understand the gravity of the situation if front of them.

Trying to pin the housing bubble on Bernanke is scapegoating, as I have pointed out before. Only now, you are ignoring what Ty is saying about Greenspan and Clinton in the 90s claiming that everyone should own a home. You are ignoring what poppy is saying about B.Frank stopping Bush from trying to change housing rules. Most importantly, you are ignoring what Bruce is saying about GS, the banks, and these financial professionals that invented all these BS"investment" products.

I have never once said that the FED wasn't part of the housing bust, however, as Virgil and I have both pointed out, aren't people supposed to take responsibility for their own actions at some point?

[Aman A.K.A. Ahamburger]

Oh, I don't want to forget about grits, who was also talking about personal responsibility.

[flow5]

You mis-interpret both cause (the catalyst - the mal-distribution and mis-allocation of risk credit assets that serve as loan collateral, i.e., bolstered or implicitly targeted via gov't legislation, which have been incentivized by an excessively easy money policy), & effect (impaired assets).   The "administered" housing prices would not be the "asked" prices, were they not “validated” by (MVt), i.e., “validated” by the world's Central Banks. I.e., Central Bankers control housing price levels.

-------------------

Tarullo:

"As for raising the rates the Fed pays on excess bank reserves in order to
head off rising inflation concerns, Tarullo said "it is one of the tools that we
contemplate using in managing an exit, when it's eventually time to do so." "

"to add a second policy instrument to effect changes in the targeted interest rate"
-------------------

The money supply can never be managed by any attempt to control the cost of credit. Raising the remuneration rate initially lead to dis-intermediation within the non-bank lending/investing sector. Raising it in lock-step with rising economic activity will slow real economic growth (increasing rates of inflation to offset its damping effect).  


And:

"Tarullo pointed to the countercyclical capital buffer in Basel III, as an
"effective (and perhaps less controversial)" way to "slow the buildup of excess
credit than a measure directed squarely at one sector"

Another confession: "countercyclical capital buffer". As I said, Bankrupt you Bernanke was solely responsible for the Great-Recession.

[flow5]

The significant economic purpose for which a debt was contracted, or the manner in which it was financed, is of in-estimable value in evaluating its economic impact.

QE encourages FINANCIAL investment as opposed to REAL investment. E.g., depending on whether a debt is acquired to finance the acquisition of a:

(1) (new-security), the proceeds of which are used to finance plant and equipment expansion, or the construction of a new house, rather than the purchase of an

(2) (existing-security) or to finance the purchase of an existing house (read bailout), or to finance (1) (inventory-expansion), rather than refinance (2) (existing-inventories).

The former types of investment are designated as (1) "real" as contrasted to the latter (2), which constitute "financial" investment (existing homes).

Financial investment provides a relatively insignificant demand for labor and materials and in some instances the over-all effects may actually be retarding to the economy. Compared to real investment, financial investment is rather inconsequential as a contributor to employment and production. Only debt growing out of real investment or consumption makes an actual direct demand for labor and materials.

The "key" to understanding the simple science is in identifying the use & non-use of savings. Macro economics concerns the rate-of-change in the flow-of-funds. And there is no such thing as "pushing on a string". The Gov't is the CB's best credit worthy borrower. But the Gov't is not the best user of savings.

[flow5]

Jim Grant (Grant's Interest Rate Observer), "says the Fed should have stayed out of the 2008 financial crisis, so that markets and wages could have freely sunk to their natural lows"

"What happens in a capitalist economy when there is not intervention?" he asks. "Prices get low enough to invite buyers to come in and seize that value."

The Fed's easing hasn't helped the economy, Grant argues. "We have been living through a very persuasive demonstration of futility of intervention to solve a recession."
-----

Not so. Government intervention is required as the economy has both limited upward & downward price flexibility (esp. "sticky wages"). This has been the case since the Great-Depression.

[flow5]

Monetary Flows (MVt)

Bernanke Caused the Great-Recession - all by himself
See: Dr. Leland Pritchard's MVt (Ph.D., Chicago, Economics, 1933, MS Statistics, Syracuse). Since DD turnover was discontinued in 1996, use RRs (required reserves) as a surrogate for all transactions. RRs just understate Vt but R^2 is still > ?

Contrary to monetary theory and Nobel Laureate Milton Friedman, the lag effects for money flows (our means-of-payment money times its transactions rate-of-turnover), have been mathematical constants for the last 100 years.

MVt = PT in Irving Fisher's "equation of exchange" - where roc's in required reserves (RRs) = roc's in final product (snapshot), nominal-gDp (proxy for all transactions). The distributed lags for both bank debits and MVt are not "long and variable".

The roc in MVt (the proxy for real-output) = 10 month delta (courtesy of the "Bank Credit Analyst's" debit/loan ratio.

The roc in MVt (the proxy for inflation) = 24 month delta (courtesy of "The Optimum Quantity of Money" - Milton Friedman.

Note1: their lengths are identical (as the weighted arithmetic average of reserve ratios and reserveable liabilities remains constant).

Manmohan Singh, Peter Stella papers on this are disingenuous (see Central Bank reserve creation in the era of negative money multipliers). S and S say that from 1981 to 2006 total credit market assets increase by 744%. But Inter-bank demand deposits owned by the member banks held at the District Reserve banks fell by $6.5 billion.

The BOG’s reserve figure fell by 61% from 1/1/1994-1/1/2001. The FRB-STL’s figure remained unchanged during the same period. And the CBs ceased to be reserve “e-bound” c. 1995. S and S neglect to point out legal (fractional) reserves ceased to be binding because:

(1) increasing levels of vault cash/larger ATM networks (in 1959 liquidity reserves began to count),
(2) retail deposit sweep programs (beginning c. 1994),
(3) fewer applicable deposit classifications (including the "low-reserve tranche" and "exemption amounts"),
(4) lower reserve ratios (since 1980), and
(5) reserve simplification procedures have combined to remove most reserve, and reserve ratio, restrictions.

Note2: the BOG's figure differs from the STL FRB's figure. Use STL's for RAM adjustments.
Note3: the 24 month moving average [of the 24 month roc in RRs] = bond metric.

This data is non-conforming (based upon statistical aggregates where data cannot be compiled accurately or in a manner which conforms to rigid theoretical concepts, & the entire approach tends to be ex posit and static").
The roc's were originally derived from the G.6 - debit and demand deposit turnover release. Required reserves are substituted for bank debits as the proxy for MVt since the G.6 release was discontinued.

See: bit.ly/yUdRIZ

Quantitative Easing and Money Growth: Potential for Higher Inflation? - Daniel L. Thornton

"the close relationship between the growth rates of required reserves and total checkable deposits reflects the fact that reserves requirements apply only to checkable deposits"

RRs represent the actual "monetary base" as demonstrated below.

Note4: per the G.6 debit and demand deposit turnover release, 93-96% of all bank debits clear thru these deposit classifications, i.e., our means-of-payment money is linked to legal or required reserves (maintenance based upon transaction deposits 30 days prior).

First contractionary program:

2006..... jan ..... 0.04

0........ feb ..... 0.01

1........ mar .... -0.02

2........ apr .... -0.03

3........ may .... -0.02

4........ jun .... -0.01

5........ jul .... -0.03

6........ aug .... -0.06

7........ sep .... -0.08

8........ oct .... -0.08

9........ nov .... -0.06

10....... dec .... -0.07

2007..... jan .... -0.11

12....... feb .... -0.09

14....... mar .... -0.11

15....... apr .... -0.09

16....... may .... -0.05

17....... jun .... -0.05

18....... jul .... -0.08

19....... aug .... -0.07

20....... sep .... -0.07

21....... oct .... -0.04

22....... nov .... -0.04

23....... dec .... -0.04

2008..... jan .... -0.07

25....... feb .... -0.05

26....... mar .... -0.04

27....... apr .... -0.03

28....... may .... -0.01

29....... jun .... -0.04

30....... jul .... -0.03

Second contractionary program:

The Commerce Department said retail sales in Oct 2007 increased by 1.2% over Oct 2006...up a huge 6.3% from Nov 2006.

POSTED: Dec 13 2007 06:55 PM

10/1/07...-0.47 * temporary bottom

11/1/07... 0.14

12/1/07... 0.44

1/1/08.... 0.59

2/1/08.... 0.45

3/1/08.... 0.06

4/1/08.... 0.04

5/1/08.... 0.09

6/1/08.... 0.20

7/1/08.... 0.32

8/1/08.... 0.15

9/1/08.... 0.00

10/1/08.. -0.20 * possible recession

11/1/08.. -0.10 * possible recession

12/1/08... 0.10 * possible recession

Trajectory as predicted:

NOTE5: Total transaction based accounts fell 22% from their high 6/27/2005 ($717b to $561.6b), until right before the FOMC (the Fed’s policy making arm) first lowered the FFR from 6.25% to 5.75% on 8/17/2007.

The sine qua non of monetary management is total current control by a central monetary authority over the volume of legal reserves held by all money creating institutions, and over the reserve ratios applicable to their deposits.

Prima facie evidence that the Reserve banks & the commercial banks have created credit, as with all bank credit creation, is an expansion in the money stock. Prima facie evidence that the money stock (transaction based accounts) has expanded, is given by the rate-of-change in legal (required) reserves (the base).