Hoenig comon sense. Is he Austrian?

Do you mean whether he's of the "austrian school" (of economics?) or from the country?

Where's the common sense in this? He's advocating that the FED back out of any further actions (quant easing etc).

Thomas Hoenig is advocating normalizing short term rates at around 1%. This seems quite sensible considering 1% is still a very low rate of interest. Having rates lower has not induced banks to lend, who are instead using the improved NIM they are enjoying to build up their balance sheets which are still impaired. In effect ZIRP is a fancy term for transfer of wealth from saver to bank. Hoenig is also concerned about the affect zero rates has no investment and consumption. A zero interest rate removes the market mechanism that helps the participants in the economy decide on the right time line with regards to consumer now vs later, investing now vs later and whether investments deliver the appropriate ROI. What we have seen from prior periods of super-low and arguably artificially low rates is over-investment or over-consumption which has led to bubbles and mis-allocation of resources.

Many of the things Hoenig is saying would find sympathy with F.A. Hayek

Correction
Thomas Hoenig is advocating normalizing short term rates at around 1%. This seems quite sensible considering 1% is still a very low rate of interest. Having rates lower has not induced banks to lend, who are instead using the improved NIM they are enjoying to build up their balance sheets which are still impaired. In effect ZIRP is a fancy term for transfer of wealth from saver to bank. Hoenig is also concerned about the affect zero rates has on investment and consumption. A zero interest rate removes the market mechanism that helps the participants in the economy decide on the right time line with regards to consuming now vs later, investing now vs later and whether investments deliver the appropriate ROI. What we have seen from prior periods of super-low and arguably artificially low rates is over-investment or over-consumption which has led to bubbles and mis-allocation of resources.

Many of the things Hoenig is saying would find sympathy with F.A. Hayek

Can you tell us why, O Riversider Voodoo Artist, why if people aren't borrowing at 0% interest, they would suddenly want to borrow more at higher interest rates?

Then, maybe, what makes these rates "artificially low"? Perchance they're "artificially low" because you'd like to see them "artificially higher," or made of gold?

Stupid, discredited theories.

There was little to no incremental borrowing demand at zero vs one percent fed funds. What we effectively saw was a small subset of mortgage borrowers refinance and only those with positive equity that could refinance. Well we had that and it produced no shot to the economy, it just transferred wealth from pension funds and other investors in mortgages to some borrowers(pension fund crisis bail out next?). Reducing rates benefited few holders of debt other than those investing in treasuries or other non-callable bonds. Many small business borrows via credit cards and a 100 basis points rise in Fed Funds would not raise credit card rates which are currently at usury rates and have not come down at all. ZIRP has produced some quirky transfers of money which provided no real shot to the economy and allowed gov't institutions to leverage up.

At least savers would gain a little interest, and at a higher interest rates we might even see some participants deciding to lend money who would not have at the lower rates.

So...bottom line is that this would be good for you.

To the Fed...raise interest rates so rent stabilizer will get more money.

Steve - to your point, I think it could be a change in focus.

If borrowers won't borrow at zero, then borrowers simply aren't borrowing. Since borrowers are effectively out (saturated with debt), why not appeal to savers? How does a saver get "yield" in this environment? Saving returns 0%, so the only recourse for a saver to accumulate some return is to chase risk or cut spending. I know I have been personally trying to manufacture some "risk free yield" by staying at home and cutting spending since there are literally no other ways of getting the bank account to grow. My guess is that I am not the only one.

Granted savers may be fewer than borrowers, but right now borrowers aren't moving the needle in terms of circulating dollars and throwing the savers a bone really couldn't hurt.

CC - you raise a fair point and are correct that this would be good for Riversider (and for me too), but if I spent some more discretionary money instead of socking it away to try and supplement the interest I used to get, wouldn't that be good for NYC too?

How else can I save for a downpayment in NYC without some kind of savings mechanism? :)

Hey..it would be good for me too.

But, consider.

You're saying that if lowering rates doesn't adequately stimulate demand, let's raise them?

Just becomes another cost to business, particularly small business that they can't pass on. Same effect as raising taxes.

Because higher interest rates decreases aggregate demand, and increased savings further diminishes the money supply and velocity, leading to further decreases in prices.

In other words, at times like now it leads to disinflation (or present state) or deflation, both of which are fatal to the economy.

That's why Riversider's Voodoo doesn't work.

or present state = our present state.

Ooops!

Steve ,
Let's look at this another way. The consumer is coming at this from a perspective of being over-leveraged. They are for once acting rational and engaged in deleveraging. Frankly lower rates will not by and large be an inducement to borrow. And this does not even address that for rates are only one factor, the other being the capacity of the consumer to borrow and his or her credit which is another reason loans aren't being done. Consumers are repairing their balance sheet.
Now let's look at the banks. Banks aren't lending because they never addressed their balance sheet either. When TARP came and the Treasury bail-outs occurred banks were not forced to repair their balance sheet right away. They did issue some new stock but we did not see shareholder equity wiped out and Senior bond holders convert engage in a debt to equity swap which would also have had the effect of recapitalizing the banks. So now we are left with banks building equity by retained earnings which is a much slower process.
But the Fed is using applying the wrong tools. It's like using a screwdriver like a hammer. Not very effective and you're likely to get a bloody hand. We'd be far better off as a nation if we stopped the transfer of wealth from savers to the big banks. ZIRP is not fulfilling the objective of the Fed of increasing lending.
It's not just you and me that benefit from higher rates. Pension funds, people on fixed incomes, insurance companies are able to fund their obligations or meet their budgets.

"why if people aren't borrowing at 0% interest, they would suddenly want to borrow more at higher interest rates?"

Steve,
I think people don't want to borrow because, in part, there's great uncertainty & negative sentiment about the direction of the economy. Who wants to indebt themselves when we don't know if we'll still have a job or how high our taxes will go? In that regard, low interest rate is less compelling because you still must repay the principle, no matter the interest rate. And, it's hard to budget loan repayment when jobs are insecure & tax rates escalate.

Considering that just about everything else Hoenig says would be "socialist" to you - no.

RS - those far-right economic policies are long discredited, and as the article itself states not even close to mainstream. Of course there are other things that can and should be done, but in a deflationary environment the last thing you want to do is:

a) raise taxes
b) raise interest rates
c) increase barriers to credit
d) reduce spending.

You want to do everything you can to encourage SPENDING, because the problem during deflation is excess savings.

Agree with a), but that's what Obama and Congress are doing.
Disagree with b) 1% is not restrictive policy. 0% is an emergency rate. We are not in an emergency situation.
c) Loose lending standards are the last thing we need. This is what created the problem. 0% is not
reducing barriers to credit, but is hurting a whole class of savers.
d) The gov't tried this, we paid people to buy cars, weatherize their homes(maybe the ones we
paid them to buy) and spending a great deal in
the process and what we learned is we paid people to do things hey would have done anyway and
produced no lasting increasing in gross domestic product.

Banks are holding one trillion in excess reserves according to Fed formulas. The banks are not lending and consumers are not inclined to borrow. But if you did want to push banks to lend a little we might try and declare their bank reserves at the Fed non-interest bearing. Now that's an idea that might work and the Fed should consider this.

So, if it were 1%, no doubt you'd be pressing for 1.5%. Anything that makes the world better for rent stabilizer.

Id like to re-write this sentence: "because the problem during deflation is excess savings" to include a few more symptons

the problem during deflation...is:

1) contraction of credit
2) contraction of credit values marked to market
3) deleveraging of levered assets from unsustainable credit expansion
4) excess savings
5) many others im sure...

all resulting in lower aggregate demand...Excess savings is simply one of the many symptons of deflation, is mostly a psychological reaction to severe pain experienced by investors/consumers/speculators as the above problems take place and individuals/corporations work to recapitalize their balance sheets.

forget the most important part, sorry...

The problem during deflation is, its physically impossible to get spending to a level where we would all be happy due to the many forces at work in deflationary times. But the fed will do everything they can to encourage spending, encourage investment, and encourage lending. But banks will not and should not increase lending during deflationary times to a consumer that is seeing deteriorating credit in a high unemployment environment. Complimenting this, consumers/corporations will not borrow like they did before in an environment like this. The capacity is simply not there anymore, wont be for decades. And this is showing up in the banks excess reserves and measures of credit creation. Consumer credit has been contracting for 21 straight months...the old pace was simply unsustainable. This will all take time.

agreed.

time is key but unfortunately time doesn't play in politics. rent stabilizer is typical of the group that is looking for any excuse to bash obama. oil spill, check. shady ancestry, check. economy hasn't turned around on a dime, double check.

Urban good points, I'll add that the ZIRP is not contributing to the healing which as you say will take time, and instead is potentially creating new imbalances and hurting the savings class, people on fixed budgets, pensions and other institutions that need to fund future liabilities. Of course the lower interest rates go, the greater the present value of those liabilities and the more difficult it becomes to fund those obligations as most debt is callable and exhibits negative convexity.

more drivel. where is the evidence that interest rates at zero are not helping? what new imbalances are being created? every action will inevitably have some negative consequences to some particular interest group. why do you endlessly bash everything?

present value of a long term obligation is never based on short term interest rates, so what is your point?

Here you go cc. Most people have been schooled on Keynes but not really, basically receiving the high school version and not really understanding it. I must put you back on ignore. You are really rather caustic.

http://www.ft.com/cms/s/0/2838c142-a560-11df-a5b7-00144feabdc0.html

Markets tend to cheer falling interest rates. Low interest rates, however, can entail real economic costs that become evident over time.

During the earlier period of monetary stimulus, from 2001-04, many businesses made economic calculation errors that later led to losses. Examples include investments in housing, commercial real estate and mining exploration, as well as the provision of defined benefit pensions to employees.

Interest rates are the most important prices in the economy, according to Nobel laureate F.A. Hayek, because they reflect the collective time preference of individuals to consume either now or later. Accordingly, interest rates co-ordinate allocation of capital across the economy by signalling to businesses whether they should invest. Distortions in interest rates can cause “clusters of errors” in which large swathes of businesses unwittingly miscalculate at the same time.

Hayek observed that interest rate stimulus interfered with economic calculations, causing managers to invest in projects that would not otherwise have appeared profitable. Losses can subsequently materialise as customer demand fails to meet forecasts that were, in retrospect, optimistic. Long-term projects are highly sensitive to interest rates and are therefore more susceptible to such distortions. Pension obligations and long-term, capital-intensive projects are at high risk of miscalculation based on artificially low rates.

To illustrate, capital expenditures accelerated in such long-term businesses as residential real estate, commercial real estate and mining exploration after the monetary stimulus that began in 2001, but losses materialised after interest rate stimulus was withdrawn.

According to the Bureau of Economic Analysis, investment in residential real estate grew by 2.8 per cent in the fourth quarter of 2000, before monetary stimulus began in January 2001. Then growth accelerated to 6.6 per cent, 10.0 per cent and 16.9 per cent during the fourth quarters of 2001, 2002 and 2003, respectively.

On June 30 2004 the Federal Reserve began to reverse the monetary stimulus just as residential investment growth was peaking at 21.1 per cent. It then decelerated and two years later home prices peaked and housing sector losses began to materialise.

Another area in which many businesses unwittingly underestimated costs is defined benefit pension plans. The widespread pension problem facing markets today is mostly attributable to the decline in interest rates amid waves of monetary stimulus during the past decade. Pension liabilities grow as interest rates fall, reflecting higher present values of future benefit obligations. A dollar of pension benefit granted in 2000 is currently worth approximately $1.32, solely reflecting the drop in interest rates. When managers calculated the costs of providing defined-benefit pensions in 2000, they could not have anticipated that a series of interest rate stimulus programmes in the intervening decade would drive costs up by 32 per cent.

Companies generally set aside funds to cover these pension obligations. However, even if a company funded its entire pension cost in 2000, for example, its asset portfolio returns would probably not have kept pace with its rising obligation. The average S&P 500 pension portfolio earned a cumulative return of 22 per cent since 2000. In the example, the pension plan would hold assets valued at $1.22 to cover an obligation worth $1.32. The company bears responsibility to pay the difference.

Hayek observed that “clusters of errors” tended to happen after monetary stimulus sparked an investment boom. When boom turned to bust he urged quick recognition of losses to free capital trapped in bad investments so markets could redeploy it to better uses. Any further rounds of monetary stimulus to cushion the bust would only prolong the inevitable adjustment and distort economic calculation anew.

If Hayek were alive he would caution businesses to be alert for the formation of new bubbles, especially in long-term businesses in which losses may not yet be fully recognised and price signals may still be distorted. He would agree with the investment caution that businesses have exhibited in the face of artificially low interest rates, and advise corporate decision makers to be alert if a project appeared profitable solely based on interest rate assumptions.

Where might the costs of the current loose money show up over time? It is impossible to predict with certainty. But low interest rates for a longer period increase the likelihood that businesses will miscalculate. Early signs of an investment recovery are showing up in such long-term businesses as industrial and transportation equipment and machinery. We will soon find out whether this recovery is real or the beginning of another bubble.

http://www.econtalk.org/archives/2010/02/larry_white_on.html

don't you understand the difference between theory and evidence?

caustic? nope.

challenging? yes.

you are in love with your endless, baseless drivel. no one else is.

http://hayekcenter.org/?p=3115

I regard him as a real genius but not as a great economist, you know. He’s not a very consistent or logical thinker. He might have developed in almost any direction. The only thing I am sure of is that he would have disapprove of what his pupils made of his doctrines.”

RS:

Agree with a), but that's what Obama and Congress are doing.

Raising taxes on those making over $250k will have little or no effect, as a) there aren't that many of them; and b) it's not money likely to be used for spending.

Disagree with b) 1% is not restrictive policy. 0% is an emergency rate[...] We are not in an emergency situation.

We were, and just wait. 9.5% and holding unemployment is very close to an emergency.

c) Loose lending standards are the last thing we need.

That is not what I said. But even the creditworthy are being denied credit.

"This is what created the problem. 0% is not."

Partly it's what created, and partly it was 0% interest.

"reducing barriers to credit, but is hurting a whole class of savers."

Then we should return to 21% interest again, b/c it helps savers?

"d) The gov't tried this"

Agreed it could have been done better, but politics is sausage. Now that the stimulus is over, look at what's happening....

Your economic theories don't work. Never have, never will.

This is a thoughtful exchange.

Don't get me wrong as I can see how lowering the interest rate when debt levels are not excessive can keep the machine buzzing along. But it is less clear to me that outside of its target "strike zone" deficit spending (when debt loads are high) does anything helpful ("pushing on a string").

In other words, is lowering the interest rate according to "established thoery" ALWAYS supposed to work? Or are there boundry conditions which prevent low interest rates from having the desired effect? If so, what are the boundry conditions? And is there an alternate prescription that would be more effective at the boundry condition? My guess is that Japan found this boundry condition and we will follow. It seems to me that we are simply taking the same path as Japan but expecting a different outcome(?)

CC - in response to your post:

"You're saying that if lowering rates doesn't adequately stimulate demand, let's raise them?"

- I guess I am answering yes in this case. Since there are segments of the population which are helped and hurt by the direction of the interest rate, if the segment of the population targeted to capitalize on low interest rates are not responsive (which I concede is a debatable point), maybe policy makers need to focus on the smaller subset of the population who are responsive to interest rate movements in the other direction.

oops meant to say in second paragraph:

But it is less clear to me that outside of its target "strike zone" LOW INTEREST RATES (when debt loads are high) does anything helpful

i was being facetious. Although there is quite a bit of disagreement about the benefits of fiscal stimulus, there is very limited support for raising interest rates in the current environment. I can understand your skepticism about the benefits of lower interest rates in that the economy is still in lousy shape but there is is little doubt about what would happen if rates were raised prematurely...starting with the obvious negative impact on real estate prices.

note what i said above about every action having a negative consequence for some interest group. Yes, raising rates would appear to be a benefit to savers but not if it further escalated a decline in the economy resulting in even less demand and ultimately more layoffs.

In the case of corporations the low rates has encouraged them to borrow money, but not to invest in their businesses, so they are either paying themselves dividends, refinancing higher priced debt(arguably a benefit but many of these businesses are over leveraged and just buying time before they fail) or investing the proceeds in government debt. Low interest rates has resulted in more debt but not more investment.

but of course you have absolutely no evidence of this. and it makes no sense. are we really supposed to believe that a significant number of companies are borrowing money to pay out dividends? why would their lenders agree to this?

clearly it is a benefit to a business to be able to refinance at a lower rate. where could there possibly be any argument about this? and the statement that somehow this only delays their inevitable demise is also presuming that their lenders are continuing to recklessly lend.

and finally, how can you say with a straight face that there is more debt now than previously? absurd.

Urban check out this piece.
http://www.hussmanfunds.com/wmc/wmc100809.htm

What's fascinating about the "corporate cash" argument is that few observers recognize that a great deal of this cash is not retained earnings but new debt issuance. Brett Arends of MarketWatch puts present levels of corporate cash in perspective: "According to the Federal Reserve, nonfinancial firms borrowed another $289 billion in the first quarter, taking their total domestic debts to $7.2 trillion, the highest level ever. That's up by $1.1 trillion since the first quarter of 2007; it's twice the level seen in the late 1990s. Central bank and Commerce Department data reveal that gross domestic debts of nonfinancial corporations now amount to 50% of GDP."

http://www.bloomberg.com/news/2010-08-15/obama-america-wins-lowest-yields-as-markets-shrink-aiding-record-deficits.html
Buying Bonds

Instead of lending money, banks are investing in Treasury and agency securities to take advantage of the historically wide spread between their cost to borrow and the returns on the debt. Their holdings of such assets increased to $1.57 trillion at the end of July, up 40 percent from $1.12 trillion in mid-2008, the same Fed report shows.

steve is still sticking to his failed Keynesian theories. To Keynesians, savings are a negative to the economy, which is one of the widely dicredited, and laughable, tenets of its theory.

I'm not such a fan of the WSJ these days, however they did run a story about the effect low rates was having on those in and planning retirement.

I also think low rates may be more inflationary than most people realize and in ways not generally considered. Until now insurance companies could offer lower rates which may have been subsidized in part based on their investment returns. With rates at rediculously low levels on both a personal and corporate level we may see sharply higher coverate rates.

Oh, LICC: "To Keynesians, savings are a negative to the economy"

Who ever said that? EXCESS savings are bad for the economy, not savings per se.

As far as Keynes.
Whether one agrees or disagrees with the aproaches is based on the value one assigns to the multiplier , the effect one assigns to increased taxes in the economy and as far as the current policies if one thinks the velocity of money is something that's easy to control or react to.

re: insurance premiums. more smoke and mirrors from the master.

assume that a policy costs $1,000 based on risk profile and an assumed investment rate of return at 5%. make the math real simple. investment return accrues 100% at the beginning of the term. take the new investment rate down to 1.5%.

new policy costs 3.5% more. what portion of total spending does insurance represent? one percent maybe? total effect is negligible and by the way, does not continue as interest rates cannot go negative.

dnfcc

http://www.bis.org/publ/arpdf/ar2010e3.pdf

History offers little guidance on the economic significance of the side
effects of unconventional monetary policy. By contrast, distortions arising from
low interest rates have been observed in the past. In this chapter, we review
these risks in the current context and argue that, if not addressed soon, they
may contain the seeds of future problems at home and abroad. In doing so, we
draw on lessons from the run-up to the financial crisis of 2007–09 and on
Japanese experiences since the mid-1990s
-------------------
Previous episodes of low interest rates suggest that loose monetary policy can
be associated with credit booms, asset price increases, a decline in risk
spreads and a search for yield. Together, these caused severe misallocations
of resources in the years before the crisis, as evidenced by the excessive
growth of the financial industry and the construction sector. The necessary
structural adjustments are painful and will take time.
In the current setting, low policy rates raise additional concerns since
they are accompanied by considerably higher long-term rates. This may leadto a growing exposure to interest rate risk and delays in the restructuring of
the balance sheets of both the private and public sector. The situation is
further complicated because low interest rates may have caused a lasting
decline in money market activity, which would make the task of exiting from
loose monetary policy more delicate.Standard economic models predict that a decrease in real interest rates causes
faster credit growth, if it is expected to be sustained. Moreover, it raises asset
prices since it drives down the discount factor for future cash flows. Other
things equal, this leads to a rise in the value of collateral, which may induce
financial institutions to extend more credit and to increase their own leverage to
purchase riskier assets. Rising asset prices are also often associated with
lower price volatility, which is reflected in lower values for commonly used
measures of portfolio riskiness such as value-at-risk (VaR).3 These factors
in turn reinforce the amount of capital invested in risky assets and the
increase in asset prices and lead to a further narrowing of measured risk
spreads.
This mechanism is widely seen as a major driving force behind the
increase in asset prices and the decline in risk spreads in the run-up to the
financial crisis of 2007–09. The crisis then brought a surge in risk premia, a
sharp drop in asset values, higher VaRs and losses for investors, including
highly leveraged players who were not well positioned to bear them. Price
reversals triggered calls on collateral and a mass rush to sell, generating
further price declines.
--------------------------------
Risky portfolios can also result from a search for yield, whereby low nominal
policy rates lead investors to take on larger risks in pursuit of higher nominalreturns.4 In the years preceding the financial crisis, many investors targeted a
nominal rate of return that they thought was appropriate based on past
experience. Furthermore, institutional investors, such as insurers and pension
funds, faced pressure to fulfil implied or contractual obligations made to their
customers at a time when nominal returns had been higher; they looked for
those returns in alternative investment opportunities. The fact that many
compensation schemes were linked to nominal returns also contributed to the
search for yield.A second symptom is distorted financial innovation. In the early 2000s,
intermediaries responded to investors’ desire for higher returns by engineering
financial products that appeared to minimise the risk associated with them.
A large variety of these “structured” products were widely sold in the years
before the crisis. On the surface they appeared to embody the investor’s holy
grail of low risk and high yield, but during the crisis their character proved
to be the opposite. As a consequence, the market has become reoriented
towards less exotic investment products. That said, financial innovation is
difficult to monitor and the shortcomings of new products are easier to spot
with hindsight.
A third symptom can be an increase in dividends and share buybacks. If
investors expect high nominal returns and if these are difficult to come by,
non-financial corporations may find themselves under pressure to return funds
to investors rather than pursuing risky but economically profitable real
investments in new plants or research and development. Buybacks and high
dividends, rather common in the run-up to the crisis, have become much rarer
in its aftermath, as is normal during cyclical downturns (Graph III.2, bottom
right-hand panel). Both dividends and buybacks rebounded somewhat in the
course of 2009 as the economic outlook brightened, but they remain below
pre-crisis levels, suggesting that this aspect of the search for yield is currently
not observable.

China's central bank governor Zhou Xiaochuan said that central banks should provide an incentive mechanism for financial institutions by properly managing lending margins so that banks can support the real economy in a more effective way.

Zhou expressed his opposition to zero interest rates. He said that commercial banks have almost no cost in taking deposits at zero deposit rates and therefore are not under pressure to give loans.

"Zero interest policies have reduced the motivation of banks to serve the real economy," said Zhou.
During the financial crisis, the United States and Japan slashed their interest rates to below one percent. Now many criticize the financial institutions in these countries as not doing enough to help revive the real economy.

http://english.caing.com/2010-09-09/100179016.html

Far as I can tell, RS is the only one posting posts to his posts. Shows the influence of Hayek.

You like my unique perspective. Would be boring if everyone agreed. It's interesting how Hayek and Hoenig seem to get more support once you read someone other than Bernanke, Geithner & Krugman

I've already told you how far Hayek is believed in economic circles. His Nobel-prize winning theories are intriguing, and work in a capitalist system where marginal tax rates are extremely high, and Socialist economic policies such as those in pre-Thatcher Britain prevail. The purpose of corporations is not to subsidize the common "good".

However, trying to apply those theories to economic situations that don't like like those of the premises of his work is just foolhardy - as is shown by the results of the Reagan and George II deficits.

economic situations that don't like like those = economic situations that don't look like those

Ooops!

Bill Clinton endorses Hayek

Hayek, The Fatal Conceit: "The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

Bill Clinton, 9/21: "Do you know how many political and economic decisions are made in this world by people who don't know what in the living daylights they are talking about?"

http://www.newmarksdoor.com/mainblog/2010/09/f-a-hayek-is-strongly-endorsed-by-slick-willie.html

Hoenig, 64, the grandson of corn and wheat farmers, doesn’t affiliate with a political party, doesn’t give campaign contributions, and definitely won’t say who got his vote for President in 2008. A product of Catholic schools and Benedictine College in Atchison, Kan., he served in a combat artillery unit in Vietnam, and has spent his entire 38-year career at the Kansas City Fed. One reason he is speaking out now, he says, is that he has only 12 months before mandatory retirement will force him to leave, and he has decided he won’t go quietly.

In the middle of the country, economic conditions are better than on the coasts. Lifted by exports, agriculture is booming. That helps explain Hoenig’s instinct that it’s time to get interest rates off zero.

http://www.bloomberg.com/news/2010-09-24/fed-dissenter-hoenig-s-campaign-against-easy-credit-has-roots-in-prairie.html

Never Enough

No matter how much money Government spends it will never be enough because government cannot create lasting jobs. As soon as the stimulus spending stops so do the jobs. No matter how many times Austrians insist Krugman look down the road to what happens to his Fantasyland model when the stimulus stops he refuses to discuss this simple point.

It is impossible to debate Keynesian clowns because no matter how much money they blow building bridges to nowhere like Japan did, the answer will always be "It wasn't enough".

http://globaleconomicanalysis.blogspot.com/2010/10/krugman-and-inevitable-i-told-you-so.html

"There is the possibility... that after the rate of interest has fallen to a certain level, liquidity preference is virtually absolute in the sense that almost everyone prefers cash to holding a debt at so low a rate of interest. In this event, the monetary authority would have lost effective control."

John Maynard Keynes, The General Theory

Simply put, monetary policy is far less effective in affecting real (or even nominal) economic activity than investors seem to believe. The main effect of a change in the monetary base is to change monetary velocity and short term interest rates. Once short term interest rates drop to zero, further expansions in base money simply induce a proportional collapse in velocity.

http://www.hussmanfunds.com/wmc/wmc101025.htm

This would be another good one to let die a natural death.

columbiacounty Ignored comment. Unhide

http://www.kansascityfed.org/publicat/speeches/hoenig-DC-Women-Housing-Finance-2-23-11.pdf

Fifteen years ago, I gave a speech entitled “Rethinking Financial Regulation,” which summarized the major threats facing our financial system. My suggestion then was to take steps to reduce interdependencies among large institutions and to limit them to relatively safe activities if they chose to provide essential banking and payments services and be protected by the federal safety net. I also argued that safety net protection and public assistance should not be extended to large organizations extensively engaged in nontraditional and high-risk activities. A final point of those remarks was that central banks must pursue policies that preserve financial stability. I am going to repeat those suggestions today, and as often as the opportunity allows. History is on my side.

Today, I am convinced that the existence of too big to fail financial institutions poses the greatest risk to the U.S. economy. The incentives for risk-taking have not changed post-crisis and the regulatory factors that helped create the crisis remain in place. We must make the largest institutions more manageable, more competitive, and more accountable. We must break up the largest banks, and could do so by expanding the Volcker Rule and significantly narrowing the scope of institutions that are now more powerful and more of a threat to our capitalistic system than prior to the crisis.

In the United States, we observe with each crisis and market collapse that policymakers consistently intervene to protect an ever broader group of creditors and investors from loss. This includes the LDC debt crisis, the failure of Continental Illinois, and the thrift industry and stock market collapses of the 1980s. These previous public interventions, though, pale in comparison to what was done recently. Market participants and large financial institutions have little reason to doubt that they will be bailed out again.
Let me offer just one staggering example. When Gramm-Leach-Bliley was passed in 1999, the five largest U.S. banking organizations controlled $2.3 trillion in assets, or about 38 percent of all banking industry assets. Currently, Bank of America by itself and in spite of its
5
need for government support during the crisis has the same level of assets – $2.3 trillion – as the top five did in 1999 and the top five now have 52 percent of all banking industry assets. What clearer sign could we find that market discipline no longer exists?

So how do you like the destabilizing effects of the Friedman Doctrine of flooding the economy with free money?

The Fed's QEII is taken straight from the Chicago / Austrian / Ayn Rand School of Stupid Economic Policies, and it's having a destabilizing effect throughout the world because of rising food / commodity prices and imported inflation.

Don't think those Arab dictators are going to be replaced by anybody warm and fuzzy: the only thing warm and fuzzy under those burkahs is Radical Islam.

Ayatollah something like this was going to happen.

Not to mention that the cause of a lot of this - housing - will continue to suffer as long-term interest rates rise, so the policy is doing exactly what it's not supposed to do: cheap money making everything more expensive.

Yet Uncle Ben persists, as did Alan G. before him. Oh where, oh where is Paul Volker, and the "let's manage the money supply not interest rates" crowd, the only ones to ever get it right?

Your confusing Monetarists, Keynsians and Austrians.

So how do you like the massive deficits and monetizing debt effects of Keynesianism?

steve, confused. Nothing has changed.

Not at all, RS: the Austrians are the Monetarists, and QEII is a decidedly monetarist policy.

And of course LICC needs a dose of slap-in-the-face reality: the deficits were run up by Reagan and George II; Clinton ran a surplus. However, in the face of the gross mismanagement of the economy under George II, and the "Maybe Ayn Rand wasn't right" confession by Alan G., Keynes was proved right all along: during times of economic desperation, deficits should NOT be controlled. They should be targeted on specific spending projects.

The effects of QEII will be pernicious: the free money has all gone into speculation - stocks, commodities, etc. - because everybody knows it must end. When it does, you will likely see a double-dip almost as bad as where it was at the nadir of 2009.

Friedman should have won the Nobel Prize for Stupid Economic Policies.

And wait: "monetizing the debt"?! The debt is already in money, LICCdope, so how can you monetize it again?

steve, you were gone for a while. What happened, did you suddenly feel the urge to publicly make a fool of yourself again?

You really need to read some econ 101 books.

Keynesianism is a discredited, failed theory. It has never worked.

I do believe that QE2 is bad policy, but it is being used to cover horrible Keynesian "stimulus" deficit blowing fiscal policy.

Not at all, RS: the Austrians are the Monetarists, and QEII is a decidedly monetarist policy.
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MY subjective view is that Austrians are Laisez-Faire. They see gov't intervention as hurting more than helping. In the context of monetary and fiscal policy I think they have some good points. This is different than regulating lead in paint or clean water. There's an argument to be made that Fed policy aimed at repairing the last bubble keeps creating the next one.

Monetarists want stable money in the system and look at velocity. They have a nice equation but the problem is that velocity of money is just too hard to pin down.

The Keynsians think that printing money and paying someone to move a brick from point A to point B is stimulus and has a multiplier effect is also wrong.

When you look at all the booms and busts and mis-allocations of capital it's because of bad gov't policy, an unlevel playing field and asymmetric access to information. Sometimes too many ingredients messes up the soup.

thank god you are an anonymous nobody.

That's the beauty of being a Tea Partier: you don't have to worry about making a fool of yourself. It's just assumed you will.

the tea party would never have riversider.

he/she/it is a party of one.

the cream cheese party.

hail cream cheese.

cream cheese if funny. Good one you pathetic miserable old man with nothing to show for life and no future.

"When you look at all the booms and busts and mis-allocations of capital it's because of bad gov't policy, an unlevel playing field and asymmetric access to information."

Actually, no: that's another stupid claim by Riversider. Just take a look at the economic history of the 19th century, and get back to me.

So when Krugman et al talk of issuing more debt to make things "better," we politely beg to differ. America's federal government must stop issuing debt. That is why we keep talking about the duration of money markets and the role of QE in maintaining the virtual reality of financial stability. The Fed's explicit monetization of the Treasury auctions via QE says it all -- but notice that the big media almost ignores the issue of the Fed and Treasury as sources of systemic risk.

We all fuss and bluster about the Fed lending money to domestic and foreign financial institutions, but say almost nothing about the greatest bailout of them all -- namely the Fed taking Congress of the fiscal hook via QE. Think President Obama would be running for re-election is rates were 200bp higher? The political ramifications of the Fed's fiscal bailout for Barack Obama and Congress dwarf the supposed import of the latest disclosures regarding loans to particular banks and corporations.

http://us1.institutionalriskanalytics.com/pub/iramain.asp

Hmmm. Can't disagree that QEII is the stupidest economic policy that I've ever seen since, well, the dot.com boom, but it is a monetarist idea, straight from the textbooks of Milton Friedman. Krugman is wrong on this one, his Yale counterpart Shiller is right: on an inflation-adjusted 10-year moving average basis, stocks are now more expensive than at any time in the last 100 years, barring - yes! - the dot.com boom / bust cycle.

Government monetary and fiscal policies are supposed to be countercyclical, not procyclical. That's what went wrong in the 1930's. Constricting the money supply would be dumb, but a massive injection of $600 billion using a technique that hasn't been applied since the Weimar Republic (where it worked) is dangerous, and it will lead to massive inflation down the line. Expect a double-dip, people, when this money is withdrawn: watch Intervention, and share the joys of withdrawal.

However, I think that "It's really a secret gift to get Obama reelected" business is just jackass dumb.

What was the economic policy of the "dot.com boom"?

CHARLOTTE, North Carolina (Reuters) - Big banks like Bank of America Corp and Citigroup Inc should be reclassified as government-sponsored entities and have their activities restricted, a senior Fed official said on Tuesday.
Hoenig is right of course.
And what's not talked about is how ridiculous the 7% capital requirements are since this translates into 15 times leverage. Banks should be levered at no more than 8 times and everyone knows it, including the banks who realize they just can't make money that way.
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The 2008 bank bailouts at the height of the financial crisis and other implicit guarantees effectively make the largest U.S. banks government-guaranteed enterprises, like mortgage finance companies Fannie Mae and Freddie Mac, said Kansas City Fed President Thomas Hoenig.

"That's what they are," Hoenig said at the National Association of Attorneys General 2011 conference.

He said these lenders should be restricted to commercial banking activities, advocating a policy that existed for decades barring banks from engaging in investment banking activities.
http://ca.news.yahoo.com/big-banks-government-backed-feds-hoenig-20110412-112137-434.html
"You're a public utility, for crying out loud," he said.

Dr. Ed Yardeni eloquently delivers our Quote of the Day on inflation, jobs, and the Fed:

“The Fed is still your friend if you are invested in cyclical stocks , commodities, and foreign currencies. If you eat food and run your car on gasoline, the Fed will continue to hurt you. If you are looking for a job, you may be wondering why it is still so hard to find ond despite all the money the Fed has spent so far on QE2.0. If you are retired and living on interest from your CDs, then you are getting really squeezed between rising food and fuel prices and the Fed’s zero interest rate policy. In other words, the Fed seems to be doing everything to widen the gap between the Haves and Have Nots than to lower unemployment and boost economic growth, which remains “moderate” according to yesterday’s FOMC statement.”

http://www.ritholtz.com/blog/2011/04/yardeni-is-the-fed-your-friend-it-depends/

http://video.cnbc.com/gallery/?video=3000023653

We don't have free markets
Fed policy is dangerous
There may be unintended consequences of easy money
We need to normalize interest rates

Aug. 5 (Bloomberg) -- Bill Gross, who runs the world’s
biggest bond mutual fund at Pacific Investment Management Co.,
said the Bank of New York Mellon Corp.’s decision to charge
clients for large deposits shows how the government’s efforts to
revive the economy are distorting markets and hurting savers.

Two Federal Reserve policy makers said the central bank’s commitment to keep its benchmark rate near zero for two years may create a misperception it’s aimed at boosting stocks, which contributed to their opposition.

Philadelphia Fed President Charles Plosser said in an interview yesterday that taking action after stocks tumbled “signaled that we are in the business of supporting the stock market.” Richard Fisher, the Dallas Fed chief, said in a speech that the Fed “should never enact such asymmetric policies to protect stock market traders and investors.” Both also said the policy won’t help spur growth.

http://www.bloomberg.com/news/2011-08-17/plosser-fisher-say-fed-shouldn-t-prop-up-stocks-through-monetary-policy.html

But is it treason?

Hypberbole.

Bernanke is clearly operating irresponsibly. His policies largely hurt our country and are by and large meant to support the banks at the expense of the rest of the economy lowering their cost of funds, paying them money not to lend and telling them which treasuries the Fed intends to buy so they can front run, and causing a spike in commodity prices.

MidtownerEast
about 1 hour ago
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But is it treason?

That question is above your pay grade.

Its nice to see we have plenty of smart economists who understand the Fed's problems...
-----------------------
http://www.bloomberg.com/news/2011-09-16/end-the-fed-s-dual-mandate-and-focus-on-prices-john-b-taylor.html

The dual mandate language is based on an outmoded concept of a tradeoff between inflation and unemployment. Moreover, too many goals blur responsibility and accountability. The dual goal enables politicians to lean on the Fed, and people often cite it as an excuse for unconventional policies.

Some worry that a single focus on the goal of price stability would lead to more unemployment. But history shows just the opposite. A single mandate wouldn't stop the Fed from providing liquidity, or serving as lender of last resort, or reducing the interest rate in a financial crisis or a recession. But it would make it more difficult for the Fed to engage in the kinds of discretionary actions that frequently have resulted in higher unemployment.

Several times in the 1970s the Fed increased money growth, trying to reduce unemployment. But the unintended consequence was actually to increase joblessness: Higher and higher inflation rates eventually required a painful disinflation, with unemployment rising above 10 percent. From 2003 to 2005, the Fed kept interest rates extra low, partly out of concern about employment. But those extra-low rates exacerbated the housing boom, leading to a bust -- a big factor in the financial crisis that eventually caused a devastating increase in unemployment.

By contrast, for most of the 1980s and 1990s -- starting when Paul Volcker became chairman -- the Fed stressed the goal of price stability in its actions. The result was much lower unemployment than before or since.

Fed Governor Sarah Bloom Raskin said today in Washington that the central bank’s use of tools has been “completely appropriate” and that she would be “quite leery” of allowing higher inflation or price expectations in an attempt to lower real interest rates. St. Louis Fed President James Bullard said in New York that faster inflation won’t reduce the housing glut; at the same time, he said that “monetary policy is ultra-loose right now, and appropriately so.”

http://www.bloomberg.com/news/2011-09-26/fed-s-bullard-raskin-voice-skepticism-on-faster-inflation-to-boost-growth.html

"and causing a spike in commodity prices."

Fail.

It fueled a spike in commodity prices and caused the dollar to depreciate.
You need to work on some issues. a lot of issues.

Commidities went up because of supply and demand.

And now they are going down, as global growth outlook has been dampened. Despite this "debased" dollar.

And when commodities WERE going up, dollar-priced ones were NOT going in any way remotely resembling uniformaty.

"Commodities went up because of supply and demand."

Uhm, no.

http://futures.tradingcharts.com/chart/CN/M

How much extra corn do you think people started eating since QEII?

Overlay ANY financial asset chart - stocks, oil, gold, etc. - and you get approximately the same pattern: prices went sky-high since QEII. There is a very strong case to be made that much of the current economic malaise was caused by all the extra money in the system, with nowhere to go. So - it went into easy-to-get-rid of financial assets, a very nice trickle-up move by Bernake, passing the "wealth" - what's left of it - from the middle class - what's left of it - and the unemployed - plenty of them around - to speculators. Unfortunately, at a time of high unemployment it's not possible to raise the price of things.

Right now we're seeing a violent - in terms of volatility - breakdown of the bubble. It will take weeks if not months to form. Revised GDP numbers are due this week. The CNBC Talking Heads have moved from "unemployment claims under 400,000 are great" to "unemployment claims under 425,000 are great." There will likely be negative job growth in September, when those figures are released.

This volatility is very bearish. Go back to the 2008 charts - any asset class - and lay them over 2010. The similarity is eery.

Dummy - commodities are a GLOBAL market. GLOBALLY growth and growth outlook (which affects the futures market) went up earlier this year and all of last. In addition, corn is heavily influenced by ethanol demand, which went sky high as gas prices rose.

"commodities are a GLOBAL market"

So...stocks and bonds aren't?

The rise in commodity prices occurred with the fall in the dollar and the excess liquidity in the market.

Explain this: "In addition, corn is heavily influenced by ethanol demand, which went sky high as gas prices rose."

a) Why would ethanol demand go up when gas demand went down?; and b) corn ethanol is a US mistake, not shared by the world. Why, if you claim that commodities are a "global market," would US demand for ethanol cause a global commodity price to rise this much?

If it were just corn, it'd be one thing. But it was EVERYTHING.

Bernanke unleashed a great deal of dollars via QE2 which had been sitting in bonds. Those funds did not go into the real economy, they went into finanical assets and commodities. Plus for countries that peg to the dollar, to keep their currencies from appreciating they had to expand their money supply which drove up their local inflation rate and that local money also went into commodities.

Corn is an interesting case, where via gov't policy the price went up since it was decided corn was better used to fuel up a car than to consume by people or cattle as a food source.

We had an even BIGGER run up in commodity prices from 2002-2008, long before QE2 and so-called "debasement." This is just a right-wing talking point, not based in any actual analysis. You say it as though its self-evident.

Very few people ever accuse me of "right-wing" anything, and no, we didn't have a "BIGGER" run-up from 2002 through 2008. The run-up was from 2008 to 2008, right before the crash, and it - likewise - coincided with a huge increase in margin balances.

The correlation between margin and QEII bubble is proved, and undeniable. What is also proved and undeniable is that QEII is a MONETARIST - i.e., right-wing - policy, not a Keynesian policy. The right-wing is just talking points its way to criticizing itself.

Sept. 28 (Bloomberg) -- Federal Reserve Bank of Kansas City President Thomas Hoenig said the Fed’s plan to push down long- term interest rates may produce accidental outcomes and policy makers risk creating “imbalances” in the economy.

“I have real concerns about trying to fine-tune and micro- manage the economy when monetary policy is a blunt tool,” he said today in an interview with Bloomberg Radio’s “The Hays Advantage” with Kathleen Hays. Efforts to “redefine yield curves” may “introduce new complexities and risk new unintended consequences,” he said.

Hoenig’s concerns about Operation Twist are shared by colleagues such as Dallas Fed President Richard Fisher, who said yesterday that the move may prove ineffective and hurt job creation. Boston Fed President Eric Rosengren said yesterday that he is ‘very supportive” of the program.

http://www.businessweek.com/news/2011-09-28/fed-s-hoenig-says-operation-twist-risks-new-complexities-.html

IMHO it's not going to do a goddamned thing - except maybe make banks more reluctant to lend as the yield curve is already flat.

The problem was never with the price or amount of money in the system; the problem is with the willingness of banks to lend it, when they have bad assets aplenty already to write down.

"no, we didn't have a "BIGGER" run-up from 2002 through 2008. "

Argghhh, I have a Bloomberg terminal at my desk. Such things are so easy to look up. From Jan 2002 through May 2006, the DJUBS Commodities index went up 109% from 88.7 to 185.3. It peaked in 2008 at 237.7 - up 28.3% from 2006. So yes, dummy MOST of the run up was BEFORE 2007-2008.

From Feb 2009 it went from 102.9 to a peak of 175.4 in April 2011 - up 70.5%. So unless you are a retard who can't do math, the 168.4% increase from 2002-2008 was in fact more than DOUBLE the increase from 2008 through 2011.

"The correlation between margin and QEII bubble is proved, and undeniable."

Correlation is not causation. And of course monetary easing has SOME affect on finacial assets, but most economists say the vast majority of the increase and decrease is supply-demand expectations.

". What is also proved and undeniable is that QEII is a MONETARIST - i.e., right-wing - policy, not a Keynesian policy."

What you have is Hayek arguing with Friedman, both on the right. But 100% of Keynseians I know of - Krugman, Stigliz, DeLong, etc., believe that monetary policy does in fact work, just not as well when you are at the zero bound. So in fact its Hayek arguing against BOTH Friedman and Keynes.

And to be clear - from Bloomberg:

Dow Jones-UBS Commodity Index
"The index is composed of futures contracts on 19 physical commodities. It reflects the return of underlying commodity futures price movements. It is quoted in USD. See {DJUBS } for membership info. You
must subscribe to Dow Jones to view members."

And so its everything from cattle to gold to oil.

"From Feb 2009 it went from 102.9 to a peak of 175.4 in April 2011 - up 70.5%. So unless you are a retard who can't do math, the 168.4% increase from 2002-2008 was in fact more than DOUBLE the increase from 2008 through 2011"

Notwithstanding the unnecessary retard comment, you will note that 2002 - 2008 comprises 7 years; February 2009 to April 2011 is slightly more than two years. Take that same measure and run it from September 2010 through the present. Take it from January 2008 through the crash: you will see astronomical rises, such as oil at $140 a barrel, down to $35.

In addition, doubling 10 gets you 20. Doubling 20 gets you 40. Therefore, the same percentages applied to the lower base leads to a lower nominal change in prices.

I understand your point, but I think you now see how I was meaning it.

"Correlation is not causation." Not quite true. "Correlation is not NECESSARILY causation."

But since market margin accounts can only be used to buy on margin, it necessarily IS causation.

No one says that monetary policy doesn't work - it does, and it was instrumental in getting us out of the 2008 crash. However, it doesn't always work, and though QEII did work by avoiding deflation, it caused a huge increase in food and energy costs - not counted in the current definitions of "core inflation" - that were unsustainable in a period of high unemployment.

>columbiacounty
about 13 months ago
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Hey..it would be good for me too.
But, consider.
You're saying that if lowering rates doesn't adequately stimulate demand, let's raise them?
Just becomes another cost to business, particularly small business that they can't pass on. Same effect as raising taxes.

Well, what do you know? It took me 13 months to find clear evidence that columbiacounty is for lower taxes. Now if only we could do something about his ruined retirement and family life.

columbiacounty
about 13 months ago
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So...bottom line is that this would be good for you.

To the Fed...raise interest rates so rent stabilizer will get more money.

What's the correlation and r^2 of the dollar index versus commodity prices? Hint, both too low over the past 10, 5, or 3 years to explain most or even the bulk the price rise in commodities. You know what is MUCH more correlated? The implied inflation and GDP growth rates based on major market yield curves.

The stock market is a good correlation too, but that reflects both future growth expectations and yes monetary expansion, so its moot.

And the CAGR of the DJUBS Commodity Index has been 20.4% from Feb 2009 through today - not appreciably different from the 19% CAGR from Jan 2002 through May 2006, or the 18% CAGR from Jan 2002 through September 2008.

I want to be clear though, over time yes dollar devalution (or appreciation) clearly impacts dollar priced commidities, by definition. But over the last three years? Not as much as gold bugs preach.

First you argue correlation doesn't matter, then you argue that it does. Not sure what you mean.

"First you argue correlation doesn't matter, then you argue that it does. Not sure what you mean."

Now you are being purposefully stupid. I did not say correlation DOES NOT MATTER. I have said, and the overwhelming majority of economists say, that the run up in commodities prices has far more to do with supply/demand expectations than with dollar valuation. And the dollar index is far less correlated with commodity index price changes than any sort of measure of economic growth or expected growth - be it the yield curves, stock market, whatever.