Posted on 08/30/2012 11:21:41 PM PDT by bruinbirdman
Central bankers may have averted outright disaster, but they are powerless to do more.
Few jamborees excite financial markets as much as the symposium of international central bankers which is held annually in late August at Jackson Hole in the Rockies.
Interest this year focuses around whether, with the American recovery again running out of steam, the US Federal Reserve is about to signal a further round of quantitative easing, marking the third such burst of money-printing in that country since the crisis began.
Yet it is also fair to say that the gathering no longer holds quite the same cachet it used to. Faith in central banks as guarantors of macro-economic stability has been shaken to breaking point by the events of recent years, a crisis which they utterly failed to see coming, still less were able to prevent.
The symposium has been further devalued by the fact that many of the top European central bankers, including Mario Draghi, president of the European Central Bank, are still so busy fire-fighting that they have failed to show up.
If nothing else, the event serves to highlight that five years after the crisis began, monetary policy is still struggling to deliver meaningful solutions. Here in the UK, the Government has put its faith in a combination of “fiscal conservatism and monetary activism” to lift the economy out of its funk. In the event, government spending has hardly been checked at all, while monetary activism has failed to revive the economy as hoped. Output remains firmly stuck a full 4.3 per cent below its pre-crisis peak.
Central banks stand widely accused of having failed. Is this fair? Not entirely. Just as they were much too highly rated before the crisis hit, they have now become somewhat oversold. Part
(Excerpt) Read more at telegraph.co.uk ...
I think this is backwards. It was a looming crisis that no one could fail to see coming, yet no one was able to prevent.
I mean, this is logical right? There it is. What can we do? Nothing, but we've got to try. And of course, they manage to convince themselves that they're on top of it, but they not only saw it coming, but felt it coming on. IOW, it's denial.
who could have ever predicted a 10% of gdp deficit, no growth a HUGE spike in money supply and 1.4% ten year tb??
Never in my wildest dreams did i believe this was possible, but no one should think hat this is sustainable.
Milton friedman always said, 24 months after the money supply spikes, we get inflation, but in some sense, none is on the horizon, or the ten year rate would not be 1.4%
There does seem to be a grand plan afoot. Someone is watching out for U.S. equities.
yitbos
“Milton friedman always said, 24 months after the money supply spikes, we get inflation, “
Don’t be fooled by an apparent increase in the money supply.
The money supply isn’t spiking when bank assets are collapsing. Bad debts are wiping out bank assets as fast as the Fed can shovel money back into the system by buying up troubled assets.
This Fed action is precisely what Friedman faulted Fed for failing to do in 1930. You’ll find that criticism in his Monetary History of the United States. In 1930 the Fed failed to act and bad debts wiped out a third of America’s banks taking with them a third of the money supply. Bernanke has been trying to avoid a repeat of this.
One other reason that inflation is missing is that the velocity of money is low.
I guess that would come under the “... but we’ve got to try” part. I’ve been saying, it’s all just money now. Equities are boulders at the bottom of the lagoon. Well ... there’s Apple!
America currently has price inflation of over 5%. (http://www.shadowstats.com/).
This is - as you say - with a low velocity of money.
When bank reserves finally mobilise/unfreeze then we can expect 20% inflation or higher. Either that or there will be a sharp devaluation event.
In the end new oil and LNG revenues - and Conservatism - will save America. But the next five years are going to be a roller coaster.
The problem in the real estate industry was that people were consistently paying more for real estate than such assets would be worth five years later.
Now we are to believe that the solution to that problem is for the Federal Reserve to print money and purchase those same assets for more than they will be worth five years later?
I feel like I am looking at the cartoon blackboard with the intermediate step labelled, "And then a miracle happens!"
Peopls in Greece are and have been living beyond their means. They will probably have to default on much of their debt and their credit worthiness will be zero while they are left to their own devices, printing their own money trying to solve the problem of not being fiscally responsible.
People in the United States are and have been living beyond their means and ..." Just what is it that you see happening to the U.S. that will be different from what is happening to Greece?
Jackson Hole. A fitting name for a place to hold an economic conference.
“The problem in the real estate industry was that people were consistently paying more for real estate than such assets would be worth five years later.
Now we are to believe that the solution to that problem is for the Federal Reserve to print money and purchase those same assets for more than they will be worth five years later?”
The Fed is stuck with trying to prevent the mortgage debacle from spreading. The Fed’s job at this point is to prevent widespread bank failure. The root of the Great Depression wasn’t the 1929 stock market collapse, it was the lesser-known collapse of one third of American banks over the years 1930-33. The Fed has to prevent a replay of this or the recession we are now in will get much, much worse.
Banks, insurance companies, financial firms of all sorts purchased trillions of dollars worth of CDOs and CMOs during the housing bubble. This paper is held on their books as an asset. When this paper loses value the banks have to contract their lending and could even become bankrupt. If this affected only the banks and their investors that would be fine, let them go under. But it doesn’t work that way. The problem is so extensive that it will bring down large sectors of the economy that have little to do with the banks.
So the Fed bails out the banks’ balance sheets by taking the toxic paper off of their hands, this is what TARP is all about. If these banks become healthy they will lend again. The fact that lending is still sluggish is a tell concerning now much damage has been done to the banking system even with TARP helping them.
“When bank reserves finally mobilise/unfreeze then we can expect 20% inflation or higher. Either that or there will be a sharp devaluation event.”
The Fed will be selling its stock of Treasuries into the banking system before this happens.
The Fed holds an enormous amount of the Treasury issue, maybe as much as half, and when it sells these holdings they act as a sponge to sop up free reserves from the banking system. This is a much easier process than what they trying to do today, where they are confronted with the “pushing on a string” problem.
What will happen then is that interest rates will rise, and the frugal will finally get a return on their savings after a decade of getting nothing.
“Banks, insurance companies, financial firms of all sorts purchased trillions of dollars worth of CDOs and CMOs during the housing bubble. This paper is held on their books as an asset. When this paper loses value the banks have to contract their lending and could even become bankrupt. If this affected only the banks and their investors that would be fine, let them go under. But it doesn’t work that way. The problem is so extensive that it will bring down large sectors of the economy that have little to do with the banks.”
And thus this household on red alert for Extortion-Care. They can’t wait to secure these phony paper makings on the backs of other’s assets.
“Banks, insurance companies, financial firms of all sorts purchased trillions of dollars worth of CDOs and CMOs during the housing bubble. This paper is held on their books as an asset. When this paper loses value the banks have to contract their lending and could even become bankrupt. If this affected only the banks and their investors that would be fine, let them go under. But it doesn’t work that way. The problem is so extensive that it will bring down large sectors of the economy that have little to do with the banks.”
And thus this household on red alert for Extortion-Care. They can’t wait to secure these phony paper makings on the backs of other’s assets and labors.
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