Senator Charles Schumer (D-NY) to Fed Chairman Ben Bernanke:
Get to work Mr. Chairman
The deep problems with our economy are not primarily matters of monetary policy (although excessively low rates maintained by the Greenspan Fed did contribute materially to asset overvaluation and the consequent 2008 crash.) Rather, our current problems are primarily a function of bad policies driven by Mr Schumer’s Democratic Party, ranging from suppression of American energy supplies to overweening regulatory arrogance to a legal climate encouraging destructive litagation to a dysfunctional public school system which every year produces millions of almost illiterate and virtually unemployable graduates.
Instead of taking their foot off the air hose of our economy, Chuckles and many of his fellow Democrats are demanding that the Fed simply turn up the air pressure. And when the hose breaks, I’m sure they’ll find lots of people other than themselves to blame.
Related post here.
David: You are not wrong, but Bernanke is standing on my air hose. Try living off your income in an environment where interest rates above 1% can only be found from investments carrying sever principal risks, like 30 year treasuries. Why there are not riots by retirees is beyond my ability to explain.
Some of the problem is not of Bernanke’s making. I no longer believe that a stable economy can be based on a fiat currency. And, the idea, enshrined in law, that monetary policy has the power to affect employment is voodoo economics (a/k/a Keynesian). But, some of his errors are his.
First, the notion that the Fed should run monetary policy so that there will be a 2% inflation rate is criminal. It is an unconstitutional tax on savings, it impairs the obligation of contract, and it erodes the nations capital. Beyond that, it too is based on voodoo economics.
Second, if I were running a bank with $60 of assets for each dollar of capital. The Fed would send in a receiver faster than you could blink. But, that is precisely what Bernanke is doing. Arguably, the emergency of 2008 required the expansion of the Fed’s balance sheet. But, the emergency was over by 2010. The Feds balance sheet should be back to less than $1T by now.
I take some grim amusement from the idea that if taxmageddon comes, the Feds won’t get any revenue out of me, because, I don’t have any income.
RS…”an environment where interest rates above 1% can only be found from investments carrying severe principal risks, like 30 year treasuries”
To really stretch the analogy, this is a consequence of an attempt to increase the air pressure and flow, despite the multiple feet on the hose, by sending more horsepower to the pumps. And that horsepower, of course, has to come from somewhere.
Lower Fed interest rates only increase bank lending up to a certain point, and I think we’re beyond it. And while it’s true that very low rates can temporarily increase stock and other asset prices (by making more conservative investments wholly unattractive), this does not increase long-term returns, it merely “borrows” future returns into a more current time period.
1) Even a 12.5 bp cut is a gratuitous transfer from taxpayers and bondholders to big institutions doing carry trades. Who else benefits? I agree with David that we’re beyond the point where cutting rates spurs bank lending. If short-rate cutting by central banks worked Japan would have boomed rather than stagnated during the ’90s and ’00s. I find it disturbing that Bernanke chooses to disregard the Japanese experience or to assume that things will be different here.
2) The Fed’s job is to maintain price stability, not to finance Congress’s spending. Bernanke appears to misconstrue his mandate.
What so many people, especially Democrats and “progressives” seem unable to understand, is that an economy is not just, or even mainly, about money. The money only has value to the extent that it symbolizes real productive forces.
French scientist Sadi Carnot, writing in 1824, noted that:
“To take away England’s steam engines to-day would amount to robbing her of her iron and coal, to drying up her sources of wealth, to ruining her means of prosperity and destroying her great power. The destruction of her shipping, commonly regarded as her source of strength, would perhaps be less disastrous for her.”
And look at America today. Many “progressives” seem to implicitly believe that they can take away America’s “steam engines” (LITERAL steam engines, in the case of the coal-fired power plants they wish to close down) and that the crippling our energy base or at very least making energy much more expensive (remember Obama’s promise to make electricity costs “necessarily skyrocket”?) will somehow have no impact on our national wealth if only the right games are played with money supply, etc. (Other “progressives,” of course, view the diminishment of American wealth as a very good thing.)
I saw somewhere that when coal power plants are closed, in some cases holes have been drilled in the boilers to ensure that they can never be used again, as if a steam boiler were some kind of criminal instrument.
See my related 2009 post Powering Down.
https://chicagoboyz.net/archives/10812.html
Jonathan: “Even a 12.5 bp cut is a gratuitous transfer from taxpayers and bondholders to big institutions doing carry trades.” Pardon my French, but f*cking bingo on that quote.
From the OP: “…to a dysfunctional public school system which every year produces millions of almost illiterate and virtually unemployable graduates.” You are not just whistling dixie there. I have absolutely no room in my business for most of today’s high school grads. This is good and bad for me. Good in the fact that I am still relatively young and have absolutely no worries that they will ever challenge me in the future for my piece of the pie. Bad in the fact that I need workers. I truly don’t think that today’s youth are totally dumb, but their social skills are severely lacking. I simply can’t have it around my customers. One smart comment by a delivery driver can cost me a very good customer.