Now at first blush, this statement might sound highly critical and moralistic, like saying that Bernanke is feeding the worst habits of the economy, when in reality the economy needs to be cut off from cheap leverage and go cold turkey.
And since elsewhere in his interview, McCulley slammed moralistic interpretations of macro-economics, this seems odd.
But here’s the full line from McCulley: “Suddenly the Federal Reserve is the bartender at an AA Meeting: You Keep cutting the price, but nobody’s drinking!”
So he actually wasn’t making a judgment, but rather just describing the reality of an economy that’s in deleveraging (or as put it, in a liquidity trap). When people want to have less debt, no amount of rate cutting will want them to take on more. When people are quitting alcohol, lowering the price doesn’t matter (or at least, it’s not the price that will make them change their mind.).
Unlike in past recessions, where households were sensitive to changes in the price of credit, in this economy they’re not, and Bernanke’s actions do very little.
So according to McCulley (who sounds very Richard Koo-like, when talking about all this) the answer is: Fiscal, fiscal, and more fiscal stimulus. Let the government lever up, so that the private sector can finishing levering down without an economic collapse.
- Two Investing Geniuses Share Their Take On The Economy, Markets, And What Government Needs To Do Now (businessinsider.com)
- Guest Post: There Will Never Be A Failed US Treasury Auction… Until There Is (zerohedge.com)
- McCulley: We Are In a ‘Liquidity Trap!’ (ritholtz.com)
- Paul McCulley on Fed policy and “liquidity trap” (investmentpostcards.com)
- This Is Paul McCulley’s #1 Fear For The US Economy (businessinsider.com)
Joe Weisenthal | Feb. 28, 2012, 11:37 AM
From Citigroup, the connection between the Russian market and the price of oil.
- Why Investors Should Care About The Russian Elections (businessinsider.com)
- Putin a shoo-in, but his state machine is showing signs of rust (smh.com.au)
While we wait for the employment report, there was another big story yesterday — the Fed treatment of savers.
Fed Chair Bernanke testified before the House Budget Committee, responding to some illuminating questions from Committee Chair Paul Ryan (R. WI). Joe Weisenthal, who is usually on the track of the biggest story, anticipated this one yesterday:
Here is Joe’s conclusion:
And while we sympathize with people not getting returns on their money, the fact of the matter is that the big problem we have right now is that people have too much debt, not an abundance of cash that’s just sitting there not returning anything.
The bottom line is this: Yes, it sucks that pensioners and garden-variety savers aren’t getting returns, but it also sucks for everyone in the U.S. right now, because the economic outlook seems to be so mediocre. Welcome to the club!
Until growth and inflation return to anything that looks robust, savers will have to be stuck with the same garbage returns boat the rest of us are in.
There is a lot of buzz about the role of the Fed and also the leadership of Bernanke. The leading Republican candidates all want to fire Bernanke, and some of them even want to abolish the Fed. Some of the GOP House Budget Committee members have joined the criticism.
Here at “A Dash” I focus on investments, not politics. Years ago some readers called me a “Bush apologist” and a blatant “supply sider.” I have tried to explain that I do not have a partisan perspective, but an investment perspective. I want to find the best investments no matter who is in power. My perspective changes with the evidence.
With that in mind, let me suggest a few propositions for your consideration. If these are not obvious, I recommend more research.
- Bernanke is a Republican, with a conservative background. This is typical for Fed Chairs.
- If President Bush had been re-elected, the current GOP fiscal argument would be different. There would be support for stimulus, including both tax cuts or spending. If you do not believe this, look back in history to the end of the Bush administration.
- If President Bush had been re-elected, the GOP monetary story would be different. They would be screaming for easy money, as both parties have always done, including past GOP administrations, and including Bush senior.
- Paul Ryan is an ambitious and aspiring VP candidate who has a theme that resonates — balancing the budget. It is an effective political argument — for the party out of power.
Meanwhile, the Fed is doing a good job of ignoring politics and focusing on the economy.
I continue my plea: Look beyond politics. Most recently, look beyond the popular ploy of making a villain out of the Fed.
The Fed has a dual mandate including both price stability and employment. Here is the official statement:
The Congress established two key objectives for monetary policy–maximum employment and stable prices–in the Federal Reserve Act. These objectives are sometimes referred to as the Federal Reserve’s dual mandate.
There are many who have criticized the US approach suggesting that there should be only a single mandate – price stability.
So let us all be clear about this — very clear.
The Fed has no Third Mandate. There is no interest rate guarantee for savers!
It is difficult enough to balance economic growth and price stability. The idea that the Fed should be judged by a third criterion — maintaining interest rates for savers — is misguided, politically biased, displaying favoritism for one group, and basically wrong.
More importantly, it is not going to happen. Our investment decisions should be based upon reality, not the wishful thinking of those with a partisan agenda.
I understand the plight of savers and senior citizens. I work with such investors every day, helping them find a combination of a bond ladder, dividend stocks, and enhanced yield. Those who do not have a job at all face a more difficult problem. Until we have a stronger economic recovery, we are all in this together.
Read more: BI
- Bernanke vs. Ryan: A lesson in monetary policy (theglobeandmail.com)
- DEAR SAVERS AND RETIREES: Stop Whining About Those Lousy Rates You’re Getting From The Bank (businessinsider.com)
- Bernanke defends Fed policies against GOP critics (seattlepi.com)
- Bernanke: Recovery ‘frustratingly slow’ (thehill.com)
- Budget Committee Lawmakers Question Fed’s Dual Mandate (usnews.com)
Image: Mark J. Perry
Of course, people are going to try to draw all kinds of different lessons from this chart. For example, some will see it as a sign that we’re in a golden-age of technological productivity, that’s allowed the overall economy to prosper, while a cohort of unemployable, skill-less workers suffer.
There’s also a political angle, namely that the needs of workers are obviously not in alignment with the interests of corporate America: Remember, the corollary to that record GDP is record corporate profits, as seen here.
Regardless of the root cause of the disconnect, this is a real and growing problem, as the lack of jobs translates into political strife, and perhaps even unrest.
- Income Inequality, Economic Mobility, and Investment (thewesternexperience.com)
- Kevin L: The “Imaginary Hobgoblin” of Income Inequality (mjperry.blogspot.com)
- CHART OF THE DAY: Keep This Chart Handy, And You’ll Know When Greece Is About To Blow Up (businessinsider.com)
- Recession? No. We’re In The Second Great Contraction (businessinsider.com)
A super-cool chart from Morgan Stanley, which basically examines different kinds out potential outcomes in Europe (with the top-right quadrant being the best, and the bottom-left quadrant being the worst), with some ideas about what kinds of policies get you to where.
Click Here – Morgan Stanley
- A Closer Look At Leverage At MF Global And Jefferies (businessinsider.com)
- Banking time bomb – banks’ balance sheet risks are increasing (tradingfloor.com)
- Morgan Stanley Presents Everything You Need To Know About Europe (MS) (businessinsider.com)
- CHART OF THE DAY: The Decline And Fall Of Morgan Stanley (businessinsider.com)
- Mapping Out The European Crisis In One Gigantic Chart (businessinsider.com)