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Bankers Told Recovery May Be Slow - Jackson Hole

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The American economy could experience painfully slow growth and stubbornly high unemployment for a decade or longer as a result of the 2007 collapse of the housing market and the economic turmoil that followed, according to an authority on the history of financial crises.

That finding, contained in a new paper by Carmen M. Reinhart, an economist at the University of Maryland, generated considerable debate during an annual policy symposium here, organized by the Federal Reserve Bank of Kansas City, which concluded on Saturday.

The gathering, at a historic lodge in Grand Teton National Park, brought together about 110 central bankers and economists, including most of the Federal Reserve’s top officials. In 2008, the symposium occurred weeks before the Lehman Brothers bankruptcy nearly shut down the financial markets. At the symposium last year, officials congratulated themselves on weathering the worst of the crisis.

But the recent slowing of the recovery cast a pall on this year’s gathering. As economists (some wearing jeans and cowboy boots) conferred on a terrace with a sweeping view of the 13,770-foot peak of Mount Teton, or watched a horse trainer tame an unruly colt at a nearby ranch, they anxiously discussed research like Ms. Reinhart’s. (Participants pay to attend the event, which is not financed by taxpayers, a Kansas City Fed spokeswoman emphasized.)

“I’m more worried than I have ever been about the future of the U.S. economy,” said Allen Sinai, co-founder of the consulting firm Decision Economics and a longtime participant in the symposium. “The challenge is unique: poor and diminishing growth, a sticky unemployment rate, sky-high deficits and a sovereign debt that makes us one of the most fiscally irresponsible countries in the world.”

Ms. Reinhart’s paper drew upon research she conducted with the Harvard economist Kenneth S. Rogoff for their book “This Time Is Different: Eight Centuries of Financial Folly,” published last year by Princeton University Press. Her husband, Vincent R. Reinhart, a former director of monetary affairs at the Fed, was the co-author of the paper.

The Reinharts examined 15 severe financial crises since World War II as well as the worldwide economic contractions that followed the 1929 stock market crash, the 1973 oil shock and the 2007 implosion of the subprime mortgage market.

In the decade following the crises, growth rates were significantly lower and unemployment rates were significantly higher. Housing prices took years to recover, and it took about seven years on average for households and companies to reduce their debts and restore their balance sheets. In general, the crises were preceded by decade-long expansions of credit and borrowing, and were followed by lengthy periods of retrenchment that lasted nearly as long.

“Large destabilizing events, such as those analyzed here, evidently produce changes in the performance of key macroeconomic indicators over the longer term, well after the upheaval of the crisis is over,” Ms. Reinhart wrote.

Ms. Reinhart added that officials may err in failing to recognize changed economic circumstances. “Misperceptions can be costly when made by fiscal authorities who overestimate revenue prospects and central bankers who attempt to restore employment to an unattainably high level,” she warned.

Several scholars here cautioned that it was premature to infer long-term economic woes for the United States from the aftermath of past crises.

The Reinharts’ research “has not yet tried to assess the extent to which different policy stances mitigated the length of the outcome,” said Susan M. Collins, an economist and the dean of the Gerald R. Ford School of Public Policy at the University of Michigan. “But the reality is that we need to have an understanding that the issues we are dealing with are severe, and that we should not expect them to be unwound in a few months.”

Ms. Collins added: “I’m very much a glass-half-full person. What we’ve seen in the past few years has been a policy success. Things are not where we want them to be, but they could have been a lot worse.”

The Reinharts’ paper was not the only one to offer somber implications for policy makers.

Two economists, James H. Stock of Harvard and Mark W. Watson of Princeton, presented a paper arguing that inflation, which has already fallen so much that some Fed officials fear the economy is at risk of deflation, a cycle of falling prices and wages, could fall even further by the middle of next year.

Inflation has been running well below the Fed’s unofficial target of about 1.5 percent to 2 percent. Ben S. Bernanke, the Fed chairman, reiterated on Friday that the central bank would “strongly resist deviations from price stability in the downward directions.”

Mr. Stock and Mr. Watson noted that recessions in the United States were associated with declines in inflation, with an exception being an increase in inflation in 2004, which occurred despite a “jobless recovery” from the 2001 recession. The authors said they could not explain the anomaly but also could not “offer a reason why it might happen again.”

Still I'm sure this time it will be different, we have the magic printing press helping out now.

Leverage is the route to easy wealth.

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The global recovery is fragile and policymakers in advanced economies might still have to provide further economic support, Bank of England Deputy Governor Charles Bean said on Saturday.

In a paper presented at the annual central banking conference organized by the Federal Reserve, which this year is focused on monetary policy lessons from the recent crisis, Bean said policymakers had succeeded in preventing a financial market collapse.

"Even so, the deleveraging process is incomplete, the recovery remains fragile and a considerable margin of spare capacity is yet to be worked off, while further policy action may yet be necessary to keep the recovery on track," he said, according to the text.

Bean's comments come as pessimism about the global outlook increases and talk of further stimulus measures creeps back on to the agenda at the BoE and other central banks.

Most analysts, however, expect the BoE will keep policy on hold well into next year.

The Fed at its August meeting said it would resume buying long-term Treasury securities to support the flagging recovery. Former Fed Vice Chairman Alan Blinder, commenting on Bean's paper at the conference, said he believes the U.S. central bank will take further action to ease financial conditions in coming months.

The rest of Bean's speech was devoted to examining whether there were fundamental flaws in the existing policy frameworks.

He gave evidence to support the idea that periods of economic stability might encourage exuberance in credit markets. But he argued it would be a mistake for policy-makers to try to induce fluctuations in the economy to prevent financial market participants becoming too confident about the outlook.

He also said monetary policy was probably too weak an instrument to moderate credit or asset booms without hurting activity too much.

"Instead, with an additional objective of managing credit growth and asset prices in order to avoid financial instability, one really wants another instrument that acts more directly on the source of the problem. That is what macro-prudential policy is all about," he said.

Bean also said buying securities is an effective instrument for a central bank to ease financial conditions in a crisis, but short-term interest rates should be the tool of choice in normal times.

"Asset purchases aimed at flattening the yield curve are probably best kept in the locker marked For Emergency Use Only," said the paper written by Bean and co-authors.

It also said raising inflation targets from the current norm of around 2 percent does not seem a productive way to pull economies out of slumps.

"There is a risk ... that even a modest increase in the target of a few percentage points could lead to a corresponding increase in inflation volatility and associated welfare losses," the authors wrote.

Mystic Merv won't be too happy he loves magical fantastical tool that is interest rates, there's nothing Mystic Merv can't do with his hand on the interest rate lever.

Bean it appears fails to grasp that lending over the past decade was not in an economic stable environment it was a credit boom fuelling the pseudo belief that the western economies where doing well.

Debt has been used to create the illusion of economic growth, the bubble has burst. In fact central bankers have been actively encouraging this growth. See Greenspan and George.

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How does anyone take this guy seriously?

A year ago, in my remarks to this conference, I reviewed the response of the global policy community to the financial crisis.1

Yeah, a financial crisis you created by willfully ignoring everything that was going on around you for the last two decades, including massive fraud in housing, massive collusive dealing in the financial system, off-balance sheet exposures that exceeded GDP in a number of firms you allegedly regulated and complex schemes intended to cover all of this up - facts that you were well-aware of.

Never mind the fact that the entire premise on which your thesis has rested has been the ever-expanding level of credit in the economy at a rate exceeding GDP growth. You're not alone in this of course; such a record extends back to the inception of the Fed Z1, but that doesn't change the fact that your theories and practice have been bereft of mathematical reality.

This list of concerns makes clear that a return to strong and stable economic growth will require appropriate and effective responses from economic policymakers across a wide spectrum, as well as from leaders in the private sector.

Let's see, as we going to find anything like "lock up the crooks and claw back their expensive toys in the Hamptons" among that list? Of course not. Nor will we see "contract leverage and systemic debt to a sustainable level". Yet both are required.

At best, though, fiscal impetus and the inventory cycle can drive recovery only temporarily. For a sustained expansion to take hold, growth in private final demand--notably, consumer spending and business fixed investment--must ultimately take the lead. On the whole, in the United States, that critical handoff appears to be under way.

No it isn't. The consumer hasn't de-levered and neither has anyone else. Not to a sufficient degree anyway. Oh sure, consumer credit has been contracting now for many months, and continues to - getting continually bent over the table with 29% interest rates will do that to you - if you don't go bankrupt first.

And don't start with that "increase in savings" bullcrap - you're well-aware, as am I, that the government defines "savings" as "income less consumption", which means that debt paydown or default is defined as "savings." Like hell - that which is saved has to remain yours once saved - if you pay off debt you've saved nothing.

Corporate "rebounds" have all been fueled by cost-of-labor decreases. To put it in terms everyone can understand, that's what happens when your boss gets in your face and says "work harder, get paid less, or get fired - pick!" Average Americans understand this, but you either don't or refuse to speak the truth about it.

Household finances and attitudes also bear heavily on the housing market, which has generally remained depressed. In particular, home sales dropped sharply following the recent expiration of the homebuyers' tax credit. Going forward, improved affordability--the result of lower house prices and record-low mortgage rates--should boost the demand for housing. However, the overhang of foreclosed-upon and vacant housing and the difficulties of many households in obtaining mortgage financing are likely to continue to weigh on the pace of residential investment for some time yet.

There is no such thing as "residential investment." Housing is a consumer durable good and is in fact consumed!

Never mind that governments add to that "consumption" with confiscatory tax systems on real estate. What's the real rate of return on a $500,000 house that has a $14,000 a year tax bill, as is the case in many of our major cities and their suburbs? If the house goes up in price at the rate of your claimed inflation (2%) then the entirety of the so-called "increase in value" is absorbed by the property tax bill and more, and we haven't begun to sock back a capital fund for things like a new water heater, roof and furnace - all of which are in fact consumed with time.

Consequently, investment in equipment and software will almost certainly increase more slowly over the remainder of this year, though it should continue to advance at a solid pace.

Intel doesn't think so.

In contrast, outside of a few areas such as drilling and mining, business investment in structures has continued to contract, although the rate of contraction appears to be slowing.

You don't get out much do you? There are more strip malls than we'll need for the next 20 years. Indeed, there is more commercial property in the general than we will need for the next 20 years. This was also fueled by fraud - particularly among your buddies in the banking system that put everything they could get their hands on into some sort of dodgy security like a CDO, then self-dealt themselves to riches, while leaving the rest of us to ruin.

Once again government is "helping" by making tax uncertainty the order of the day, which means that business is having and increasingly hard time figuring out what the liability side of the balance sheet will look like a couple of years hence. And that's a problem, because while everyone seems to lie about the assets, especially banks, liabilities are always good to the penny and have to be covered.

Bank-dependent smaller firms, by contrast, have faced significantly greater problems obtaining credit, according to surveys and anecdotes. The Federal Reserve, together with other regulators, has been engaged in significant efforts to improve the credit environment for small businesses.

Most small business loans have been in fact collateralized by the owner's home. That owner's home is now underwater, and the owner likely has blown the (falsely believed) equity expansion on Hummer, vacation condo (also seriously underwater) or boat. He therefore has no collateral to put up for a loan, and the bank is entirely correct in saying "No", given that 9 out of 10 businesses fail within the first five years.

There is no solution to this problem with "lending", other than "don't borrow." And that, in fact, is the right answer - run a business that doesn't require lending - that is, leverage - to be viable. This means that only productive enterprises get started, instead of ponzi-based things like building $400,000 craptastic McMansions at grossly-inflated prices.

Firms are reluctant to add permanent employees, citing slow growth of sales and elevated economic and regulatory uncertainty.

Why would I hire people into falling demand, a confiscatory government environment and the ever-present threat of your buddies at Humongous Bank Inc. shoving a stallion up my backside? I'll pass, and logical businessmen and women nationally are doing exactly that.

Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place. Monetary policy remains very accommodative, and financial conditions have become more supportive of growth, in part because a concerted effort by policymakers in Europe has reduced fears related to sovereign debts and the banking system there

You're smoking crack dude. 12% of GDP in deficits here and you call this "accommodative"? I call it "idiotic" and "that which can't go on forever won't." We're arguing when (it goes boom), not if.

Maintaining price stability is also a central concern of policy. Recently, inflation has declined to a level that is slightly below that which FOMC participants view as most conducive to a healthy economy in the long run.

Inflation should be zero. That way I can choose to save and invest without having your cronies try to force me into dodgy deals. But of course that's what you do on the FOMC, right - try to coerce people into getting involved in dodgy investments which are guaranteed to eventually blow up, as are all Ponzi Schemes. You managed to pull it off twice in ten years - congratulations. I hope you don't mind if the public decides to erect the middle finger in your direction, having learned by hard experience what listening to you will do their financial (and emotional!) stability.

In support of the stock view, the cessation of the Federal Reserve's purchases of agency securities at the end of the first quarter of this year seems to have had only negligible effects on longer-term rates and spreads.


Looks to me like when you quit jacking around with your nutty programs rates on the long end declined - that is, when you were jacking around rates were generally rising!

But I thought "Quantitative Easing" was supposed to suppress rates? At least this is what you sold to Congress and the American People. How "suppressed" were they Ben? NOT! Never mind that this is just government debt - how about credit cards? Were those rates "suppressed" by your little game? Oh I know, the little guy doesn't matter, right?

A first option for providing additional monetary accommodation, if necessary, is to expand the Federal Reserve's holdings of longer-term securities. As I noted earlier, the evidence suggests that the Fed's earlier program of purchases was effective in bringing down term premiums and lowering the costs of borrowing in a number of private credit markets.

It was? Well spreads, yes. But let me ask this: Were mortgage rates higher or lower while you performed "QE" than they are now? Oh, they were higher, right?

Oh sure, banks were able to issue debt into the market at very low rates. But why? Was it really "QE" or was it really the government backstop - some of it explicit - that was attached to that debt? Ditto for "Build America Bonds".

As for private credit, well, that's a different matter. Show me the reduction in actual interest rates while you were tampering with the market in places that mattered to average Americans. You can't - because in fact rates went the wrong way!

A lot of that had to do with what I argue was your intended purpose behind "QE" - to provide a "risk-free" arb opportunity for certain "special people", while the rest of America twisted in the wind. Funny how the banks all seemed to know which coupons you would buy in advance, and how certain asset managers had the prescience to know what you buy before you came in and lifted every offer, all the way up. Nice for them, but of absolutely no benefit to the average American.

However, uncertainty about the quantitative effect of securities purchases increases the difficulty of calibrating and communicating policy responses.

How about the truth: The effect was exactly the opposite of what you claimed it would be!

Another concern associated with additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed's ability to execute a smooth exit from its accommodative policies at the appropriate time. Even if unjustified, such a reduction in confidence might lead to an undesired increase in inflation expectations.

A: It's not unjustified.

B: You know damn well this Ponzi can't go on forever, and proof of that is found in your refusal to identify the conditions under which you will exit - and how.

A second policy option for the FOMC would be to ease financial conditions through its communication, for example, by modifying its post-meeting statement.

Lying has worked so well up until now in producing lasting prosperity. You should do more of it.

A third option for further monetary policy easing is to lower the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System.

Right - 25 basis points is so much that it's a huge incentive. "I have a squirt gun and I'm not afraid to get you wet!" Pull the other one Bernanke.

A rather different type of policy option, which has been proposed by a number of economists, would have the Committee increase its medium-term inflation goals above levels consistent with price stability. I see no support for this option on the FOMC.

That's probably because pitchforks and torches are a universal language, and nobody on the FOMC (except perhaps you) is really all that interested in finding out if there really is a breaking point in American Society beyond which The Wizard of Oz is revealed to be a tiny little man with an even-smaller johnson that has been jacking the town around for years, at which point the citizens of Oz simply decide to eat him.

Oh wait - they were "more civilized" in the novel. Yeah, well, that was a children's story. This is the real world, and the people do have a limit of tolerance for abuse. When they're unable to find redress through the law and are homeless, jobless and starving, they have nothing left to lose. That's not something I or anyone else who's sane wants to see.

First, the FOMC will strongly resist deviations from price stability in the downward direction. Falling into deflation is not a significant risk for the United States at this time, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation.

Deflation on a moderate scale is only bad if you're in debt. Never mind that we've got it and have had it for more than 20 years in certain areas. Who among the citizens is upset with deflation in technology, for instance?

Anyone remember the price of a color television 30 years ago? How about a computer in 1981? A calculator? A cell phone - oh wait, there was no such thing. All of these things and more have undergone massive and continual deflation since their introduction. We love it as consumers, because, well, we consume these things. When our computer wears out we buy a new one that is both faster and cheaper. Same with our cellphone. Same with our color TV.

Exactly how is this bad? It's not - unless you went massively into debt to buy the thing, at which point you got serious problems, as the debt has to be paid off for a product that is worth a tiny fraction of what you paid for it!

Finally, we need to distinguish between genuine deflation and attempted support of a price level that was achieved by fraudulent economic and monetary policy - that is, it was through fraudulent inducement that the original INFLATION of those prices occurred.

Deflation through greater productivity per unit of labor cost is a good, not bad thing. It means you can buy more capability with less work. This is a net societal positive.

The latter is an adjustment that is necessary to restore balance. The question there is not whether we should have "deflation", it is whether those who caused the inflation of the price level through these fraudulent manipulations in the market should be held to account for their activity and imprisoned while the economy is allowed to contract back to a sustainable level of price on a macro basis, such that playing ponzi finance is no longer necessary to do basic economic things like buy a home or automobile.

My answer to that question is "yes", but I'm just one of 330 million.

Dennigers rant at Bernanke.

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  • 415 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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