Comments for "Fed's Yellen: A Minsky Meltdown: Lessons for Central Bankers"


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Bwahahahahahahahahahahahahahahahahahahahaahahahahahaha!

What a load of self serving horse shite!

The Federal Reserve CAUSED the friggin' bubble.

Nostrovia,


.............GM Said to Plan All-Equity Offer for Bondholders ...........

.http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a8kWBTRWRzxo


The intro for tonights Automatic Earth entry makes "green shoots" look like stapled down astro turf: Must read:
http://theautomaticearth.blogspot.com/2009/04/april-16-2009-1-fake-feel-...


Capping the top looks just as bad as digging the holes at the bottom.


One could argue that the housing bubble happened because interest rates were too low, for too long.


It would make sense for monetary policy makers to intervene only if the fallout were likely to be quite severe and difficult to deal with after the fact.

My usual rant follows.

I think the larger problem lies in the recent assumptions amongst policy makers that they have both the authority and the ability to deal with certain societal events. It irks me no end that the first two questions of governance are no longer being asked at any level; 1. Are we empowered? and 2. Should we act? Somehow these days we just skip to; 3. What should we do? And nearly as bad; 3a. Are the consequences justified by the results?


Art.........

Good read on Elizabeth Warren in the last thread. She's an exceptional woman.

- - - - -

Black Star Ranch


Let me help Yellen here;
get advice outside the FED room and FED banks. Get input from Shiller, Roubini, et all. Look at historical prices for various assets. Finally, why not just admit you have no idea what you all are doing, abolish the FED and let the market work it out alone (from Mish). I think you will see limited bubbles.


"I think the larger problem lies in the recent assumptions amongst policy makers that they have both the authority and the ability to deal with certain societal events."

Exactamente. +10

- - - - -

Black Star Ranch


I guess they don't cover the whole barn door, closure, horse and timing thing when you get an advanced degree in economics.


bgates wrote on Thu, 04/16/2009 - 5:54pm.
I guess they don't cover the whole barn door, closure, horse and timing thing when you get an advanced degree in economics.

Generals fight the last war. Economists fight the last depression.


She forgot to include Beanie Babies in her bubble bursting case study candidate list.


Oh man! TALF 3.0 for CRE bailout!?? Will it ever (can it??) END
http://zerohedge.blogspot.com/2009/04/will-talf-30-be-enough-for-cre-laz...

I once thought there was a "practical" limit to the money the US government could spend. Judging by the bond market and Chinese bond buying reaction to our latest escapades, I now amend that to "practical limit" versus "theoretical limit" and it seems in theory no amount of money is too much! What a position to be in.


This isnt that complicated, geez. If you think you detect a bubble, might be a good idea to ask yourself what is fueling it? It's not like just low interest rates are themselves enough. A trained monkey could have figured this out if they wanted to look. The problem is when you have people in place that DO NOT WANT TO SEE what is in front of their face. Cart before the horse folks...aiya!

HAL : I'm afraid. I'm afraid, Dave. Dave, my mind is going. (CHONG : Dave's not here.)


So the Fed's solution to the asset bubble is...

...making the debt growing larger?

Hm...


Yeh, lookin pretty obvious that the Fed is a big part of the problem. And sadly, its solution is to recreate the bubble causes.

Wahh, I want my mommy....

HAL : I'm afraid. I'm afraid, Dave. Dave, my mind is going. (CHONG : Dave's not here.)


... with the financial world in turmoil, Minsky's work has become required reading. It is getting the recognition it richly deserves. The dramatic events of the past year and a half are a classic case of the kind of systemic breakdown that he-and relatively few others-envisioned.

-----------------

I remember reading about this on CR a couple years ago .....


bearly writes
She forgot to include Beanie Babies in her bubble bursting case study candidate list.

How about 50 dollar an ounce silver? Havent seen a mouth that big since my last large mouth *ASS had a hook in it.

-tin snow


Theme music here. Pay close attention to one of the "generals." [Branson]


I enjoy the debate over banking regulations. Just like the ones I enjoyed in 1933.


Yellin isn't jellin.....

episodes of exuberance

they STILL can't bring themselves to call fraud and greed and arrogance by their names.

she ends up saying that increased regulatory action may be the right answer, but doesn't say WHY the Fed ignored their regulatory duties over member banks, permitting ridiculous leverage ratios, collaterilization without supervision, insurance (CDSs) without reserves or organized markets, etc.

Worst of all, she says identifying bubbles is difficult, but doesn't mention that housing price increases were so far off the scale or normal (historical) appreciation that no rational person could expect that would continue forever.

Federal Reserve: FAIL

Time for a new regulator of huge banks.


Bubbles are not easy to detect because estimates of the underlying fundamentals are imprecise. ...

No. No. No.

Why is it that people of power and position find it so hard to admit their limits?


Yup, raisnign margin requirements in 87 or 98 would have done wonders to defuse the tech bubble. Requiring banks to actually underwrite mortgage loans and not letting IB's leverage out the wazoo would have done much to cool off the housing bubble. Using conventional monetary policy is far to blunt an insturment, although clearly it would have helped a bit if Al had started to raise raes sooner.


Regulation is such a red herring. You leave tremendous power in the hands of private forces that are opposed to the regulation and do everything in they can to undermine them. Who will stand in their way? Regulatory capture must be accounted for. The only way to proceed is to decentralize power. It is also the hardest way, but damn the doomers it is not impossible.


What additional supervisory power or ability was necessary but unavailable to the authorities to stop the madness?

I don't recall Yellen making any speeches in which the lack of the Fed's or the OCC's powers or resources were being lamented. And, yeah, I've been alert to all of these wordy meanderings in the past 10 years.

All that the supervisory (read: political) power already given to them did was to create a sham that allowed some powerful and visible people to crow about rising home-ownership and insist that FNM and FRE were safe.

We all make mistakes. Yellen is no different.

But, having made the mistake, it makes no sense to say, "If only we had more regulation."

Rather, it makes sense to say, "The Fed failed. It was our job to ensure price stability and economic growth. And, you know what? We ignored the evidence under our noses and allowed 2 to 5 years of serious excess to develop. Not once, but twice. Twice in one decade. We're worthless. We truly are. We should be shot and our kidneys and eyeballs donated to ailing zoo monkeys, who, sight-unseen, would appear to have a higher claim on these primate tissues than we do."

But, no.

Instead, we have this wistfulness about more and better regulation.

We don't need regulation. We need shame. In high places. And, there isn't any.


The only way to proceed is to decentralize power. I
---
Is that the power of banks or the power of regulators or both? Seems we did okay with decentralized banks and relatively centralized regulators.


A naif in a position of high responsibility dancing around some solid truths and never quite seeing them. We're in for a long one.


I was speaking about the power of private power specifically, but any power given to regulators should be limited and subject to recall.


sorry meant private individuals


Again half the story ...

The housing bubble was small, what happened is that it burst the underlying

$50 trillion bubble that has been building since the time of Reagan.

~~~~~

Summer 2009: Crash of International Currency System CONFIRMED

Thus, in this GEAB N°34, our researchers develop more their anticipations on the possible forms that the American suspension of payment will take by the end of the summer 2009, and from April 2009 (principal month of collection of the tax incomes in the United States) will be impossible to mask (10). The suspension of payment by the United States in the summer 2009 is indeed a topicality increasingly more extreme from now on with the public deficit completely out of control on the back of explosion of the expenditure (+ 41%) and of collapse of the revenues from taxes (- 28%), like LEAP/E2020 anticipated more than one year ago: for only March 2009, the federal deficit was assembled to nearly 200 Billion USD (much above the most pessimistic forecast), that is to say not under half of the deficit recorded for the whole of the year 2008 (11). And the same phenomenon is repeated on all the levels of the public structure of the country: federal state, federate states (12), counties, cities (13) … everywhere the revenues from taxes disappear involving in an accelerated way the worldwide in an overdrawn spiral that nobody (Washington in first chief) controls any more.


That should have set off the alarm bells for regulators.

It didn't.

And that's the whole problem with arguing for more regulatory solutions.

The regulators totally failed to do their job so there's no reason to think they will do it properly in the future.


OMG,

I have no idea what hard money is. Oh yeah, levereaged end of civilization shorts, issued by ProShares.

Save yourselves.


Short term interest rates are not the appropriate tool to combat asset price bubbles. In the case of the recent sub-prime bubble, some of the stupidest loans occurred after the Federal Reserve raised interest rates. While low short term rates contributed to the housing bubble (in the sense that it supported income growth in the economy as a whole), it is long term rates that was a bigger factor. Part of the reason was the build up of reserves in Asia. Another contributor was the Clinton decision to finance the Federal deficit as if the dot-com bubble revenues were a structural change to the Federal deficit instead of a cyclic change. This lead to a shortage of longer term Treasuries which depressed long term rate even more. Alan Greenspan noted that long term rates were not rising as the Federal Reserve raised short-term rates -- the conundrum. But no one made any attempt to correct long term rates, until the market did it for them.


If the fed won't allow another bubble, how will Obama get re-elected?


$50 trillion bubble that has been building since the time of Reagan.

Really since the LBJ.


Ac,

I'll see your LBJ and raise you FDR. I can go all the way back to Washington if I have to.


"I once thought there was a "practical" limit to the money the US government could spend. Judging by the bond market and Chinese bond buying reaction to our latest escapades, I now amend that to "practical limit" versus "theoretical limit" and it seems in theory no amount of money is too much! What a position to be in."

I think this is a very important point. So long as the Chinese are willing to pour money into fixing the US balance sheet, we will be able to stave off the worst of what could be. Question is: what are we going to owe them when this is all said and done?


"Bubbles are not easy to detect because estimates of the underlying fundamentals are imprecise.."

But NOW we can have faith in your forcasts?!

contrary indicator: The IMF says things are going to get worse for longer than thought. I might just go super long tonight on that one!


Bubbles are not easy to detect because estimates of the underlying fundamentals are imprecise

Right. The Case-Schiller graphs showing the GINORMOUS increase of house price (for the same house) to income AND the charts showing the same GINORMOUS increases inthe ratio of house price to rent - wow, those were really hard to read!

There never was a bubble where the fundamentals were better known or the bubble was easier to see.


This month's New Left Review, Arrighi - "when competition intensifies, investment in the material economy becomes increasingly risky, and therefore the liquidity preference of accumulators is accentuated, which, inturn creates the supply conditions of the financial expansion." Realities of the 50s-70s are irrelevant now. Heraclitus and the river.


AZN, I disagree...we DO need the regulations that brought us 50 years of comfort and growth put back in place.

BUT - we also need a nationwide change of attitude towards white-collar crime. J6P needs to stop getting his undies in a wad of the possibility that a black kid might break into his car and steal his radio and start caring about the real estate fraud that will cost him $100k. As long as we, as a nation, spend more angst on street crime than we do on white-collar crime this fraud will continue unabated. Our jail cells are full of street criminals while the thieves that have defrauded taxpayers out of trillions of dollars are still sitting at their desks, collecting bonuses.

Stop arresting the kid selling weed in the park and start arresting the bastards engaging in fraud.


Ac,

I'll see your LBJ and raise you FDR. I can go all the way back to Washington if I have to.

Well, I say LBJ because that's when we started spending more than we make as a country. At least for a while after WWII we actually paid for the stuff we bought.


There are only two acceptable dates:
February 3, 1913 and December 23, 1913.


.....hmmmmm......I guess even a non - paranoid person could be alarmed when a caravan of unknown people show up at Black Star Ranch in Louisiana looking for me, huh? Maybe I should use the "idiot" term less often when describing certain A-types, huh?

- - - - -

Black Star Ranch


If the fed won't allow another bubble, how will Obama get re-elected?

Anonymoose's (member)

worry not young anon, There never was a bubble


....it's much easier to initiate more laws than enforce the ones on the books. Enforcement has always been the most expensive and least desirable end-response. The hope is the "bad guys" will observe the law as the "good guys" do. Just more pie-in-sky-spread-fairy-dust-for-solutions.....

- - - - -

Black Star Ranch


Perhaps, but I wonder how great life was in 1912. I read that the average person from about 70 years ago or so would be considered mentally handicapped by today's standards.


AZN, I disagree...we DO need the regulations that brought us 50 years of comfort and growth put back in place.

Well the counterargument to that is the pre-WWI era which saw our greatest growth in per capita income was relatively unregulated and pre-dated the federal reserve and the more centralized regulation mechanisms we now have.

Where or not there's a cause and effect relationship, you can't say that you can't have prosperity without a lot of regulation.


Bubbles are not easy to detect because estimates of the underlying fundamentals are imprecise.

Sadly Ms. Yellen is among the best of the bunch and in a functional society this claim would immediately be followed by ritual career Seppuku.


How convenient of the Fed to blame this all on the regulators. Who is regulating the regulators?!?! In a hierarchical environment, if the upper managers see that the lower managers are screwing around & not doing their jobs, the lower managers are supposed to get "fix this or get packing" messages, lest the whole thing blow up and the upper managers get in trouble. Apparently, the new paradigm is to blame it all on the lower managers, and the upper managers don't have to be accountable to the subordinates.

Sadly, this sounds like my employer's situation.


49 and 50'ish/

gonna be a hard few years... blame your children.


She talks about the housing bubble and bond bubbles as if they are the same ilk.

But housing prices are down 35-60%. And long-term govt. bond prices are...still up??

Oh, I forgot. Fed quantitative easing.


"Why is it that people of power and position find it so hard to admit their limits?"

Rhetorical question, no? How do you achieve power and position, by admitting your limitations?

Pavel Chichikov


Except for some medieval popes, who had to be dragged screaming out of their monasteries.

Pavel Chichikov


pavel.chichikov (member) wrote on Thu, 04/16/2009 - 6:45pm.
"Why is it that people of power and position find it so hard to admit their limits?"
Rhetorical question, no? How do you achieve power and position, by admitting your limitations?

Okay, point taken. Why do we allow people so psychotic that they don't recognize absolute limits to occupy positions of power?


How convenient of the Fed to blame this all on the regulators. Who is regulating the regulators?!?!

I think the real question is do financial regulators have sufficient incentives to regulate properly? Here's my idea about the problems with financial regulation I posted as a response to a comment elsewhere:

------------------------------------

"The banking system should be regulated to the same extent as the nuclear industry, since it's become rather obvious that interconnected, global banking system = economic neutron bomb."

There's a big problem with this kind of thinking:

With the nuclear industry there's not a lot of incentive as a regulator to do your job poorly. If you screw up you have a nuclear disaster that's likely to affect you and everyone you know.

Finance is very different:

If you screw up as a regulator you and all your Wall Street buddies are likely to get very rich. The negative effects will tend to be concentrated on Main Street but for you and your banking buddies it's party time.

How many people got Ferrari's in the Hamptons from Chernobyl?

How many from this disaster?

It's just not appropriate to compare regulation in these two contexts.

One is vastly more prone to corruption. In fact a person more cynical than I might go as far as suspecting corruption to be the status quo in financial regulation - there's just too much of a payoff for it.


"I read that the average person from about 70 years ago or so would be considered mentally handicapped by today's standards."

Well, some of us haven't changed, and I HAVE been considered a mental cripple by a few.

I still think these are exciting times. It will bring families together - it will make them work out their differences. It will finally teach and display truths and weaknesses thru forced interventions. I like the idea of it as long as the Mad Cow doesn't get me first.

- - - - -

Black Star Ranch


had a little email chat with Martin Wolf about this the other day. He is on the same team...just sees it as a bubble, not corruption. Only "elements" of corruption. And therein lies the problem...no one wants to see how widespread and elegant the corruption is in this country. As Martin had said in his article, Russia's corruption is overt and egregious. Ours is clearly more egregious, just more cleverly covert and backed by the power structure, who still hold them in high regard, instead of hunting them down like the nicely dressed thugs they are.

HAL : I'm afraid. I'm afraid, Dave. Dave, my mind is going. (CHONG : Dave's not here.)


I haven't read the whole piece, but it seems like if you're going to write about Minsky then you'd focus on the idea of the "Minsky Moment" -- especially given it's right-now relevance. Instead, we get all this rear-view hand-wringing.

-----

"Hope for the best, prepare for the worst"


Meanwhile, the K-wave is studiuosly ignored.
The denial is amazing.

Now we can focus on discussing "asset bubbles" in isolation with no worry about the fabric that makes them not only possible, but inevitable.


Greenspan lit the fire on the recent housing bubble.

Once a bubble is ignited it can't be stopped without crushing the main street economy with punitive monetary policy.

Greeny should never have forced the rates down so low. But in the wake of the 2000 stock market decline he/they were afraid of a financial panic after the terrorist attacks on 9/11/01. So they cut the Fed Funds Target Rate from 3.25% down to 1%. That excessive easing is what lit the credit bubble. All the stupid easy lending derives from that excessive fed easing, and the greedy rush to exploit it.


Can Optimism Alone Spur Recovery?

To view our impartial assessment, please visit:

www.TheValueatRisk.blogspot.com


CR says "I agree with Yellen's emphasis on regulation and oversight. I think it was easy to identify the surge in credit (especially home borrowing) and that lending standards had become very lax. That should have set off the alarm bells for regulators."

Yes but what is current status today ?
If the IMF's staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform.

The Quiet Coup
http://bit.ly/9QobY

People talk about it .....BIG f**cking hindsight is 20/20.... but BUT ONE starting with Obama and US Congress are doing nothing to correct the The Triumph of the Banking Oligarchs !!!!!!!


snick,

On average they were far more numerate than the 'advanced' models we turn out now...I will never forget asking a young waitress once for the time (standard clock on edge view to me)...her reply, "Oh, I'm a digital girl."


i.e. but BUT NO ONE


Black Star Ranch (member) wrote on Thu, 04/16/2009 - 6:36pm.
.....hmmmmm......I guess even a non - paranoid person could be alarmed when a caravan of unknown people show up at Black Star Ranch in Louisiana looking for me, huh? Maybe I should use the "idiot" term less often when describing certain A-types, huh?

That's a minor problem. You should be more concerned that the DHS has now decided you are potentially a domestic terrorist if you hold certain political/social views. Quoting from the article, "In the report, right-wing extremism was defined as hate-motivated groups and movements, such as hatred of certain religions, racial or ethnic groups. "It may include groups and individuals that are dedicated to a single issue, such as opposition to abortion or immigration," the report said."

Alas, don't fret, they are equal opportunity at the DHS: "The department's definition of left-wing extremism in the March 26 report includes a reference to violence, stating these groups that embrace anticapitalist, communist or socialist beliefs seek "to bring about change through violent revolution rather than through established political processes.""

Soon, we will all be enemies of the state...


ac,

On the topic of corruption of the regulation of finance, I can tell you from first hand experience that the regulators are "captured" by the regulated. The effectiveness of regulation is significantly "corrupted" by this. Not by graft-like corruption, but by weak, overly sympathetic regulation. The people on the front lines of regulation are often inexperienced and looking to find better paying jobs in the industries they regulate. Wouldn't pay to make enemies with potential future employers. And it certainly wouldn't pay to piss off the industry buddies of your boss in the department. This same problem applies to the rating agencies as well.

This is not conjecture on my part. I have been "at the table" and experienced it myself as a financial industry CEO.


I read that speech and I feel I'm seeing some bureaucrat trying to cover her butt.

Yellen: "Fed monetary policy may also have contributed to the U.S. credit boom and the associated house price bubble by maintaining a highly accommodative stance from 2002 to 2004."

It seems to me, Yellen kind of misses the forest for the trees here. The credit boom began thirty years ago, a look at the data in the Flow of Funds makes it pretty obvious. The growth in debt to GDP, whether household or total U.S. debt, began in the late 1970s. The growth of the last few years may have been accelerated, but it is one long trend.

Yellen: "Should central banks attempt to deflate asset price bubbles before they get big enough to cause big problems? Until recently, most central bankers would have said no."

That's simply not true. It may be true for most American central bankers, but both the BoE and ECB were saying asset prices needed to be taken into account back in 2005. They may have failed at it, but the idea that asset bubbles should be ignored on the way up, but placated on the way down was an American (Greenspan) invention.

Every day I'm losing more faith in the system to correct itself.


Maybe she just wasn't in to you anony! j/k


Yes. The implied thrust of the article is that all is contained now
Right.


The mere existence of the phrases "Greenspan put" and "irrational exuberance" implies that Yellen is lying. Unfortunately, she's the best we've got now. How sad is that?

--
The Zombie Apocalypse begins when U3 hits 15%


Well, I say LBJ because that's when we started spending more than we make as a country. At least for a while after WWII we actually paid for the stuff we bought.
----
I like blaming Washington too. This may be exaggerating but hasn't the US been a debtor nation more often than not? We were in debt before we even became a country, and a huge chunk of the people that settled here were just fleeing personal debts in England.


FED governors are determined to influence asset prices, but deny that credit influences them.

It's a strange disassociation from cause and effect.

Almost child-like, really.


Bubbles and crashes are manias. Once started they are nearly impossible to stop. You almost have to just let the fire burn out. There is never the political will to apply the effective cure until long after it would do any good.

But our regulators and congress are worse than that. The actually make things worse by over-reacting, with a lag, and by using tools that need long lead times to have any meaningful impact. So the cures they apply hit the economy with such a long lag that most of the activity is counterproductive - adding to the next cycle extreme. Like a drunk oversteering to stay on the road - turn hard left, no, hard right...

But, I love them for it because they are so predictable in their incompetence. I have made my fortune betting on the continuation of this dynamic.


How many people have gotten out of the market over the last year? I'm not talking about people here on CR... talking about everyone everywhere.


A prudent regulation, and one unlikely to cause much damage to the real economy through a wrong guess, would be a limit on leverage. If regulated financial institutions can't originate, or buy loans or securities originated, with less than (say) 20% equity, the borrower will have some skin in the game and be much less likely to buy on pure speculation of an upside. Same thing for financial institutions: if you're operating at 97% leverage, as most of Wall Street was, then the upside is almost unlimited for the executives and their bonuses, but a 5% drop in asset values wipes the shareholders out. Part of the leverage inquiry should include a matching of asset and liability duration: the residential borrower who somehow scrapes together a large down payment but lacks the salary and savings to cover debt service shouldn't get the loan; and the investment bank with 24% of the commercial paper funding its operations consisting of overnight repos (like Lehman at the end) should have a very large amount of cash sitting there in case the plug is pulled.


On the topic of corruption of the regulation of finance, I can tell you from first hand experience that the regulators are "captured" by the regulated. The effectiveness of regulation is significantly "corrupted" by this. Not by graft-like corruption, but by weak, overly sympathetic regulation. The people on the front lines of regulation are often inexperienced and looking to find better paying jobs in the industries they regulate. Wouldn't pay to make enemies with potential future employers. And it certainly wouldn't pay to piss off the industry buddies of your boss in the department. This same problem applies to the rating agencies as well.

This is not conjecture on my part. I have been "at the table" and experienced it myself as a financial industry CEO.

Yup. The problem goes back to Roman times... "Quis custodiet ipsos custodes?" [Who will watch the watchmen?].

The only workable solution other than just let it happen and try to save yourself is to maintain a rigorous & aggressive anti-trust department and bust them up BEFORE they have so much power to easily capture the regulators & 'buy' influence in congress. Plus it keeps them under the TBTF trip wire.

Once they are small then you have a chance at letting the 'markets work'... I'd argue oligopolies are indistinguishable from state owned & run socialism.

Also - if you want small gov't... then you better make damned sure you have aggressive anti-trust else the trusts 'become' the gov't. Big gov't and big business have been in an organizational 'arms race' ever since the WWII and the Manhattan Project.


"The people on the front lines of regulation are often inexperienced and looking to find better paying jobs in the industries they regulate."

.........incompetence in all forms. Many old guys are laughing in retirement saying, "Just wait 'till the wheels fail off"......

- - - - -

Black Star Ranch


I always thought so anyway.
_____________________
(http://krugman.blogs.nytimes.com/2009/04/16/reconsidering-a-miracle/)

April 16, 2009, 4:28 PM

Reconsidering a miracle

In preparation for some recent teaching, I went back to something that was a hot topic not long ago, and will be again if and when the crisis ends: the apparent lag of European productivity since 1995. One recent, seemingly authoritative study is van Ark et al; and I noticed something that gave me pause.

In their paper, van Ark etc. identify the service sector as the main source of America's pullaway - which is the standard argument. Within services, roughly half they attribute to distribution - roughly speaking, the Wal-Mart effect. OK.

But the other half is a surge in US productivity in financial and business services, not matched in Europe. And all I can say is, whoa!

First of all, how do we even measure output of financial services? If I read this BEA paper correctly, we more or less use "checks cashed" - or, more broadly, the number of transactions undertaken. This may be the best we can do, but it's a pretty weak measure of actual work done by the financial system.

And given recent events, are we even sure that the expansion of the financial system was doing anything productive at all?

In short, how much of the apparent US productivity miracle, a miracle not shared by Europe, was a statistical illusion created by our bloated finance industry?

Dean Baker has argued for some time that, properly measured, the productivity gap between America and Europe never happened. I'm becoming more sympathetic to his point of view.

Evil


I think this might have been posted here a couple of days ago. If not it made an appearance several other places across the econoblogosphere. It's long, but well worth the read.

The implications are enormous, because it means that we can be held responsible for money that someone else is creating ("too big to fail"). It gave me a queasy feeling. Not only is this not Kansas, it ain't even the US anymore

http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit...

..."In some ways these conclusions are unremarkable: banks make money by extending debt, and the more they create, the more they are likely to earn.\ But this is a revolutionary conclusion when compared to standard thinking about banks and debt, because the money multiplier model implies that, whatever banks might want to do, they are constrained from so doing by a money creation process that they do not control.

"However, in the real world, they do control the creation of credit. Given their proclivity to lend as much as is possible, the only real constraint on bank lending is the public's willingness to go into debt."\


OT. but I am stunned by the torture memos released today (thank you, ACLU). Systemic corruption in the financial and political realm has been documented here too often, but what has been done in our name truly sickens me. For the record, if you read the memos, this is not "interrogation", this is torture. Flat out. Insects???
Obama has said he will not pursue justice, or the law, but wants to "move on"?
Without responsibility, we do not have a civil society....is there no law, no moral or ethical breach that cannot now just be shrugged off?


Use REGULATORY policy to attack asset bubbles. Monetary policy is too crude.


Don't they feel any guilt or shame when they talk about avoiding asset bubbles and bursts?


I am surprised that Krugman is surprised.
_________________________________

In their paper, van Ark etc. identify the service sector as the main source of America's pullaway - which is the standard argument. Within services, roughly half they attribute to distribution - roughly speaking, the Wal-Mart effect. OK.
But the other half is a surge in US productivity in financial and business services, not matched in Europe. And all I can say is, whoa!

Evil


Sociopaths do not have guilt.

//Don't they feel any guilt or shame when they talk about avoiding asset bubbles and bursts?//

Evil


"How many people have gotten out of the market over the last year? I'm not talking about people here on CR... talking about everyone everywhere."

My pre-boomer parents were bemoaning the state of thier 401Ks today and expressed the assumption that we would be back to 2006 levels shortly, (assuming that we have bottomed). I of course chastised them for being 100% equity, when they should have been 50% tops and let them know that this market was going sideways for ~10 years as the smarter boomers reduce market exposure for something that has less downside and some level of return, again, (assuming that we have bottomed).

They were not thrilled.

So, to my knowledge, there are a sizable number of, buy and hold, wishful thinkers out there.


Doctor Doom
The 'Stress Tests' Are Really 'Fudge Tests'
Nouriel Roubini, 04.16.09, 12:01 AM EDT

The fog of opacity grows greater still.

The spin machine about the banks' stress test is already in full motion. Some banking regulators have already served up--to The New York Times--their spin that all 19 banks that are subject to the stress test will pass it. In other words, not one will fail.

But let's look at the actual data. The macro data for the first quarter on the three variables used in the stress tests--growth rate, unemployment rate and home-price depreciation--are already worse than those in the U.S. government baseline scenario for 2009. They are, in fact, even worse than those for the stressed scenario for 2009.

The government used assumptions for the macro variables in 2009 and 2010 that are so optimistic that the actual data for 2009 are already worse than the adverse scenario. As for some crucial variables, such as the unemployment rate--key to proper estimates of default and recovery rates for residential mortgages, commercial mortgages, credit cards, auto loans, student loans and other banks loans--the current trend shows that by the end of 2009 the unemployment rate will be higher than the average unemployment rate assumed in the more adverse scenario for 2010, not for 2009. Put plainly, the results of the stress test--even before they are published--are not worth the paper on which they are written.

Evil


I think the Fed needs to be nationalized and all upper managment fired for incompetence.


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"The Zombie Apocalypse begins when U3 hits 15%"

I think we start seeing some kind of riots at 10%. 15% and yeah, there will some hell to pay.


How many Obama cheerleaders are left now that he has made the turn and elected to sell out the nation to save a few bankers. He's destroying what remained of this country that Bush failed to destroy.

I'll take Paulson any day over the Traitor and tax cheat Geithner. Obama is a naive fool to listen to Geithner, Bernake and Summers, the architects of the looting.


dryfly says:

"if you want small gov't... then you better make damned sure you have aggressive anti-trust else the trusts 'become' the gov't. Big gov't and big business have been in an organizational 'arms race' ever since the WWII and the Manhattan Project."

You have encapsulated an entire future political movement in two sentences.

Nice work, dry.


fried (member) wrote on Thu, 04/16/2009 - 7:29pm.
OT. but I am stunned by the torture memos released today (thank you, ACLU). Systemic corruption in the financial and political realm has been documented here too often, but what has been done in our name truly sickens me. For the record, if you read the memos, this is not "interrogation", this is torture. Flat out. Insects???
Obama has said he will not pursue justice, or the law, but wants to "move on"?
Without responsibility, we do not have a civil society....is there no law, no moral or ethical breach that cannot now just be shrugged off?

Oh Fred! The horror! A group of scumballs that wanted to kill you by flying passenger planes into buildings were subjected to girlscout levels of torture! Oh the horror!


re: US torture.
You won't see this on US cable TV: Al-Jazeera's interview with Richard Armitage
http://tinyurl.com/cjh88l


.....hmmmmm......I guess even a non - paranoid person could be alarmed when a caravan of unknown people show up at Black Star Ranch in Louisiana looking for me, huh? Maybe I should use the "idiot" term less often when describing certain A-types, huh?

But "idiot" describes them so well. I could find you in about eight hours if I needed to, just from what you've written in the last month. I'd just go to your area (I'd get the right state) and ask for the guy that owns Milkshake.

Errr, and from other things you've written before,...I'd be very, very polite.


Jim3,

Great link! Love this part, which echo's something I've been saying here for quite some time:

The only way that Bernanke's "printing press example" would work to cause inflation in our current debt-laden would be if simply Zimbabwean levels of money were printed-so that fiat money could substantially repay outstanding debt and effectively supplant credit-based money.

-----

"Hope for the best, prepare for the worst"


Torture? Sounds like pussy football! Obama closing Gitmo make one obvious statement. Next time the terrorist disappear and get real torture then eliminated. Their fate has been set by this action.


"Oh Fred! The horror! A group of scumballs that wanted to kill you by flying passenger planes into buildings were subjected to girlscout levels of torture! Oh the horror!"

I would hope, that no matter the justification that we as a nation would not devolve to such quiestionable means of interrogation. It is not a very American or Cristian thing to do. Particularly to a group of people who's guilt has yet to be determined.

So, in the event of say a nuclear detonation in a major US city... well ok, I might be fine with that. But anything less an we lower ourselves to the level of those we oppose. So, your sentiment disturbs me.


Re finding Black Star Ranch sdtfs says: "I could find you in about eight hours if I needed to, just from what you've written in the last month. I'd just go to your area (I'd get the right state) and ask for the guy that owns Milkshake."

That is the hard way. I found Black Star Ranch in less than a minute by using Google...

1361 Bayou Blue Road...

Nice place!


I suppose we have to cheer signs of progress in our leaders. But it does seem too little, too late, and a little CYA self-serving. Someone in Yellen's shoes should be helping us understand what's going on. Instead she seems to be barely able to comprehend what's obvious to us, even though we have much to figure out yet. I hope she accelerates her learning.

Either that, or she (and others in her position) are truly clever and devious. I actually think it's about 40% dumbness and 60% deviousness. There is a reason most professional financiers and regulators either supported the bubble or didn't stand in its way. It wasn't because they were all evil. They knew that acting forcefully on any doubts was probably the end of their careers; suspending doubt was certain to produce continued personal career success. As others have pointed out before, "It is difficult to get a man to understand something when his salary depends upon his not understanding it."


Never met that bitch, Yellen.


first (second after the one from some other member which suggested bad banks have to be put to rest) sensible comment from the Fed that I have seen in long time!!

"Should central banks attempt to deflate asset price bubbles before they get big enough to cause big problems?"

Anyone with common sense will say yes to this! If you answer with a "no" then your answer should be a "no" to any intervention after the event.

Else you allow bandits to game the system and walk away with the loot!!

However, other observers argue that monetary authorities must consider responding directly to an asset price bubble when one is detected. This is because-as we are witnessing-bursting bubbles can seriously harm economic performance, and monetary policy is hard-pressed to respond effectively after the fact. ...

replace "is hard-pressed to respond effectively after the fact" with "by generally screwing prudent asset buyers, savers and tax payers with the beneficiaries being the very screwballs who created the bubble"

"Second, even if bubbles do occur, it's an open question whether policymakers can identify them in time to act effectively. Bubbles are not easy to detect because estimates of the underlying fundamentals are imprecise. ..."

Yes, may be difficult to identify!! Then you either take a chance and regulate OR leave the markets alone in both directions (you can't say I will not regulate when it goes up and I will come in on the leg down and screw the guys who exhibited common sense) let the cleansing happen and those who have to take a haircut TAKE IT!!

Basically Fed (and others) feel good when the party is on even if it is suspected to be on drugs (bubble) and NOBODY has the capacity to say "emperor has no clothes" and even if one does, what is the guarantee that it is taken seriously.

Therefore IF YOU DO NOT do not do anything when the bubble is built up THEN DO NOT DO ANYTHING ON THE LEG DOWN and screw people who were not party to it.


Janet Yelen of the Federal Reserve Bank of San Francisco (in her October 2007 speech at the Omni hotel in Los Angeles, printed in the Winter 2007 edition of the Town Hall Journal - not affiliated with townhall.com):

"Here in California, the rise and fall of house prices has been a lot like the nation's, only more so. In 2004 and 2005, many homeowners gleeflully watched the meter tick up and up on their house values. I know I did."


"Second, even if bubbles do occur, it's an open question whether policymakers can identify them in time to act effectively. Bubbles are not easy to detect because estimates of the underlying fundamentals are imprecise."

The above sounds like a typical technocratic belch out of, say, a New Republic article.

Bubbles aren't detectable because a) instruments don't exist, or in the alternative, are calibrated to represent bubble activity as positive growth; b) data are often obfuscated and/or misrepresented; c) policymakers are beholden to interests that inflate bubbles.


I guess a lot of people (including Yellen) still misunderstand Minsky. Or they do understand, but try to mislead the public with such pseudo-sophisticated talk.
Minsky is sure rotating in his grave, when somebody outlines his theory and then draws the completely wrong conclusion.

One of the key elements of Minsky's theorie is, that bubbles can NOT be avoided by more regulation,
since more regulation creates an environment of "safety", which then leads investors to take on more risk,
what then leads to a bubble anyway.

The FED and the government can not avoid bubbles, but they should not create them themselves like they
did with low interest rates and affordable housing programs.


this is ridiculous. Did anyone miss the fact that asset prices were prices. There is no reason that any central bank should fight rise in consumer good prices (what has mistakenly be labeled inflation) and encourage rises in capital good prices.
Why the hell should a central bank fear wage rises and promote profitability ?
If you systematically hike interest rates when wage and consumer good price rise and lower them to promote higher profit and higher stock prices ... you end up with this mess. THis is just central bankers having an asymetric policy favoring certain price increases and fighting other price increases.


Of course, Janet Yellen gave her talk at the 18th Annual Hyman P. Minsky Conference. My modest response to her talk
(and to many comments here) is a link to the 17th Annual Hyman P. Minsky Conference (and to all that Minskyite stuff Levy Institute provides us):

http://www.levy.org/pubs/pro_Apr_08.pdf

Try "A Reverse Minsky Journey" by Paul A. McCulley (PIMCO)...

For beginners in Minskyism, McCulley´s stuff is a nice way to learn you way around; and there is something even for Minsky-aficionados: now you know what "Ponzi-squared" means...


I have just seen the full text of Yellen´s "A Minsky Meltdown: Lessons for Central Bankers"...She gives a ringing endorsement for the very McCulley piece I was referring to in my previous post....Well, I guess that is an even better reason to read McCulley...Smile

Alas, another participant of the 18th Annual Hyman P. Minsky Conference, Joe Stiglitz, is not pulling any punches in his critique of the Obama´s bailout of Wall Street. According to Bloomberg:

' The Public-Private Investment Program, PPIP, designed to buy bad assets from banks, "is a really bad program," Stiglitz said. It won't accomplish the administration's goal of establishing a price for illiquid assets clogging banks' balance sheets, and instead will enrich investors while sticking taxpayers with huge losses.

"You're really bailing out the shareholders and the bondholders," he said. "Some of the people likely to be involved in this, like Pimco, are big bondholders," he said, referring to Pacific Investment Management Co., a bond investment firm in Newport Beach, California. '

Of course, it was McCulley who told his audience in the very article Yellen (and I) praised this:

'Let me tell you that, while the Levy Institute is a think tank, Minsky's work is not just think-tank
work. It's also not just policy-wonkish work. It has real, practical implications in the world that I live
in. At PIMCO, we manage three-quarters of a trillion-with a t-debt units. They're sometimes called
bonds, but here I think I should call them debt units. I introduced our CIO, Bill Gross, to Minsky's
thinking about six years ago, when we had the corporate scandals associated with WorldCom and Enron
and so forth. We were in an investment committee meeting, and I said, "Bill, it's very simple: it's a
Minsky moment"-a phrase I'd coined back in 1998. And he said, "What do you mean? Who is this
Minsky guy?" I said, "Bill, you have got to get up to speed here." So he said immediately, "Give me his
work." I had my copy of Stabilizing an Unstable Economy (1986) right on my shelf at the office, so I lent
it to Bill. He read it cover to cover. By 2006, he had become a disciple, if you will.
I say "disciple" because the whole framework of Minsky has a very simple core thesis. We all know
it: stability is destabilizing, because market participants, or economic agents, being human beings,
extrapolate stability into infinity. And, if you extrapolate stability into infinity, then you inherently take
on ever more risky debt structures. That is a Nobel Prize concept, that the world is not inherently meanreverting
on the basis of value. The world is inherently momentum-driven. Human beings are inherently
reflexive. Intellectually, we know to buy low and sell high, but emotionally, we can't bring ourselves to
do that; we tend to do the exact opposite, which imparts an intense procyclical character to capitalism.
Perhaps even worse, it imparts procyclicality to regulatory structures. Not only are the kids and the frat
party procyclical, but the guidance counselor is too. That's a reality of financial markets.'

So, after "Rational Expectations", the next game in the town is to try to outguess your increasingly Minskyan opponents?


I agree with df - house price appreciation was inflation, and the resulting bubble popping has caused deflation. It should be looked at more as a money supply issue because of the amount of money supply created through the mortgage loans. In terms of only using short-term rates, that would have raised costs for those using traditional loans in most of the country, but if you could turn a 7% loan into a 2% option arm 2-year teaser, why couldn't you turn a 9% loan into a 3% teaser rate? Not all mortgages were created equal in terms of inflating the bubble.

And as for even seeing the bubble, so many pundits & policy makers either ignored the bubble or saw home price appreciation as the magic of the ownership society, it would have been hard to reach an actionable majority to keepit from inflating larger.

One of the biggest problems in FL was the disregard for higher downpayments on 2nd and investment properties. If you have prices going up, and you only need to put 10% or less down, what's stopping someone from going 'all-in'?


Convince Barney and his buddies that everyone is not entitled to a home so they do not push Fannie and Freddie to buy mortgages from banks that have been pushed to come up with nutty ways to allow some body to get in a house for no money down with low interest..

It amazes me that they are still idiots today. I work for an ag lender, mainly large acreage. Our borrowers will build a home on their 100 acre ranchette. We require 20% down on all our loans. So many of our borrowers will survey out a half and acre or so on the end of a half mile long driveway and use that half acre with the home as security for a conforming loan. I looked at one the other day to determine if we would allow the small parcel to be cut out of our security, in order to determine that it did not damage the value of what we had left. I looked at the small piece surveyed out. All of this kind of happening at same time and the applicant was showing me where the house will sit. The water well is on our security. I told him so. I asked where septic would be and it will also be on our remaining security. I told him it didn't matter to me and in fact the water well would help the value of our remaining acreage, but his house would be essentially worthless if any one on the residential side was smart enough to figure out there was no water source available and no septic on the property secured with the house. I told him not to worry that it was doubtful anyone would figure that out, and as it turned out they did not. When they do this half the time the drive way is not on the easement or the well or septic is not on the sucured property.


"So, to my knowledge, there are a sizable number of, buy and hold, wishful thinkers out there."

And they are encouraged and praised by mutual fund and 401k managers every day. "Dollar average" "Buy and Hold" "The market has always come back".

It may take a decade and half a generation for reality to sink in: those catch phrases were destructive advice for most people. They have been sound advice only during carefully selected periods of history... which means they are not, per se, sound advice.


If we would properly include asset inflation into the economic inflation #'s, then asset bubble control is inherent in inflation control. We deceived ourselves when we (mostly) removed asset prices from inflation calculations in the 70's. Now that we are "wiser" we need to correct that error.


Done