Why did you
buy that shirt? I wanted to look cool.
Why did you
buy another cat? I love animals.
Why did you
try-out for the baseball team? I like to play sports.
Why did your
company buy that factory in China? We wanted better exposure in Asia.
Why did you
try to kiss that girl? She was pretty.
Enough? What’s
the point?
Behavior is
rooted in goals. Behavior often makes sense. What is baffling is when an organization or a person seems to be engaging in behaviors that don’t make sense? Or maybe the goals
that are forwarded seem flimsy or just wrong. As a result, you might want to
know what the REAL Goal is. Why, really, are they engaging in that behavior?
That’s the
way I feel about the Fed these days – the Federal Reserve System and its chair,
Jerome Powell. I think they are shoveling a bunch of poo at us and we just lap
it up. What is really going on there? My short answer is the Fed is like a lot of not-for-profit institutions that gain power and influence outside of the usual measures of profitability. They don't try to acquire wealth or income. Their real game is to increase the institution's employment, annual budget, or clout.
In my previous
post about the Fed I noted how different the Fed is today from how it started.
It had simple goals in the beginning and those simple goals made sense. Now the
Fed does everything from buying the vegetables to wiping down the grocery carts.
The Fed is everywhere and is doing really weird things. And there is no
stopping it. Pretty soon a pretty lady in professional attire with FED blazoned
on her blue blazer will ask you if you want to sell your house? Or maybe your
car? Or maybe your sad fat husband glued to the TV.
Why would
the Fed take on all these questionable transactions? How is their behavior
rooted in satisfying goals?
The Fed frequently discusses their goals.
They drove interest rates to zero and still didn’t think they
did enough to get the economy humming. So, they decided to do other things. To keep doing things until the economy goes back to humming like an Edsel at a 4th
of July parade.
They noticed that various credit market channels were not
functioning properly. Financial institutions couldn’t sell assets that had gone
bad. If they couldn’t sell their assets then they could not lend out the other
window. The Fed explained that markets were not functioning.
Those sound
like good goals, right?
Wrong!
Until
recently the Fed lived a straightforward, though challenging, life.
When the economy needed money the Fed bought government bonds
and that resulted in lower interest rates. When the economy was growing too
fast and threatened inflation they did the opposite.
The Fed also worked with other regulators
– the Controller of the Currency, Federal Deposit Insurance Corp, Securities and
Exchange Commission, Credit Union National Association, and so on. While the
Fed was on this team of regulators to oversee markets and institutions, it was
always at a distance from those they regulated.
Regulation meant setting rules of proper behavior and punishing those that broke the rules. It did not involve the Fed dealing directly and making transactions with households or firms or banks or governments with financial problems.
Regulation meant setting rules of proper behavior and punishing those that broke the rules. It did not involve the Fed dealing directly and making transactions with households or firms or banks or governments with financial problems.
So here we
are now with the Fed trying to unclog all sorts of markets by buying and
selling everything from Tampax to New York State bonds.
What’s the
point?
Here’s the
point. If pushing interest rates to zero and dumping enough money on the US
economy to fill our toilet paper needs through 2021 wasn’t enough, then why does one think that all this extra policy will have a major impact? How will
all these loans and asset sales cause people to come out of their caves and
start buying stuff at Target and the Green Lake Bar and Grill?
Credit channels
were clogged? I don’t think so. Credit didn’t flow because the health panic
caused a recession. In a recession people don’t pay their debts. Of course,
credit was disturbed. But the Fed buying all those unsold assets doesn’t solve
a thing. It basically throws money into financial institutions so they can lend
that money to households and firms that have no capacity to pay them back.
Figure that one out. Our government is trying to stimulate bad loans!
So why is
the Fed doing this? How do they gain?
Does the Fed
make more money by doing this? No
Does the Fed
look sexier doing all this? No
Does the Fed
solve the nation’s problems doing this? No
Does the Fed
get more income from the government? No
Does the Fed
get more income from anywhere? No
Does the Fed
satisfy the impossible demands of those on the left who always believe that government
intervention is necessary? Probably
Does the Fed
gain power through its size and influence? Yes.
The Fed’s employment has risen appreciably through 2018 and we don’t even have the 2019 numbers in, much less figures for 2020.The Fed’s operating budget during those same years also rose appreciably.**
The Fed’s employment has risen appreciably through 2018 and we don’t even have the 2019 numbers in, much less figures for 2020.The Fed’s operating budget during those same years also rose appreciably.**
The Fed doesn't have to do any of this stuff. The Treasury and Congress are the right bodies to use fiscal policy to address these kinds of structural problems. But those institutions are too chicken-hearted (no insult to chickens) to do their job. Those fiscal institutions have already created too much debt and they don't have the honesty or courage to take on the extra debt. Instead they look over at the Fed who has unlimited ability to increase the money supply. I can see our friends in the government in a huddle -- dudes we don't need to spend more. We can ask the Fed to spray money all over the place. Let them take the heat when things don't turn out.
And the Fed is more than happy to oblige. Naw, inflation will never come back. To do all these new functions they need more and better paid staff and they need bigger operation budgets. A not-for-profit dreams about such growth.
**I had a
helluva time finding employment data for the Fed. The best I could do is find a
table in the Annual Report of the Board of Governors that showed that between
2010 and 2018 the employment at the regional banks increased from around 15,000
to about 20,000; and it did not increase
at all for the Board of Governors. In total the Fed employed about 23,000 in
2018, an increase of about 18%. The annual operating budget went from about $4 billion
to about $6 billion. That's a 50% increase.
***Not sure
I believe any of that data anyway. The Fed does a wonderful job of publishing reams
of data about private banks and the economy. It is a data horse. But when it comes to
finding time series data for the Fed’s employment and operating expenses, start
looking in dark corners and under area rugs. Could they be trying to hide something?
All are good observations. Treating the Fed as a agency that wants to get bigger is a good predictor for what it does. Increasing the ability of banks to lend to people who do not want to spend is not a good predictor. But some of the assets it is acquiring is from "fallen angels" where companies were doing well and are not now. I think this means they can meet their payrolls because they don't have to replace their debt at higher market rates. Mabye I'm wrong though. Meanwhile we need to think about what the Fed does with all this debt it has acquired.
ReplyDeleteThanks Mr Yachts,
DeleteMore than likely the Fed will end up torching all that debt. It isn't really worth much. I don't see the Fed as the proper agency to be bailing out companies. Its just an excuse to take the heat off a government that has gotten so indebted that its own debt cannot be trusted. Let the Fed splash around a few more trillion while the Congress avoids its fiscal responsibility. It is a recipe for an impossible return to anything close to normalcy.
Regardless of how much money is pumped into the Economy, in this case it is how to re-employ the unemployed which is based on the businesses and not for profits having buyers for their products or markets to introduce their not for profit service.In simple terms, does the local manufacturer have a customer base now large enough to support their 2019 operation? Do the customers who may still have their jobs afford to buy that service if it is not needed to live? In other words how long will it take for the buyer to buy non essential services and products which determine how long the non essential supplier can stay at the same 2019 size in terms of employees....it is a circular Catch 22. More money thrown into the market does not mean return to 2019.
ReplyDeleteHoot, its not just the money. It's how the Fed and the Congress will have imposed themselves into the business sector in ways that will be almost impossible to reverse anytime in the future. Thus we are stuck with a government run economic system. If one worries that we have already moved too far in that direction in the last 50 years, then we will likely have gone so far this time as to leave no avenue for a movement in the opposite direction.
DeleteDear LSD. It’s the proverbial ‘betixt a rock and hard place’ fer ya’ll land lubberz. . . . or down here in the depths ‘betwixt a giant clam and a killer whale.’ Makes my gillz ‘n finz quiver.
ReplyDeleteMoney needed to try to keep afloat bidinessez will balloon the debt beyond FUBAR and the Fed money-tree ATM has further exacerbated the sitiyation by inject’n trillion$ in the economy and thus artificially keep’n the stock market from crash’n. Fed justifies this by say’n, “Heck, we ain’t see’n no inflashun so no foul.” Smellz like a rott’n anchovy to me.
All this stuff considered we’re head’d for muy muy rud-0 more unknown and unprecedented economic rock’n-roll. I don’t think the end game will be pretty. Someones’ gott’a pay the piper ‘n the govomit and Fed won’t have any more moola to pay’m. It’s gunn’a be impossible to put all that moola back in the piggy bank genie boddle.
I guess we won't run out of an ammunition for the blog.
DeleteLarry:
ReplyDeleteHappy to see someone out there sees the disaster the Fed is working up for our future. No inflation? HA! They are just repeating what they did wrong ten years ago and that produced no inflation. The only different is there are now a few extra zeros. Does anyone really know what a trillion is? It was just rounding of the stimulus money ten years ago. Now we are creating multiple trillions.
What does the Fed know about financing businesses? Maybe their objective is creating enough inflation will somehow make everyone's debts become immaterial and business will prosper.
Thanks Unknown. There's even more to it. These policies over the past 10 years might not have raised inflation or interest rates but they have done plenty of other damage. Low interest rates destroy the wealth of savers. No retiring on so-called bonds when they give you 0.5% per year. And then think of all the risk induced by low interest rates. How do we ever get out of a credit crisis when people are loaded up with debt? These policies have in the past and definitely in the future will cause great harm.
DeleteThanks Larry. Let me identify "unknown." It is Dick Krieger, one of your old macro students from Sanibel. Miss those classes terribly. Not enough people out there are concerned about the long term aspects of the stupid Fed. keep up the good work.Enjoying your blogs.
DeleteThanks Ed. Glad you are keeping up with the blog. I too miss those classes at Sanibel. I met some really great people that way and the classroom interactions were always fun. I hope you will stay in touch. My email address is davidso@indiana.edu
DeleteThe Fed took the "money printer go brrrr" meme literally. We have a fake market now, thanks for everything Powell.
ReplyDeleteJay stole the future growth opportunities from the next generation and gave it to the undisciplined rich - a reverse Robinhood strategy. We tell individuals to have 3-6 months of expenses to cover emergencies. And if someone gets in trouble and doesn’t have an emergency fund, we say shame on you! Big business we say don’t worry, we’ll just print as much as you need. Shares of Apollo Group, the giant private equity firm, have soared 80% from their lows, Blackstone has risen 50%.
The reason: Asset holders like Apollo and Blackstone have been insured by the world’s most powerful central bank. This largess is boundless and without conditions.
Thanks anonymous. Sadly the Fed is much better at flooding the world with money than they are at pulling it out.
Delete