Pimco’s Paul McCulley Wants Japan To Go “All In”

Posted on January 11th, 2010 by bile
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“Japan’s problem is deflation, not inflation as far as an eye can see,” wrote Paul McCulley, a member of the investment committee, and Tomoya Masanao, the head of portfolio management for Japan, in a report on the Web site of Newport Beach, California-based Pimco. “An ‘all-in’ reflationary policy is what is needed.”

The BOJ may also consider promising to refrain from raising interest rates until inflation becomes “meaningfully positive,” McCulley and Masanao said.

this is just craziness as mish points out.

Japan has the highest debt-to-GDP level of any industrialized country to the tune of 227% of GDP. It has built bridges to nowhere, held interest rates at .1% for a decade, tried massive amounts of quantitative easing, Keynesian stimulus, and even at times sold Yen to buy dollars.

The result is two decades of total failure. Japan’s recession is 19 years running. The Nikkei hit 38,900 in 1990 and sits at 10,800 today, down 72% two decades later.

Japan has already gone “all in”. It has tried everything under the sun for two decades including Keynesianism, Monetarism, and selling its own currency to sink it. All it has to show for its efforts is a massive pile of debt equaling 227% of GDP.

how does one look back on the past 20ish years in japan and claim they haven’t inflated enough?

Definitions of Insanity

  • In One Sentence: Insanity is doing the same thing over and over and over and expecting different results each time.
  • In Two Words: Paul McCulley
  • In One Word: Keynesianism
  • In Another Word: Monetarism

The attacks on HR1207 are starting

Posted on May 13th, 2009 by bile
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Extraordinary times require extraordinary actions. Nowhere is that more apparent than in the bold policy moves undertaken by the Federal Reserve over the past two years. The financial crisis forced the Fed to be aggressive and creative in its attempts to provide liquidity to credit markets that had frozen up. These were necessary steps, and mostly applauded.

But the very boldness of its actions has put the independence of the Fed at risk. Congress is now clamoring to audit the Fed, and some of the policy proposals currently under discussion at the Federal Reserve will only increase the threat to its independence.

Without independence, the political cycle would subject the central bank to political pressures that, in turn, would impart an inflationary bias to monetary policy.

On this view, politicians in a democratic society are short-sighted because they are driven by the need to win their next election. This is borne out by empirical evidence. A politically insulated central bank is more likely to be concerned with long-run objectives.A variant of the argument for central bank independence is that control of monetary policy is far too important to put in the hands of politicians. As a group, they have repeatedly demonstrated the lack of political will power to make difficult economic decisions. But now they want to assert control over the Fed. The bill, HR 1207, introduced by Sen. Bernie Sanders (who brought you the “Employ Americans First Act”) and Rep. Ron Paul, would assert greater control over the Fed. As Ron Paul writes on his Web site: “Auditing the Fed is only the first step towards exposing this antiquated insider-run creature to the powerful forces of free-market competition. Once there are viable alternatives to the monopolistic fiat dollar, the Federal Reserve will have to become honest and transparent if it wants to remain in business.”

Great! Obviously, monetary policy is so falling-off-a-log simple that your elected representatives can insert themselves via the demand for transparency into decisions of true complexity and subtlety. Why am I not feeling reassured?

I believe cy_cy says it all:

Quoth Cooley- “Without independence, the political cycle would subject the central bank to political pressures that, in turn, would impart an inflationary bias to monetary policy.”

Is this sentence for real? Perhaps you could summon a grad student to investigate the “inflationary bias” pre-Fed and post-Fed. (I realize you’re too busy.)

Since the Fed’s inception, the dollar has lost over 98% of its value. Before the Fed, the dollar would actually GAIN value as time passed (thanks to productivity gains.) Are you implying that the so-called “independent fed” should be patting itself on the back for (so far) preventing hyper inflation?

You clearly imply that Ron Paul wishes to bring transparency to monetary policy so that he himself can make macro monetary calls (manipulating interest rates, reserve rates, etc.) You imply that he is not qualified to be making these decisions. I am sure he would agree: his entire point is that no individual or small group can centrally determine interest rates.

The fact that you would so horribly misstate Paul’s monetary thesis suggests you either have not bothered to research his thesis (yet have the audacity to write an article about it anyway), or you do know what he is trying to say, but you grossly misconstrued his message so that you could shout it down. Either option is an overwhelming suggestion of both intellectual bankruptcy and, in light of your career choices as a writer and an educator, severe moral bankruptcy as well.

Tags: The Fed, HR 1207, Intellectual Cowardice

Henry Kaufman: Federal Reserve led astray by libertarian dogma

Posted on April 28th, 2009 by bile
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The Federal Reserve has been hobbled by at least two major shortcomings that were primarily responsible for the current and several previous credit crises. Its failure to spot the importance of changing financial markets and its commitment to laisser faire economics were big mistakes and justify a fundamental overhaul of the Fed.

Bill Bonner puts it well over at FleetStreetInvest.co.uk:

How about that? America’s largest car company is going to be state-owned… nationalized… presided over by the federal bureaucrats.

It’s just a part of the shift away from the free market and towards an un-free market. Free market capitalism has failed, say the pundits. Let’s give the feds a chance.

Even Henry Kaufman, writing in today’s Financial Times, says that the Fed’s “libertarian dogma” prevented it from controlling the banks properly.

But the Fed is hardly a libertarian organization. It’s a banking cartel. As a cartel, it looks out for its member banks – and doesn’t hesitate to use state power to do so. There is nothing libertarian about it… and no dogma associated with it – except as Greenspan’s eyewash – that is even vaguely libertarian.

The Fed colluded with member banks to fix interest rates. In so doing, it helped create the biggest bubble in credit the world had ever seen. It was a terrible thing for the average fellow – who was lured deep into debt by rising house prices and cheap credit. But it was a great thing for the members of the Federal Reserve cartel. Profits in the financial sector – notably, the big Wall Street investment banks – soared.

But bankers are vulnerable to too much of a good thing – just like everyone else. Soon, they made the classic Wall Street mistake – they came to believe their own hype. Not only did they gin up trillions of dollars’ worth of preposterous financial instruments… they actually bought these debt bombs from each other.

This posed a grave danger to the nation’s economy… and to the banking system. Henry Kaufman claims the regulators dropped the ball because they put too much faith in the free market. But the regulators were little more than front men for the banks themselves. After Alan Greenspan came Henry Paulson as head of the Fed. He was probably still replying to messages at his old address when the crisis began. And the head of the New York Fed – now, US Treasury Secretary Tim Geithner – was elected to his post by the very institutions he was supposed to be overseeing.

Neither of them was about to stop the party; they and their friends were having too much fun.

I agree it was inconsistency which helped lead to this. You can’t supercharge an industry and remove the governors (regulations) and not expect shit to hit the fan eventually.

Let’s be consistent. Remove the supercharger. Remove the governors. Stop tweaking with a system you can’t possibly control and leave it be. Get rid of the Federal Reserve and it’s monoply on interest rates and money and credit creation. Remove it’s monopoly on legal tender. Treat fractional reserve banking as the fraud it is (in its current form anyway). Allow the bubble created “too big to fail” failures to fail and go into bankruptcy. Oh and stop handing out our grandchildren’s future tax dollars on failed institutions.

Speaking of which… yesterday Obama said that the government should spend as much on R&D as on the military. On Slashdot someone asked why when we are already in debt would we be spending money on something that would help us but costs would be placed on our children. A response was that it would more likely help them because the advancements would come out later.

My question is… what moral authority does this guy have spending future generations money (which will be forcefully taken from them) regardless of who it will directly effect? Is that not taxation without representation? They have had no say in the matter. Why not let the bureaucrat tyrants of their own time decide how best to steal from them?

Instaflation: Fed launches bold $1.2T effort to revive economy

Posted on March 18th, 2009 by bile
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With the country sinking deeper into recession, the Federal Reserve launched a bold $1.2 trillion effort Wednesday to lower rates on mortgages and other consumer debt, spur spending and revive the economy. To do so, the Fed will spend up to $300 billion to buy long-term government bonds and an additional $750 billion in mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.

Fed Chairman Ben Bernanke and his colleagues wrapped a two-day meeting by leaving a key short-term bank lending rate at a record low of between zero and 0.25 percent. Economists predict the Fed will hold the rate in that zone for the rest of this year and for most — if not all — of next year.

The decision to hold rates near zero was widely expected. But the Fed’s plan to buy government bonds and the sheer amount — $1.2 trillion — of the extra money to be pumped into the U.S. economy was a surprise.

“The Fed is clearly ready, willing and able to be the ATM for the credit markets,” said Terry Connelly, dean of Golden Gate University’s Ageno School of Business in San Francisco.

Wall Street was buoyed. The Dow Jones industrial average, which had been down earlier in the day, rose 90.88, or 1.2 percent, to 7,486.58. Broader indicators also gained.

And government bond prices soared. Heralding a coming drop in mortgage rates, the yield on the benchmark 10-year Treasury note dropped to 2.50 percent from 3.01 percent — the biggest daily drop in percentage points since 1981.

The dollar, meanwhile, fell against other major currencies. In part, that signaled concern that the Fed’s intervention might spur inflation over the long run.

When the FED buys government bonds that is directly inflationary. If they don’t offset the printing of money through other means Wall Street will directly gain from this injection and we will all lose. Unless you are looking to get a mortgage.

Rate jacked? Hardly.

Posted on December 18th, 2008 by bile
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CNN just has a segment on credit card companies raising interest rates and/or changing billing cycle lengths. The teaser for the segment mentioned being “rate jacked” and said that it can happen even if you have “perfect credit.” Just before the commercial break the host asked “What can you do about it?”

Oh oh!!! I know!!! Not sign the contract which gives them the OK to do such a thing. Don’t get a credit card. Live within your means or take out a loan. I’d even go further given my appreciation of the title transfer theory of contract and say that it’s their money and they can put any conditions on it being lent out at any time regardless of the the contract.

But what was CNN’s answer? Government interference. Christopher Dodd has a bill that apparently got stuck in committee which would make it illegal to do “those things which make credit card holders so angry” such as sudden rate and schedule changes. Showing, IMO, an implied approval of the bill CNN asked Dodd’s office why it hadn’t passed yet receiving a vague answer saying that the credit card industry has push back hard against it. They also asked about the over $4 million which he has received from the financial industry in his last campaign but they refused to respond. Not that I blame them. The way the news organizations and politicians calculate those numbers are bogus. I work in the financial industry. I donated to Ron Paul. I’d be considered the “financial industry” when someone looked it up even though I donate personally and not on behalf of the company I’m employed at. In any case their solution was anti-personal responsibility, anti-freedom and unconstitutional.

Federal Reserve sets target rate to near zero

Posted on December 16th, 2008 by bile
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The Federal Reserve entered a new era on Tuesday, setting its benchmark interest rate so low that it will have to reach for new and untested tools in fighting both the recession and downward pressure on consumer prices.

Going further than analysts anticipated, the central bank cut its target for the overnight federal funds rate to a range of 0 to 0.25 percent, a record low, virtually bringing the United States to the zero-rate policies that Japan used for six years in its own fight against deflation. The rate had previously been 1 percent, and a cut of a half-point had been widely expected.

The move, which affects the rate at which banks lend their reserves to one another, was to a large degree symbolic. Demand for interbank loans has been so low that the actual Fed funds rate has been far below the previous target for a month and hovered at barely 0.1 percent in the last several days.

In its statement announcing the cut, the Fed’s Open Market Committee made it clear that it still had ammunition with which to stimulate the economy and referred the wide array of new lending programs that essentially allow it to pump money directly into financial institutions.

“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” it said. Among those tools, it cited the continuing purchase of agency debt and mortgage-backed securities and the “potential benefits of purchasing longer-term Treasury securities.”

With its move, the central bank implicitly acknowledged that recession is more severe than officials had thought at their last meeting in October. “The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time,” it said.

And Japan has still not recovered after close to two decades. Can the United States even last that long? How much evidence is required before these economic command and control types give up? Or will they just go down with the ship and bring us down with them?