“Today, we really seem to be stuck in a negative spiral”

The Federal Reserve

Take that, Congress

Sep 21st 2011, 19:36 by The Economist online | WASHINGTON

IN THEORY central banks need independence to insulate them from meddling politicians’ demands for easy money. It is a sign of these strange, post-crisis times that the Federal Reserve is now fending off the opposite demand.

On September 20th, as its officials sat down to a two-day policy-setting meeting, they got an unusual letter from the four top Republicans in Congress urging them to “resist further extraordinary intervention in the US economy. [We] have seen no evidence that further monetary stimulus will create jobs.”

If the politicians had hoped to stay the Fed’s hand, they failed. Today, it announced it would purchase $400 billion of Treasury securities maturing in six to 30 years by next June, while selling an equivalent amount with maturities of three years or less. It also said it would maintain its mortgage-related holdings at current levels to support the mortgage market. Three of the ten voting officials dissented, as they did in August when the Fed said it expected to keep short-term rates near zero at least until mid-2013.

Buying long-term bonds by selling shorter-term issues is less aggressive than the Fed’s previous two rounds of “quantitative easing” (QE), in which it bought bonds with newly printed money. But the impact is similar. Lengthening the average maturity of the Fed’s $2.65 trillion portfolio reduces the supply of long-term bonds, nudging down yields.

Politicians have long bashed central bankers. In the 1970s and 1980s Congress men regularly threatened to impeach the Fed chairman. In 1981 one Republican senator told Paul Volcker, the then chairman, “you’re high on the hit parade for lynching.” Democrats, too, have sought to bar hawkish reserve-bank presidents from voting on monetary policy.

But the latest assault differs in several key respects. One is that politicians, especially those from Texas, have historically wanted easier policy from the Fed. By contrast, when Rick Perry, the Texas governor and Republican candidate for president, recently threatened Ben Bernanke, the current chairman, with rough justice, it was for providing just that. This is partly political opportunism: if monetary stimulus worked, the principal political beneficiary would be Barack Obama. But many Republicans genuinely equate Fed bond-buying with reckless government activism leading to rampant inflation.

The second difference is that past critics had a point: Mr Volcker’s tight monetary policy did tank the economy. This time, the hysteria over inflation has no obvious factual basis. Overall inflation has gyrated with petrol prices but is an unremarkable 2% when food and energy costs are excluded. Wage growth and inflation expectations are docile; nominal demand is barely growing.

Third, and most important, historically the Fed’s antagonists came from the fringes of their (usually Democratic) party. Now Republican leaders and presidential candidates are flouting the idea of central-bank independence. That has troubling implications. Mr Bernanke’s term ends in early 2014 and in the unlikely event he wanted another, a Republican president would not grant it. A new chairman in sync with his (or her) philosophy would presumably tighten monetary policy forthwith, the last thing the economy is likely to need.

Housing prices have now fallen further than they did during the Great Depression

• The last time that happened, it took nineteen years to recover.
• 4 million homes have been lost to foreclosure since 2006.  
• Goldman Sachs cut its economic growth forecast for the second time in a month last week. It now predicts the economy to have added just 150,000 jobs in April, down from 244,000 in March.
• Economic growth is under 2%.
• Gas prices, food prices, and rental prices are increasing.
• May 31st,  14.5% of the American public received food stamp benefits that averaged $133.24 per person, up over 10% since January past. 
• The number of limousines owned by the U.S. government increased  73 percent during the first two years of the Obama administration, 
• The Democrats have not a clue and neither do the Republicans and Obama plays golf.

Grim Prospects for jobs and wages on Labor Day 2010

No defence left against double-dip recession, says Nouriel Roubini

The United States, Japan and large parts of Europe have exhausted their policy arsenal, leaving them defenceless against a double-dip recession as recovery slows to ‘stall speed’.

By Ambrose Evans-Pritchard, International Business Editor in Cernobbio, Italy
Published: 9:49AM BST 05 Sep 2010
Telegraph

“The US has run out of bullets,” said Nouriel Roubini, professor at New York University, and one of a caste of luminaries with grim forecasts at the annual Ambrosetti conference on Lake Como.

“More quantitative easing (bond purchases) by the Federal Reserve is not going to make any difference. Treasury yields are already down to 2.5pc yet credit spreads are widening again. Monetary policy can boost liquidity but it can’t deal with solvency problems,” he told Europe’s policy elite.

Dr Roubini said the US growth rate was likely to fall below 1pc in the second half of the year, despite the biggest stimulus in history: a cut in interest rates from 5pc to zero, a budget deficit of 10pc of GDP, and $3 trillion to shore up the financial system.

The anaemic pace compares with rates of 4pc-6pc at this stage of recovery in normal post-war recoveries.
“We have reached stall speed. Any shock at this point can tip you back into recession. With interbank spreads rising, you can get a vicious circle like 2008-2009,” he said, describing a self-feeding process as the real economy and the credit system hurt each other.

“There is a 40pc chance of double-dip recession in the US, and worse in Japan. Even if it is not technically a recession it will feel like it,” he added.

Hans-Werner Sinn, head of Germany’s IFO Institute, said the US would have to purge its debt excesses the hard way.

“The bitter truth is that there is no way out of this with monetary and fiscal policy. They will just have to see their living standards go down. I see a decade of difficulties for the US,” he said.

Dr Sinn said the US the market for mortgage securities (CDOs) had collapsed from $1.9 trillion in 2006 to just $50bn last year, leaving the US property market reliant on federal agencies.

“The world is simply not willing to buy these dubious financial products again. Germany is leaving, China is no longer there, and Japan is pulling away. The US system of mortgage finance is on government life support and that cannot drive a sustainable upswing,” he said.

Harvard Professor Niall Ferguson said the US has exhausted fiscal stimulus given warnings from the Congressional Budget Office that interest payments as a share of tax revenues will reach 20pc by 2020 and 36pc by 2030 without drastic retrenchment.

“The fiscal crisis seems to be out of control. The 'big crossover’ is approaching when the US spends more on debt service costs than on security, and historically that is the tipping point for any global power,” he said.

Mr Ferguson said the “Chimerica” marriage of recent years is on the rocks. China is no longer willing to fund the US Treasury bond market, cutting its share of holdings from 13pc to 10pc of the total debt stock.

While China must find ways to recycle its trade surplus and hold down the yuan, it is doing this by stockpiling commodities, buying hard assets around the world, or rotating into Asian bonds.

Dr Roubini said US companies have plenty of cash but are boosting profits by a policy of “slash and burn” on labour costs. “We’ve lost 8.4m jobs and if you include the loss of hours worked it is equivalent to another 3m. We need to generate an extra 450,000 jobs every month for three years to get it back,” he said.

The US non-farm payrolls data released on Friday was better then expected but still showed a net loss of 54,000 jobs.

Dr Roubini said average public debt in the rich countries would rise to 120pc of GDP by 2015 in the rich countries, leaving no scope for a further fiscal stimulus. If they push their luck, they too risk the sort of bond crises seen in Southern Europe this year.

In the US, the fiscal boost has faded, switching to tightening over coming months The lift from the inventory cycle is finished. Capex spending by companies has held up well, but this slowed sharply in July. Housing is already in a double dip. The last support for the US economy is consumption, barely growing at 1pc.
“All we did was kick the can down the road and stole demand from the future,” he said.