Wednesday, January 15, 2014

The Fed plans to become even more evil

Anyone who holds out the hope that with the coming of Janet Yellen, the Fed is somehow going to become more enlightened may want to read the following two stories to get a grasp on how unlikely this is.

The first article summarizes a study done by a couple of Fed hacks who come to the conclusion that interest rates could be higher without affecting business investment.  They look at the zero-rate interbank interest-rate climate over the past few years and note (correctly) that very little borrowing has happened in the real economy as a result.

Well, duh!  We have known for a century now that while the Fed can slow down or even destroy parts of the real economy by raising interest rates, lowering them will not automatically repair the damage.  When I took economics, this phenomenon was called pushing on a string.  What our Fed staff "economists" have merely shown is that the institutionalized usury in place between 1980 and 2008 destroyed so much of the real economy that it doesn't matter all that much where interest rates are now because there is no reason to borrow anyway. Bottom line, the "intellectual" foundations for raising interest rates are being laid.  Of course, this will be catastrophic and the new babe will be blamed.

Which leads to the second article.  The big moneychangers seem worried that Ms. Yellen may wander off the reservation.  So the they have installed a purveyor of the conventional "wisdom" in her old job.  The guy's name is Stanley Fisher and if that name doesn't scare you to death, it should.  As the article states, "Fischer was Ben Bernanke's thesis advisor at MIT, probably the world's best economics department, and advised other famous economists like ECB Chief Mario Draghi and Harvard's Greg Mankiw."  There is bunch more celebratory horseshit but needless to say, this guy ranks up there with Milton Friedman as one of the major architects of our current economic mess.  And his appointment should be read as a clear signal that things will continue to get worse for the vast majority of the earth's inhabitants.

Both articles discuss the worst aspects of monetary policy as if they were good ideas.  It is the conventional wisdom after all.  It is also the reason the global economy is suck on stupid.  Readers beware.

A New Fed Study Destroys One Of The Central Tenets Of Monetary Policy


New research by Federal Reserve staff economists Steve Sharpe and Gustavo Suarez suggests that the outlook for business investment — a notably lacking aspect of this economic recovery — has little to do with changes in interest rates.

"A fundamental tenet of investment theory and the traditional view of monetary policy transmission is that a rise in interest rates has a sizable negative effect on capital expenditures by businesses," write Sharpe and Suarez in a paper titled The Insensitivity of Investment to Interest Rates: Evidence from a Survey of CFOs.

"Yet, a large body of empirical research offer mixed evidence, at best, for a substantial interest-rate effect on investment."

In the paper, the economists examine data from the quarterly Duke University/CFO Magazine Global Business Outlook survey conducted in September 2012, which asked chief financial officers across companies of various sizes questions related to their spending plans.

The main findings:
The vast majority of CFOs indicate that their investment plans are quite insensitive to potential decreases in their borrowing costs. Only 8% of firms would increase investment if borrowing costs declined 100 basis points, and an additional 8% would respond to a decrease of 100 to 200 basis points.

Strikingly, 68% did not expect any decline in interest rates would induce more investment.

In addition, we find that firms expect to be somewhat more sensitive to an increase in interest rates. Still, only 16% of firms would reduce investment in response to a 100 basis point increase, and another 15% would respond to an increase of 100 to 200 basis points.
In short, most firms wouldn't invest more if long-term interest rates were lower, and the majority wouldn't invest less as long as those rates weren't more than 300 basis points higher.

A sharp rise in long-term rates over the course of 2013 allowed Sharpe and Suarez to validate these results with follow-up questions asked in the same survey a year later:
By August 2013, twelve months after Global Business Outlook surveyed firms on their sensitivity to hypothetical interest rate changes, long-term interest rates had in fact risen substantially; notably, yields on 10-year Treasury bonds and investment-grade bonds were about 100 basis points higher. Fortuitously, the Global Business Outlook survey for the third quarter of 2013 once again included questions about interest-rate sensitivity, including a retrospective question:

"Over the past quarter, interest rates have increased by 1%. What effect have higher rates had to this point on your capital spending [also hiring, debt financing]?"

Among the 396 usable responses to this question, 9 CFOs indicated their capital spending was “reduced significantly” and 28 indicated it was “reduced somewhat”. Thus, in total, 9.3% of respondents claimed they had reduced capital spending in response, closely in line with the 10% of respondents from the 2012 survey who predicted their firm would reduce investment plans in response to a 100 basis point increase.
The August 2013 survey also included this question: "If benchmark long-term interest rates increase 1% [more] by the end of 2013, will this affect your capital spending?"

"For the 91% of the sample respondents that had not indicated reducing capital spending as a result of the recent 1% increase in interest rates, their responses to the forward- looking question in principle should indicate whether a total increase in interest rates (by year end) of 2% would induce a cutback in their capital spending," write the Fed economists. "Within this group, only 15 respondents, about 3.7% of the overall sample, indicated they would likely reduce capital spending as a result. This suggests even less sensitivity to a 200 basis point increase than the results from the original survey."

So what does determine business investment?

The Global Business Outlook survey also asks CFOs for the top three company-specific concerns they face.

"The responses a firm chooses to this question might be indicative of characteristics that are likely to influence firm investment plans," write Sharpe and Suarez. "The two most commonly chosen of the standard response choices offered are concern with 'ability to maintain margins' and 'cost of health care,' flagged by about 60% and 40% of sample respondents, respectively." more

Economists Are Thrilled To Hear Stanley Fischer Will Be Joining The Fed

MAX NISEN JAN. 11, 2014

Stanley Fischer was officially nominated Friday as a Governor and Vice Chairman of the Federal Reserve, the job Janet Yellen is vacating as she becomes Chairwoman.

While Yellen is incredibly qualified, it's exciting to have Fischer beside her.

He's a legend in central banking and economics circles, and for good reason. Fischer's a highly accomplished monetary economist, and excelled as Israel's central banker.

When rumors of his nomination cropped up, Morgan Stanley's Vincent Reinhart wrote that it would create a "Fed Dream Team."

There's a longer profile of Fischer from the Washington Post's Dylan Matthews that's worth reading, but here are a few of the reasons his nomination is great news.
  • He's credited with essentially saving the Israeli economy, the economy barely faltered during the global financial crisis.
  • Fischer's skeptical of forward guidance as a policy tool, something Yellen endorses, which hopefully means he'll bring debate and an outside viewpoint to Fed meetings. 
  • While other countries were still struggling in the depths of recession or depression, Fischer actually raised rates in Israel in 2009, basically saying that the crisis was over for the country. It's the ultimate central banking power move. 
  • He aggressively manipulated the country's currency, the Shekel, and the massive devaluation helped the country keep growing. 
  • Israeli politics might be even more dysfunctional than the U.S. congress, but Fischer still got the job done, and is hugely respected in the country. 
  • Fischer was Ben Bernanke's thesis advisor at MIT, probably the world's best economics department, and advised other famous economists like ECB Chief Mario Draghi and Harvard's Greg Mankiw.
  • "Fischer has been around the inner circle of international economic policymaking for three decades," Morgan Stanley's Vincent Reinhart wrote in a research note. "If he was not at a major meeting in person, one of his students from his long tenure at MIT probably was."
  • He is a brilliant academic economist, and one of the fathers of New Keynesian economics, which is the dominant approach in leading departments.
  • He has some fascinating and unconventional views on monetary policy, and arguably a de facto champion of NGDP targeting.
  • The rest of his résumé is equally stellar, he helped resolve the Asian financial crisis of the late '90s at the IMF, and rose to a top job at Citigroup
It's difficult to think of a more qualified or interesting choice for an essential job. more

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