Total Posts:12|Showing Posts:1-12
Jump to topic:

Robert Reich: Hopelessly Clueless on the Fed

ResponsiblyIrresponsible
Posts: 12,398
Add as Friend
Challenge to a Debate
Send a Message
7/12/2015 1:18:01 PM
Posted: 1 year ago
I think most of you know I haven't much respect for pesudo-economists like Robert Reich, who are more hackish political pundits than serious policy analysts. That notwithstanding, I follow him on Facebook for some reason, and he actually made an interesting post yesterday. Granted, his conclusion is accurate, but the logic he employs to get there is highly flawed. It's funny, actually, because I distinctly remember him calling Fed policy "trickle down economics," benefitting only the affluent and incapable of boosting the economy whilst the government is still in austerity mode (i.e., the term "monetary offset" is lost on him). [http://robertreich.org...]. The change of tune is duly noted.

He writes:

Federal Reserve chair Janet Yellen, speaking after weeks of financial-market turmoil over China and Greece, confirmed yesterday that she and the Fed are still planning to raise interest rates later this year. That would be a huge mistake. Higher interest rates mean higher borrowing costs. As a result, we pay bankers more of what we earn and have less to spend on what we need. This, in turn, slows the economy, causing fewer jobs to be created and lower wage increases.

Yet unemployment is still high, wages are still stuck in the mud, and record numbers of Americans are in part-time jobs but need full-time work. Congress continues to embrace austerity. And the global economy is more fragile than it's been in years. The Fed must keep rates low.

The Fed pretends it's apolitical, but it's run by bankers. In balancing full employment against the risk of inflation, bankers always opt to prevent inflation. It's time for the rest of us to have our voices heard.

What do you think?

So, lots of stuff here. Let's take it line by line.

The first assertion is a distortion of Yellen's words. There have been *no* stated "plans" to increase interest rates this year. It's a forecast, and is conditional on incoming developments. Earlier this year, the Fed amended its statement to accentuate its focus on monitoring international developments, and we know from the June meeting minutes that China and Greece were mentioned explicitly. The current SEP suggests that two rate hikes will occur this year, but we've seen the SEP dot plot gravitate outward and become progressively flatter over the past several meetings. There's no plausible reason to think that this path, like market expectations with which it was beginning to converge, won't be likewise revised downward.

But, that aside, there's no excuse for Robert to insinuate a commitment where there is none, or to misinform his readers (and don't even get me started on his readers, more hopelessly clueless than even him). Here's Yellen, reiterating the same thing she's always said: the Fed is data dependent.

"Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy. But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step. We will be watching carefully to see if there is continued improvement in labor market conditions, and we will need to be reasonably confident that inflation will move back to 2 percent in the next few years...Because there are some factors, which I mentioned earlier, that continue to restrain the economic expansion, I currently anticipate that the appropriate pace of normalization will be gradual, and that monetary policy will need to be highly supportive of economic activity for quite some time."

[http://www.federalreserve.gov...]

Oh, would you look at that? That doesn't sound like a *plan* to increase interest rates, but a forecast that conditions and developments will merit liftoff later this year -- with a notable amount of risks to that sunny forecast. And she tells us that it will only have a miniscule effect on the amount of overall easing provided by the Fed, though starting earlier will provide for a more gradual pace of firming thereafter. Reich avoids these nuances, though.

Moving on...

The mechanism he describes by which this may slow unemployment is generally accurate, but misleading. Yes, higher interest rates caused by tighter money mean higher borrowing costs all else equal, but that itself what's trouble or even the appropriate benchmark: what we really care about is real borrowing costs relative to the market-clearing natural rate, and that's dependent on structural factors, demographics, technology, and overall NGDP growth. What Reich meant to tell you, but didn't, is that higher borrowing costs are a concern because current interest rates are *already* above the market-clearing levels, there's still a sizeable amount of financial frictions, and inflation and NGDP are low, meaning wage gains have been tepid. Ignore of course, that interest rates are *not* the primary transmission of monetary policy, and rates have been pinned at zero since December 2008, but the Fed managed to ease and contract policy at multiple points since then. The goal of monetary policy is the hot-potato effect: ease policy to convince people to do something more risky with their money, and tighten it to convince them to do something less risky.

He's right that the global economy is extremely fragile. Our low degree of exposure to Greece notwithstanding, growth forecasts from the IMF were recently revised down considerably to their lowest level since 2009 -- so, yes, we have reason to worry about developments in China and Greece, and that *is* a reason not to tighten further. Notice my use of "further." We not only tightened a long way back, but we were never following an "easy money" policy in the first place. We needed a credible regime shift for that. Don't expect Reich to tell you that, though. That would screw with the pseudo populism he's selling you.

The next part is just pathetic, and nothing more than a bone to readers who are at their core hostile to the banking system "just because." There are valid concerns with respect to the way in which these institutions are regulated and their conduct in the lead-up to the financial crisis. But the idea that bankers are -- or even could -- really for a rate hike is just ridiculous.

Look at it this way: credit standards are already highly elevated and banks are already holding onto a metric fckton of reserves earning a mere 25 basis points in interest payments from the Fed. Higher interest rates mean that *some* of these reserve may flood the market. What happens next?

Well, what happens when demand for money market securities increases? Poof -- they tank. Risk premia may rise post-liftoff, but why in the world would anyone desire a small increase in interest rate payouts -- yes, we're talking 25 basis points, and they could still earn 50 via IOR, anyway -- because of increased risk as opposed to stronger fundamentals?

Not to mention, Milton Friedman was right: tight money means higher interest rates now but lower rates into the future -- it's in the bank's best interest to support *further* easing now.

This doesn't even account for the regulatory measures that will likely unfold once liftoff commences. The big concern is of course excess reserves, and the Fed will drop every conceivable capital requirement it can to ensure those reserves don't go far -- and then it will soak up the rest via the Term Deposit Facility. To use this phrase for the third time in the past few days, liftoff will be a veritable pain in the backside for the banks. They don't want this.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ironslippers
Posts: 509
Add as Friend
Challenge to a Debate
Send a Message
7/12/2015 5:36:50 PM
Posted: 1 year ago
^^^ I read that ^^^
Everyone stands on their own dung hill and speaks out about someone else's - Nathan Krusemark
Its easier to criticize and hate than it is to support and create - I Ron Slippers
ResponsiblyIrresponsible
Posts: 12,398
Add as Friend
Challenge to a Debate
Send a Message
7/12/2015 5:37:47 PM
Posted: 1 year ago
At 7/12/2015 5:36:50 PM, ironslippers wrote:
^^^ I read that ^^^

Awesome!

What do you think?
~ResponsiblyIrresponsible

DDO's Economics Messiah
ironslippers
Posts: 509
Add as Friend
Challenge to a Debate
Send a Message
7/12/2015 6:28:29 PM
Posted: 1 year ago
At 7/12/2015 5:37:47 PM, ResponsiblyIrresponsible wrote:
At 7/12/2015 5:36:50 PM, ironslippers wrote:
^^^ I read that ^^^

Awesome!

What do you think?

What is SEP? Simplified Employee Pension?

I disagree with both Robert and the FOMC this is going to sound simple because I am:
the "numbers" leveling (or slight deflation) I think is actually an indication that current policies have acheived their optimal effect, and new policies should now be put to practice. Kicking the can further down the road "one can't wait for the weather to be perfect to go outside.

the concern for Greece and China:

Greece crises is more important politicaly than financially.

China doesn't even fully disclose complete and acurate numbers to the IMF or to anyone for that matter. China has been turning on and off their trading system at will for years. China loses credability.

I don't give much credability to unemployment numbers, I don't think they tell that much of the story.

So I'm think I in alignment with you.
Everyone stands on their own dung hill and speaks out about someone else's - Nathan Krusemark
Its easier to criticize and hate than it is to support and create - I Ron Slippers
ResponsiblyIrresponsible
Posts: 12,398
Add as Friend
Challenge to a Debate
Send a Message
7/12/2015 6:52:06 PM
Posted: 1 year ago
At 7/12/2015 6:28:29 PM, ironslippers wrote:
What is SEP? Simplified Employee Pension?

Summary of Economic Projections. It's a document the Fed releases four times a year with forecasts for goal variables and the expected path amongst FOMC participants for the federal funds rate.

I disagree with both Robert and the FOMC this is going to sound simple because I am:
the "numbers" leveling (or slight deflation) I think is actually an indication that current policies have acheived their optimal effect, and new policies should now be put to practice. Kicking the can further down the road "one can't wait for the weather to be perfect to go outside.

I don't see it as kicking the can down the road; it's true the number has leveled out, though the target is 2 percent -- "slight deflation" (and it's not quite deflation, last I checked, though it might be on a month-over-month basis) is actually extremely troubling, and signals that there might be more slack in labor markets than we thought. The risk calculus heavily favors holding off, especially if Greece or China were to implode.

the concern for Greece and China:

Greece crises is more important politicaly than financially.

Right now, yes, though if the political crisis boils over, the ramifications are financial in nature.

China doesn't even fully disclose complete and acurate numbers to the IMF or to anyone for that matter. China has been turning on and off their trading system at will for years. China loses credability.

I don't disagree with this, but the numbers aside, it's in a complete whole and has a lot of exposure to the U.S. economy, so we would suffer greatly if China were to go down, in much the same way that falling demand from China depressed global oil prices and thus pushed down capital investment.

I don't give much credability to unemployment numbers, I don't think they tell that much of the story.

I generally agree with this. The conventional unemployment number is probably more optimistic than it ought to be.

So I'm think I in alignment with you.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ironslippers
Posts: 509
Add as Friend
Challenge to a Debate
Send a Message
7/12/2015 7:31:28 PM
Posted: 1 year ago
At 7/12/2015 6:52:06 PM, ResponsiblyIrresponsible wrote:
At 7/12/2015 6:28:29 PM, ironslippers wrote:
What is SEP? Simplified Employee Pension?

Summary of Economic Projections. It's a document the Fed releases four times a year with forecasts for goal variables and the expected path amongst FOMC participants for the federal funds rate.

Thanks many of the terms you use are VERY new to me, hence my slack opinions.

I disagree with both Robert and the FOMC this is going to sound simple because I am:
the "numbers" leveling (or slight deflation) I think is actually an indication that current policies have acheived their optimal effect, and new policies should now be put to practice. Kicking the can further down the road "one can't wait for the weather to be perfect to go outside.

I don't see it as kicking the can down the road; it's true the number has leveled out, though the target is 2 percent -- "slight deflation" (and it's not quite deflation, last I checked, though it might be on a month-over-month basis) is actually extremely troubling, and signals that there might be more slack in labor markets than we thought. The risk calculus heavily favors holding off, especially if Greece or China were to implode.

Here where we differ in process you use calculus and I use my instinctive algorythms in my head, Yes I see my short coming LOL

the concern for Greece and China:

Greece crises is more important politicaly than financially.

Right now, yes, though if the political crisis boils over, the ramifications are financial in nature.

How detrimental can that be, their economy is not very large probably less than most US States. Is this because of Greek issue being directly tied to other governments and does that not make those same government at fault in a similar way as Greece (I digress).

China doesn't even fully disclose complete and acurate numbers to the IMF or to anyone for that matter. China has been turning on and off their trading system at will for years. China loses credability.

I don't disagree with this, but the numbers aside, it's in a complete whole and has a lot of exposure to the U.S. economy, so we would suffer greatly if China were to go down, in much the same way that falling demand from China depressed global oil prices and thus pushed down capital investment.

I see what you're saying, could this not create opportunity for other nations (just an idea)

I don't give much credability to unemployment numbers, I don't think they tell that much of the story.

I generally agree with this. The conventional unemployment number is probably more optimistic than it ought to be.

So I'm think I in alignment with you.

Oh Man! your knowledge base is so far beyond and more specific than my own, Yes I'm humbled LOL

HERE'S a Question: is it possible to have a sustainable economy, as in one that doesn't require growth? ...rhetorical... I think an economst that can do that would have the world in his palm
Everyone stands on their own dung hill and speaks out about someone else's - Nathan Krusemark
Its easier to criticize and hate than it is to support and create - I Ron Slippers
PetersSmith
Posts: 5,804
Add as Friend
Challenge to a Debate
Send a Message
7/12/2015 7:37:05 PM
Posted: 1 year ago
At 7/12/2015 5:37:47 PM, ResponsiblyIrresponsible wrote:
At 7/12/2015 5:36:50 PM, ironslippers wrote:
^^^ I read that ^^^

Awesome!

What do you think?

I think I'm proud you're already mentioning the Reich.
Empress of DDO (also Poll and Forum "Maintenance" Moderator)

"The two most important days in your life is the day you were born, and the day you find out why."
~Mark Twain

"Wow"
-Doge

"Don't believe everything you read on the internet just because there's a picture with a quote next to it."
~Abraham Lincoln

Guide to the Polls Section: http://www.debate.org...
ResponsiblyIrresponsible
Posts: 12,398
Add as Friend
Challenge to a Debate
Send a Message
7/12/2015 7:38:08 PM
Posted: 1 year ago
At 7/12/2015 7:31:28 PM, ironslippers wrote:
At 7/12/2015 6:52:06 PM, ResponsiblyIrresponsible wrote:
At 7/12/2015 6:28:29 PM, ironslippers wrote:
What is SEP? Simplified Employee Pension?

Summary of Economic Projections. It's a document the Fed releases four times a year with forecasts for goal variables and the expected path amongst FOMC participants for the federal funds rate.

Thanks many of the terms you use are VERY new to me, hence my slack opinions.

Fair enough.

I disagree with both Robert and the FOMC this is going to sound simple because I am:
the "numbers" leveling (or slight deflation) I think is actually an indication that current policies have acheived their optimal effect, and new policies should now be put to practice. Kicking the can further down the road "one can't wait for the weather to be perfect to go outside.

I don't see it as kicking the can down the road; it's true the number has leveled out, though the target is 2 percent -- "slight deflation" (and it's not quite deflation, last I checked, though it might be on a month-over-month basis) is actually extremely troubling, and signals that there might be more slack in labor markets than we thought. The risk calculus heavily favors holding off, especially if Greece or China were to implode.

Here where we differ in process you use calculus and I use my instinctive algorythms in my head, Yes I see my short coming LOL

Lol, not quite calculus.. really just an assessment of what's happened when central banks with a similar risk calculus chose tightening. It wasn't pretty.

the concern for Greece and China:

Greece crises is more important politicaly than financially.

Right now, yes, though if the political crisis boils over, the ramifications are financial in nature.

How detrimental can that be, their economy is not very large probably less than most US States. Is this because of Greek issue being directly tied to other governments and does that not make those same government at fault in a similar way as Greece (I digress).

It would bring down the entire euro, so not just Greece, but the 19 countries sharing that currency, would be severely impacted. The dollar would appreciate considerably, so U.S. exports would plummet, both from more expensive exports and from falling foreign demand for U.S. goods. Add to that volatility in U.S. markets, and it makes for a really volatile exit.

China doesn't even fully disclose complete and acurate numbers to the IMF or to anyone for that matter. China has been turning on and off their trading system at will for years. China loses credability.

I don't disagree with this, but the numbers aside, it's in a complete whole and has a lot of exposure to the U.S. economy, so we would suffer greatly if China were to go down, in much the same way that falling demand from China depressed global oil prices and thus pushed down capital investment.

I see what you're saying, could this not create opportunity for other nations (just an idea)

Opportunity in what way?

I don't give much credability to unemployment numbers, I don't think they tell that much of the story.

I generally agree with this. The conventional unemployment number is probably more optimistic than it ought to be.

So I'm think I in alignment with you.

Oh Man! your knowledge base is so far beyond and more specific than my own, Yes I'm humbled LOL

Lol, I don't know about that!

HERE'S a Question: is it possible to have a sustainable economy, as in one that doesn't require growth? ...rhetorical... I think an economst that can do that would have the world in his palm

That doesn't require growth....

I mean, sort of -- if every business and person is working at full capacity, I guess it could conceivably work.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ResponsiblyIrresponsible
Posts: 12,398
Add as Friend
Challenge to a Debate
Send a Message
7/12/2015 7:38:23 PM
Posted: 1 year ago
At 7/12/2015 7:37:05 PM, PetersSmith wrote:
At 7/12/2015 5:37:47 PM, ResponsiblyIrresponsible wrote:
At 7/12/2015 5:36:50 PM, ironslippers wrote:
^^^ I read that ^^^

Awesome!

What do you think?

I think I'm proud you're already mentioning the Reich.

Lollollol
~ResponsiblyIrresponsible

DDO's Economics Messiah
ironslippers
Posts: 509
Add as Friend
Challenge to a Debate
Send a Message
7/12/2015 8:05:19 PM
Posted: 1 year ago
At 7/12/2015 7:38:08 PM, ResponsiblyIrresponsible wrote:
At 7/12/2015 7:31:28 PM, ironslippers wrote:
At 7/12/2015 6:52:06 PM, ResponsiblyIrresponsible wrote:
At 7/12/2015 6:28:29 PM, ironslippers wrote:
What is SEP? Simplified Employee Pension?

Summary of Economic Projections. It's a document the Fed releases four times a year with forecasts for goal variables and the expected path amongst FOMC participants for the federal funds rate.

Thanks many of the terms you use are VERY new to me, hence my slack opinions.

Fair enough.

I disagree with both Robert and the FOMC this is going to sound simple because I am:
the "numbers" leveling (or slight deflation) I think is actually an indication that current policies have acheived their optimal effect, and new policies should now be put to practice. Kicking the can further down the road "one can't wait for the weather to be perfect to go outside.

I don't see it as kicking the can down the road; it's true the number has leveled out, though the target is 2 percent -- "slight deflation" (and it's not quite deflation, last I checked, though it might be on a month-over-month basis) is actually extremely troubling, and signals that there might be more slack in labor markets than we thought. The risk calculus heavily favors holding off, especially if Greece or China were to implode.

Here where we differ in process you use calculus and I use my instinctive algorythms in my head, Yes I see my short coming LOL

Lol, not quite calculus.. really just an assessment of what's happened when central banks with a similar risk calculus chose tightening. It wasn't pretty.

the concern for Greece and China:

Greece crises is more important politicaly than financially.

Right now, yes, though if the political crisis boils over, the ramifications are financial in nature.

How detrimental can that be, their economy is not very large probably less than most US States. Is this because of Greek issue being directly tied to other governments and does that not make those same government at fault in a similar way as Greece (I digress).

It would bring down the entire euro, so not just Greece, but the 19 countries sharing that currency, would be severely impacted. The dollar would appreciate considerably, so U.S. exports would plummet, both from more expensive exports and from falling foreign demand for U.S. goods. Add to that volatility in U.S. markets, and it makes for a really volatile exit.

Correct me if wrong, You don't think the eurozone is a good idea, but you don't endorse the Grexit.... Expand

China doesn't even fully disclose complete and acurate numbers to the IMF or to anyone for that matter. China has been turning on and off their trading system at will for years. China loses credability.

I don't disagree with this, but the numbers aside, it's in a complete whole and has a lot of exposure to the U.S. economy, so we would suffer greatly if China were to go down, in much the same way that falling demand from China depressed global oil prices and thus pushed down capital investment.

I see what you're saying, could this not create opportunity for other nations (just an idea)

Opportunity in what way?

Say.. India could take market share (Jobs) from China

I don't give much credability to unemployment numbers, I don't think they tell that much of the story.

I generally agree with this. The conventional unemployment number is probably more optimistic than it ought to be.

So I'm think I in alignment with you.

Oh Man! your knowledge base is so far beyond and more specific than my own, Yes I'm humbled LOL

Lol, I don't know about that!

OK grateful for decent dialog, In my circle people don't talk economics. This would explain my shortcomings in this subject.

HERE'S a Question: is it possible to have a sustainable economy, as in one that doesn't require growth? ...rhetorical... I think an economst that can do that would have the world in his palm

That doesn't require growth....

I mean, sort of -- if every business and person is working at full capacity, I guess it could conceivably work.

Economy baised solely on growth seems doomed for heavy corrections
Why not now?
Everyone stands on their own dung hill and speaks out about someone else's - Nathan Krusemark
Its easier to criticize and hate than it is to support and create - I Ron Slippers
ResponsiblyIrresponsible
Posts: 12,398
Add as Friend
Challenge to a Debate
Send a Message
7/12/2015 8:09:24 PM
Posted: 1 year ago
At 7/12/2015 8:05:19 PM, ironslippers wrote:
Correct me if wrong, You don't think the eurozone is a good idea, but you don't endorse the Grexit.... Expand

Sure. I think eventually exiting the euro is the right call, but that would create a whole lot of volatility insofar as it's unplanned or force, as it would be if Greece were to leave for failure to pay its debts. I'd much prefer a coordinate exit.

Opportunity in what way?

Say.. India could take market share (Jobs) from China

Yeah, I suppose that's possible, though not really as easy as it sounds insofar as China's vast market share translates into falling demand for export goods and thus tanks the economies of other countries, with which India trades.

Lol, I don't know about that!

OK grateful for decent dialog, In my circle people don't talk economics. This would explain my shortcomings in this subject.

It's largely esoteric stuff, but yeah, you'll get there.

HERE'S a Question: is it possible to have a sustainable economy, as in one that doesn't require growth? ...rhetorical... I think an economst that can do that would have the world in his palm

That doesn't require growth....

I mean, sort of -- if every business and person is working at full capacity, I guess it could conceivably work.

Economy baised solely on growth seems doomed for heavy corrections
Why not now?

Corrections in what way? I mean, I could see that being the case if growth was volatile or unstable, but central banks were created to mollify output and inflation volatility. The only we could sustainably have 0 percent growth and survive is if we were operating at full capacity already.
~ResponsiblyIrresponsible

DDO's Economics Messiah
ironslippers
Posts: 509
Add as Friend
Challenge to a Debate
Send a Message
7/12/2015 8:23:52 PM
Posted: 1 year ago
At 7/12/2015 8:09:24 PM, ResponsiblyIrresponsible wrote:
At 7/12/2015 8:05:19 PM, ironslippers wrote:
Correct me if wrong, You don't think the eurozone is a good idea, but you don't endorse the Grexit.... Expand

Sure. I think eventually exiting the euro is the right call, but that would create a whole lot of volatility insofar as it's unplanned or force, as it would be if Greece were to leave for failure to pay its debts. I'd much prefer a coordinate exit.

Politically unlikely like nill, someone always feels slighted in such plans

Opportunity in what way?

Say.. India could take market share (Jobs) from China

Yeah, I suppose that's possible, though not really as easy as it sounds insofar as China's vast market share translates into falling demand for export goods and thus tanks the economies of other countries, with which India trades.

What's your belief in economic warfare... Like Russian sanctions coinciding with falling oil prices.

Lol, I don't know about that!

OK grateful for decent dialog, In my circle people don't talk economics. This would explain my shortcomings in this subject.

It's largely esoteric stuff, but yeah, you'll get there.

HERE'S a Question: is it possible to have a sustainable economy, as in one that doesn't require growth? ...rhetorical... I think an economst that can do that would have the world in his palm

That doesn't require growth....

I mean, sort of -- if every business and person is working at full capacity, I guess it could conceivably work.

Economy baised solely on growth seems doomed for heavy corrections
Why not now?

Corrections in what way? I mean, I could see that being the case if growth was volatile or unstable, but central banks were created to mollify output and inflation volatility. The only we could sustainably have 0 percent growth and survive is if we were operating at full capacity already.

Resources and capacity are limited and you say full capacity as if that's unacheivable.
Everyone stands on their own dung hill and speaks out about someone else's - Nathan Krusemark
Its easier to criticize and hate than it is to support and create - I Ron Slippers