Comments on: Too much, or too little

By: DOR

DOR — Thu, 28 May 2009 03:33:20 +0000

I’d like a major risk of inflation, please.
Deflation is much more difficult to break than inflation. We have solid experience about how to break inflation, but deflation is mostly just theory.

Having experienced both, I’ll take inflation.

By: Twofish

Twofish — Thu, 28 May 2009 02:13:31 +0000

The increase in US Treasuries at the long end of the yield curve may have something to do with people moving money out of Treasuries and into corporate bonds, in which case the net result is likely to be more or less dollar neutral.

By: Twofish

Twofish — Thu, 28 May 2009 02:06:39 +0000

ReformerRay: The refusal to allow the chips to fall shows that the leadership of the U.S. does not believe in the ability of the private sector to re-invent itself.

That’s largely because very few private sector people in banking and finance think that the US financial system would have survived the sorts things we were looking at last year.

By: A shift in US Treasury markets « Wasatch Economics

A shift in US Treasury markets « Wasatch Economics — Wed, 27 May 2009 23:48:35 +0000

[...] A good analysis of recent activity posted by commenter David Pearson over at Setser: [...]

By: locococo

locococo — Wed, 27 May 2009 23:07:03 +0000

…Just an example: Banking trade groups are lobbying the Federal Deposit Insurance Corp. for permission to bid on the same assets that the banks would put up for sale as part of the government’s Public Private Investment Program. The FDIC insures deposits at 8,246 institutions with $13.5 trillion in assets. The insurance fund, generated by fees paid by banks, fell to $13 billion from $17.3 billion in the previous quarter, and failures in the quarter cost the fund $2.2 billion, the FDIC said and insured some more bonds to be released with a FDIC stamp to all those hungry investors out there as the long end does the thing that sits Ben firmly in the chair. Again…

By: don

don — Wed, 27 May 2009 22:56:04 +0000

“what do you all think of the argument that more QE (treasury purchases) means higher inflationary expectations, and thus it won’t succeed. fed has to buy more and more to keep nominal yields down …”
I would say the total amount of the debt is the main inflation concern, more so than how it is distributed. As PK explained, fighting deflation is something of a balancing act, as it involves setting future expectations, which can shift suddenly. The question is, if expectations shift, will the Fed be able (or even want to) soak up the reserves they have created. I think Ben will favor more inflation than I would. Ultimately, the amount of debt, and the extent of the debt burden, will determine if it is to be honored in full or partly reduced through inflation.
To me, the biggest danger is that the Fed and Treasury will keep stubbornly to their wealth maintenance strategy (bailouts of banks and legacy lenders), denying the possibility that the Treasury won’t be able to afford it. The Fed is entering dangerous grounds in taking on questionnable loans that the taxpayer may (and probably will) end up paying for. Such budget considerations are properly undertaken by Congress, not the Fed.
For those who trust the Fed more than Congress, consider the legacy of AG, recall that Ben was with Hank in arguing that the housing crisis would probably not spread to the overall economy, and consider the bank stress tests, which were more a political than an economic exercise. I don’t think Ben is unprincipled, but he is surrounded by those with a vested interest in denying the extent of the bad loan problem.

By: jonathan

jonathan — Wed, 27 May 2009 22:37:10 +0000

The long-term aspect of QE has always struck me as self-contradicting because the more you do it, the more you both indicate and create long-term weakness that requires you to do more which indicates and creates more weakness, la di da. I understand there was a desire to buy long to break the credit log jam but QE to maintain rates strikes me as an example of the apocryphal story of King Cnut the Great: Cnut put his throne on the beach and commanded the tide to stop and when the tide refused to listen, Cnut said this showed the limit of man’s powers versus God’s.

If we continue with QE for the long end – QEII? – then that might be the story of the deaf spider. You see, there was a scientist who decided to test a spider’s ability to respond to commands. He removed one of the spider’s legs and said, “Walk, spider, walk.” The spider walked and the scientist recorded in his lab book, “Spider with 7 legs walks.” As he removed more legs, the spider still tried to walk. Even with only one leg, the spider still moved and the scientist wrote, “Spider with 1 leg tries to walk.” The scientist removed the last leg and commanded, “Walk, spider, walk!” The spider didn’t move. He repeated, “Walk, spider, walk!” The spider still did not move. The scientist then squashed the spider and wrote in his lab book, “Spider with no legs is deaf!”

By: Twofish

Twofish — Wed, 27 May 2009 22:33:57 +0000

apachecadillac responds: Why does everyone always assume the brightest and most innovative people in the world live in the United States?

They don’t, but the United States has a system of government and economics so that bright, innovative and passionate people find it easier to make something of themselves in the US than in most other places.

By: locococo

locococo — Wed, 27 May 2009 22:31:01 +0000

Cedric, there is another school of thought that thinks you have a huge klepto problem not an economic/monetary one – the latter just covers the former over. Then there is this other school that says this crisis is of an IQ – stressed in a test a bit too much – origin… who d know tho…

anyway, nice post .

By: Twofish

Twofish — Wed, 27 May 2009 22:28:55 +0000

FollowTheMoney: The United States is home of the most bright and innovative people in the world, and we should not lose that.

And there is no reason I can think that the US is in any real danger of losing that.

FollowTheMoney: What concerns me is that the majority of the Goldman Sachs, JPMorgan, Blackstone, etc hire a bunch of the Ivy League talent. Talent that majored in Arts, History, English, and in some cases Music.

They also hire lots of electrical engineers, physicists, and mathematicians. If you go into any trading floor, what do you see, computers. Lots and lots of computers. JP Morgan has more programmers than Microsoft.

You get an interesting mix of people in banking. Also Goldman-Sachs and JPMorgan tend also to hire a lot from state schools (i.e. University of Michigan, University of Virginia and the like.)

FollowTheMoney: In some cases, (speaking of my close friends) that went to these Ivy Leagues have absolutely no care to be working in finance whatsoever but just do it because it “presents them in the correct light”. Attend TRINITY, go to YALE, and work at GOLDMAN.

Which explains why Goldman-Sachs has such a notoriously, rigorous, and painful hiring process. They put people through many, many rounds of interviews precisely to get rid of these people.

FollowTheMoney: What would be great for this country is if the big banks went to the University of Idaho’s or the university of Nebraska and seek out the passionate set with finance skills??

They do. The problem is that in order to work for a large corporation (any large corporation), you can’t be too passionate. You have to work with people, at that means you have to take orders and take out the trash. The key is to be around people that you think you are not going to give you orders that you would have problems following.

FollowTheMoney: At the same time this music major could have been starting his own online music platform, managing a group, or building a record label.

Which turns out to be total hell because you are competing against the million other people that want to do the same thing, and you quickly learn that it’s all about money, anyway. Once you try to do something “artistic” you very quickly learn that it’s people that either have money or know how to get it that call the shots, and that gets you back into banking and finance.

FollowTheMoney: Our country needs a plan to focus on the future. And now is a good time to for us to start! Let’s reshape and rebuild!

But all of this comes back to money and respect. If you want me to work at a community college or high school, you aren’t going to do it if you pay me dirt and worse yet treat me like dirt. Even the “do this because it’s good for the world” doesn’t work, I think I’ve done more good in playing a tiny role in stopping the next great depression anything I could have done teaching bored students that just need a credit to graduate.

If Obama can create a new system in which people that go into academia can be paid as much as and have as much influence as people that go into banking, they I’m all for that.

I have my doubts that he is going to be able to do that.

It’s easy to talk about changing things, but you quickly figure out when you do, is that it comes back to money.