The WSJ reports on an interview with a Fed official who says that the central bank will keep rates at 0% for two more years at least. But right now, banks have no reason to lend (zero earnings) and no one has any reason to save (zero earnings), and the risk associated with long-term projects is nowhere reflected in these obviously phony rates signals. What’s striking too is that the plan hasn’t work, just as it didn’t work in Japan. And yet the Fed persists.
Source link: http://blog.mises.org/11061/the-fed-plan-two-more-years-of-stupid-things/
The Fed Plan: Two More Years of Stupid Things
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“What’s striking too is that the plan hasn’t work, just as it didn’t work in Japan.”
Work for who? It’s actually working perfectly for the ones who own the printing presses. Borrow at 0% and buy something that grows more than 0%. Like gold. Let’s say gold grows 30%. If you get 10x leverage, your return is 300% (assuming you don’t get margin called somewhere in between). Printing press owners want as much inflation as possible.
Gotta keep stimulating, man. Just keep on stimulating. The Economy (TM) will get the hint eventually.
Isn’t this whole 0% rate just for the heck of it anyway since the Fed is paying the banks to hold on to their reserves?
It’s not like they are actually borrowing money from the Fed.
This would be hilarious if it weren’t so sad. Even a meth addict knows that you have to crash sooner or later. Apparently, the Fed is not as smart as a tweaker, even with the negative example of the Japanese Lost Decade.
BTW, “What’s striking too is that the plan hasn’t work, just as it didn’t work in Japan.”, should be “…the plan hasn’t workED…”
Zero interest rates – hmm. Insanity – doing the same thing over and over again and expecting different results. “I’m forever blowing bubbles.” This time it’s the stock market.
I have a question for whoever can answer it. Is the Federal Reserve paying interest on bank reserves they supplied, or bank reserves in general? That is, do banks get paid interest for holding onto pre-existing reserves, or reserves which are formed by the savings of their clients?
The reason why I ask is because there is still lending going on, even if the volume has decreased. I wonder if the money being lent is from reserves which existed before the reserves were bolstered, or from the newly created money.
Johathan,
I think it’s actually the opposite. Banks “borrow” reserves from the Fed and pay interest on the increased reserves. The idea is that the short-term loan will stimulate lending, which will produce some form of economic activity that looks good on a piece of paper and allows economic planners to puff out their chests and claim that they “did something to help the economy”.
Ron,
The Federal Reserve is currently paying interest on reserves held by banks (I think it’s the real rate of interest, which is the rate of interest tied with inflation).
This isn’t surprising. A few months ago I looked into the timing of the NBER declaring a recession over and the Fed first hiking rates. Using Greenspan’s actions (which, granted, conditions are somewhat different), it gave a projection of March 2012 being the earliest the Fed will raise rates. Here’s a section of my article:
July 1990 to March 1991 Recession:
This recession was declared to be over on December 22, 1992, 21 months after it ended. The Fed began raising rates on February 4, 1994, 35 months after the end of the recession and 13 months after the end of the recession was announced.
March 2001 to November 2001 Recession:
This recession was declared to be over on July 17, 2003, 20 months after it ended. The Fed began raising rates on June 30, 2004, 31 months after the end of the recession and 11 months after the end of the recession was announced.
So under Greenspan, the Fed averaged a delay of 33 months between the recession ending and raising rates. There was even an average delay of 12 months between the NBER announcing the recession and the Fed raising rates. The Fed, despite its need to anticipate and act quickly, was unexpectedly behind the ball. One might wonder if the NBER would do a better job of monetary policy, but I’ll keep the focus on the timing, not the competence, of the Fed.
This data can be used to make a projection of when Bernanke will raise rates, specifically the earliest he would do so. The earliest the recession could reasonably be declared to have ended would be Q2 2009. So, under the assumption that the end of the recession occurred in June 2009, that yields the following projection:
1) The NBER will announce June 2009 was the end of the recession in February or March 2011.
2) The Federal Reserve will begin raising rates in March 2012.
Yes it is working, it is working for those who want it to work (the political scientist and the economic scientist.)
Of the world they want a world with no first world or third world just second world world wide.
To Jonathan Finegold Catalán.
The Federal Reserve is paying interest on *all* bank reserves, at a rate of 0 to 0,25% for the moment. It is not necessary at a fixed rate: it could fluctuated.
The money being lent is from the actual reserves whatever where they come from, and also from the money received in term deposits and the money they get by selling assets, like mortgages.
Usually the money from the reserves is for short term loans, and the money from term deposits is for longer term loans. They also invest the money instead of loaning it.
Zero Percent Interest Rate Foolishness!
This part of the plan (monetary policy) is perfect if you ask the Nobel Laureate for Wackonomics Paul Krugman. The reason there are no booming results according to this same charlatan is that the stimulus (fiscal policy) is exponentially too small.
Are all these Keynesians so stupid? They are totally consumed with ego-driven interventionism. Their ignorance and maliciousness can be described as satanic.
They’ll peg that rate as close to zero for as long as possible. Why not, the world is still lending us $100 bil a week – most of which is short-term and at ridiculously low rates – and the financial sector can take advantage of the spread between short-rates, and longer durations. Price inflation is minimal (although evidence of rising inflation expectations is appearing – gold, TIPS spreads.) Everyone wins, except the responsible savers who are losing on the nominal yield AND the real yield. The USD would naturally appreciate during-after the crisis if the fed didn’t intervene. Those who made the correct/responsible decision to de-lever before the crash, holding cash balances and fixed income assets, had their future wealth stolen and redistributed to those who were wrong/irresponsible and levered(liable) into the crash. The unseen.
…
The Fed needs to pay interests on reserves so as not to lose control of the fed funds rate. The huge amount of bank reserves floating around the interbank market would put a ceiling and downward pressure on rates. If prices inflate, rates on financial assets will become more attractive and banks will be less likely to hold reserves. So, the reserves will either restrict the fed from tightening (by holding down the effective fed funds rate) or get invested/lent by banks, both exacerbating the price inflation.
Most of the reserves are non-borrowed now so the fed would have needed to sell securities it owns or reverse repo some of the reserves back. The former won’t happen any time soon; the latter relies on the primary dealers’ willingness and/or ability to conduct repo’s for 100′s of billions in reserves. It’s also temporary in nature.
By paying interest on reserves, and increasing this rate if necessary, they can theoretically neutralize them before they get into credit-money creation mode with the banks expanding credit, and creating deposits. A natural rise in short-rates, or fed intervention will be needed; will the fed let rates move up? They are trying to deflate real debt burdens (particularly for the US Gov)… they don’t want to see positive real rates. They want low rates AND inflation. They should be careful what they wish for.
It’s tempting to say they are just playing an expectations game, and have to, for the bond market.
They want to blow that bubble as big as they can before the market itself forces their hand.
The Fed is not an existential threat. The Fed is a full blown malignancy.
Those economists at the likes of Paul Krugman have no concept of private property. They think that the various economic actors are merely cogs operating the economics machine and that society should be organized to operate this machine as fast as possible.
Krugman views us as slaves who should work hard and spend everything to keep the economy accelerating.
From his economist’s ivory tower, he cannot grasp that people couldn’t care less about the economy in general and that they work to bring food on the table, send their kids to college, pay down debt and mortgage and embetter their lives while saving for their future.
And he cannot grasp that without government intervention, such crisis and business cycles would not happen in the first place and that savings would be the pre-requisite for future investments and growth.
Krugman is a creature spawned by big government and his species will probably be extinct when the concept of big government will be revolved.
But unil then, were headed for two more years of stupid but dangerous things. This stupidity comes from the fact that the fed decides the interest rates rather than let the market decide it and those fale signals will create malinvestments in the midst of a financial crisis.
Things are going to get a lot worse before they get better, this is not the kind of stupidity to laugh at. It’s a national and global tragedy.
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