FOMC January 2013 Statement

"The foundations of the Maginot Line were the war cemeteries of France."

Vivian Rowe, The Great Wall Of France, 1959

Nothing really new in the FOMC statement, but we have to view this in the light of the shocking revelation from the recently released Fed Notes that they failed to see the crisis coming even in the days before the financial system teetered on collapse.

These are old and tired generals, fighting new wars with the old tools and tactics.

Until the banking system is reformed, the Fed will continue to attempt to prop it up, and stand by doing little else while the real economy stagnates. Except perhaps to foment yet another imbalanced, unstable bubble in financial instruments.

Press Release

Release Date: January 30, 2013

For immediate release

Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors.

Employment has continued to expand at a moderate pace but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has shown further improvement.

Inflation has been running somewhat below the Committee’s longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.

Although strains in global financial markets have eased somewhat, the Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee will continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.

Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.

In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations.

Bernanke's Hammer: When You Have a Printing Press, Everything Looks Like a Monetary Transaction

"I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail."

Abraham Maslow, The Psychology of Science, 1966

Apparently while Maslow made this saying famous with a more elegant formulation, the original source of the image is from a Mr. Kaplan who wrote his 'law of the instrument' in 1964.

"I call it the law of the instrument, and it may be formulated as follows: 'Give a small boy a hammer, and he will find that everything he encounters needs pounding.'"

Speaking of boys and their toys, the word that has made its way across the trading desks is that the Fed's put is back on, or more colloquially phrased, while Bernanke keeps printing, certain favored classes of assets can keep going higher, without regard to fundamentals, except for significant event-driven incidents, that will be quickly papered over.

Otherwise, the dips will be shallow and the trend will be maintained.  For how long I do not know, but as the VIX shows, perceived risk is back down to low levels that we have not seen since the growing credit bubble of 2004-2007.

As an aside, before snarky propeller heads with little better arguments to make point out that the Fed does not literally 'print money,' we all know that. It is a degenerate profession that mixes a pretension to lofty equations and high science with the taunts and arguments of the schoolyard, when they act as the politicians' bullyboys.

The pity is that 'the printing press' is not the only instrument at the Fed's disposal.  After all, they are a significant regulator of the banks, and have gained even more power and influence since the financial crisis.  But as might be obvious to most, they are a terribly conflicted regulator, and given to remarkable lapses in judgement.

Monetary inflation without reform is the 'solution' that most favors the monied interests and the financial class given the extractive nature of the system as it is.

The second most favorable policy is 'austerity,' again without serious reform.  One can increase the value of their own pile of ill gotten gains relative to others through either policy.  It is no choice when you can pick the choices you give to the people, all of which are favorable to you.

Unfettered capitalism is remarkably inventive in its ability to transfer wealth and destroy value.  It commoditizes everything, and subordinates all to a place on its hellish balance sheet.

The meme on the financial markets is that there may be shallow pullbacks, or even a greater correction in response to a specific event, such as the 'fiscal cliff,' but the Fed's policy is to target asset inflation once again, through the Too Big To Fail Banks and hedge funds, and their buying of paper at non-market prices.

There is also a belief, whether it is right or wrong, that the regulators will turn a blind eye to the capping of certain commodities like gold and silver, in the name of managing them as rival currencies.  Even a folk hero like Paul Volcker has previously endorsed this as a policy.

This turning of things upside down is what has been called Rubinomics, the principle that by supporting the buying of certain select instruments such as SP futures ahead of a crisis, one can more efficiently avert a financial problem than by allowing the markets to reflect the fundamentals, and then to clean up the mess afterwards.   It's cheaper and easier he observed.

It is the belief that rather than an instrument of price discovery within the real economy, the financial markets ARE the economy, and will lead rather than follow.  And it has become a form of financial totalitarianism through the manipulation of policy and money.

Robert Rubin articulated this policy perspective while he was the Secretary of the Treasury, and he somehow persuaded Greenspan, then the Chairman of the Fed, to go along with it, shortly after the Maestro had made his famous 'irrational exuberance' speech.  Although it should be noted that Greenspan had already found that tool, and used it.  He merely took it to another level, not as a response to be used to a crisis as in the case of the Crash of 1987, but as a proactive tool of financial engineering.

And this was the genesis of the principles of new Modern Monetary Theory, which in fact is a concept as old as the hills, appearing over again with different names, and the source of much recent misfortune through several Presidencies.

"Notwithstanding anything said or done by the Congress this year, operating through trained surrogates such as Geithner, Summers and others, Robert Rubin is still pulling the economic and financial strings in Washington. The fact that there is a Democrat in the White House almost does not seem to matter. President Obama arguably has a subordinate position to Rubin because of considerations of money."

Chris Whalen, The World According to Robert Rubin

And this is the problem I have with this Modern Monetary Theory that would save the system by placing the ability to simply create money in the hands of the Treasury, to be wielded such titans of sound judgement as Robert Rubin, Hank Paulson, and Tim Geithner, with oversight perhaps by those incorruptibles and paragons in the Congress.

I do not like the banking system as it is, as you know if you frequent this Cafe.  The corruption of insider dealings, opaque deals, and unequal justice has displaced the discipline of well run markets.

The system as it is has all the problems, inefficiences, and injustice of a corrupt and self-serving oligarchy. This is not to say that is a grand conspiracy, but rather a series of unfortunate events and human tendencies, aiding the actions of a relative few.

The solution seems obvious, which is to reform the system, to provide for transparency and the rule of law, and a return to regulations and reforms that worked for decades.  And it is not to replace it with some gimmicky solution that has the same faults or worse, that will be used by same rotten, self-serving gang of idiots and careerists.

And this is why I do not even favor something more rigorous like a return to a gold or mixed metal standard now, because with the system as it is, it would surely be used as an instrument of control and repression.  A corrupt system can corrupt all.  Ask the Greeks how an external standard like the euro is working for them.  It has become an instrument of official plunder. 

The thought of the central government having the power to set official gold prices and control inventory, which they most surely would do, makes one shudder. At least in a nominally free market they can provide some refuge against financial engineering, given a wide enough timeframe.

So what about the markets, and such similar financial engineering notions as 'Nominal GDP Targeting."  Well, we can wonder how the Fed might want to actually achieve such a thing, short of going out and buying iPhones and foodstuffs.  Would it be to continually stuff money into the banks and their associated companies and camp followers, and wait for the trickle down effect?

We have seen the result of such an approach in the past.  The 'hot money' seeks beta, and that means financial paper, and frauds like collateralized debt obligations, tied to whatever hapless aspect of the real economy that is convenient, such as housing for example.

And the self same snarky economists will say, 'Where is the inflation?' and point to the very instruments of measurement of inflation that have been distorted and disabled so as not to show it, 'Chained CPI' being the most recent aberration.  And they know full well that in a situation in which the money supply is being expanded selectively and distributed through a relatively narrow source like the biggest banks, the inflation will show up selectively for quite some time, in inflated assets, bonuses and even industries like the tech sector if one can remember back to the 1990's.

I know how tempting it is for 'a little boy with a hammer' to go about pounding everything in sight.  But at some point, the adults have to come and take away that hammer, and restore the instrument to its proper usage in the service of real work and creative, productive activity.

Be careful in this market.  In markets where stocks trade like commodities, the technicals tend to be dominant because the market is a cynical game of supply and demand, squeezes in both directions, divorced from the underlying economic fundamentals. And it has been made worse by the light volumes, as few bystanders want to put their money down on the three card monte table, such as it is.

The pity is that it is strangling the flow of money to the real economy.

Max Keiser interviews Jesse Eisinger of ProPublica about his recent piece in Atlantic magazine, "What's Inside America's Banks?"

I would like to see Mr. Eisinger interviewed on the Bill Moyers show on PBS.

I doubt he could obtain a fair hearing on any mainstream media channel which prefers to stage manage their discussions in the manner of red versus blue.

A House Divided: A Synopsis of Bernanke's Speech at Jackson Hole, and What It Means

When listening to a speech like this, one has to remember who is speaking and under what conditions. A Fed Chairman has a thousand watt megaphone attached to his chest, and so he must speak quietly and calmly, in order not to disrupt markets and place the Fed in the middle of political controversies. Unless you have actually been close to or in a position of power, where your words carry great significance, it is all too easy to forget this.

Bernanke addressed his problem with the dysfunctional Congress, gridlocked by luddites and libertines, and the serpentine leadership style of Obama.  He is trying to stand his monetary policy on a two legged stool, and it is not working.  The all important fiscal side of economic governance is broken.  Not so much that it is doing the wrong things.  Rather, the process itself is broken, hopelessly frozen by ideological warfare and implacable extremes.

He reiterated that the Fed has the additional policy tools to deal with the situation, in addition to the unprecedented actions they have taken already, although there is a lack of consensus on his own Fed. It is significant that they have expanded their September meeting from one to two days in order to discuss this more fully.

Bernanke gave a particularly sharp rebuke to the Congress, at least by Fed Chairman standards, for the debt ceiling deadlock and discussions that recently shook confidence in the markets.

There is little doubt in my mind that the Fed will put some additional scalable programs in place before the end of the year. The introduction of new programs during a Presidential election year is typically considered to be only acceptable at extreme risks to the banking system and obvious duress to the economy.

As a reminder, there will be another Non-Farm Payrolls number out next week.

There are forces in the US that are on the offensive, and pushing for a crisis in order to better obtain their objectives. What Bernanke is doing is positioning the Fed on the sidelines as best he can, while signaling that they will act once again, overtly or quietly, to prevent a major financial breakdown.

But he is stressing that the Fed has done quite a bit already, and they cannot do it alone. The monetary actions are ineffective without a fiscal counterpart. Like most observers, the Fed sees a broken governance process, and the new super-committee is likely destined to fail in more gridlock. The Fed will not act again except under the duress of an approaching crisis, although they will have the programs in place in anticipation of that crisis.

The US is a house divided against itself. Until the system of governance is repaired, the Fed cannot be reasonably expected to take up the burden of the nation's problems on its own.

So for the future, listen to what the Fed says, but more importantly, watch what the Fed does. And some of that may be opaque, at least for the time being.

This is not necessarily what I think, or what I would do if, God forbid, I was the Fed Chairman. This is what Bernanke is thinking in his own words, and what I believe he is doing, and to some extent, why he is doing it.

Fri Aug 26, 2011 10:00am EDT

JACKSON HOLE, Wyoming, Aug 26 (Reuters) - The following are highlights of Federal Reserve Chairman Ben Bernanke's speech on Friday to a central bank conference sponsored by the Kansas City Federal Reserve Bank.

On economic growth, inflation outlook:

"The recent data have indicated that economic growth during the first half of this year was considerably slower than the Federal Open Market Committee had been expecting, and that temporary factors can account for only a portion of the economic weakness that we have observed.   Consequently, although we expect a moderate recovery to continue and indeed to strengthen over time, the Committee has marked down its outlook for the likely pace of growth over coming quarters.

"With commodity prices and other import prices moderating and with longer-term inflation expectations remaining stable, we expect inflation to settle, over coming quarters, at levels at or below the rate of 2 percent, or a bit less, that most Committee participants view as being consistent with our dual mandate."

On what the Fed's recent policy decision means:

"We indicated that economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. That is, in what the Committee judges to be the most likely scenarios for resource utilization and inflation in the medium term, the target for the federal funds rate would be held at its current low levels for at least two more years."

On what other tools the Fed has:

"In addition to refining our forward guidance, the Federal Reserve has a range of tools that could be used to provide additional monetary stimulus. We discussed the relative merits and costs of such tools at our August meeting. We will continue to consider those and other pertinent issues, including of course economic and financial developments, at our meeting in September, which has been scheduled for two days (the 20th and the 21st) instead of one to allow a fuller discussion. The Committee will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate to promote a stronger economic recovery in a context of price stability."

On market volatility:

"Financial stress has been and continues to be a significant drag on the recovery, both here and abroad. Bouts of sharp volatility and risk aversion in markets have recently reemerged in reaction to concerns about both European sovereign debts and developments related to the U.S. fiscal situation, including the recent downgrade of the U.S. long-term credit rating by one of the major rating agencies and the controversy concerning the raising of the U.S. federal debt ceiling. It is difficult to judge by how much these developments have affected economic activity thus far, but there seems little doubt that they have hurt household and business confidence and that they pose ongoing risks to growth. The Federal Reserve continues to monitor developments in financial markets and institutions closely and is in frequent contact with policymakers in Europe and elsewhere."

On long-term economic growth prospects:

"It may take some time, but we can reasonably expect to see a return to growth rates and employment levels consistent with those underlying fundamentals ... Notwithstanding the severe difficulties we currently face, I do not expect the long-run growth potential of the U.S. economy to be materially affected by the crisis and the recession if -- and I stress if -- our country takes the necessary steps to secure that outcome."

On the impact of monetary and fiscal policy:

"Normally, monetary or fiscal policies aimed primarily at promoting a faster pace of economic recovery in the near term would not be expected to significantly affect the longer-term performance of the economy. However, current circumstances may be an exception to that standard view ... The quality of economic policymaking in the United States will heavily influence the nation's longer-term prospects. To allow the economy to grow at its full potential, policymakers must work to promote macroeconomic and financial stability; adopt effective tax, trade, and regulatory policies; foster the development of a skilled workforce; encourage productive investment, both private and public; and provide appropriate support for research and development and for the adoption of new technologies."

Quantitative Easing: the Opiate of the Banks

Much is being made of Bernanke's program of quantitative easing, which is nothing more than an extreme form of artificially low rates of interest with direct monetization of debt in the aftermath of a financial crisis.

The current program of quantitative easing is not only no miracle cure, it will not work at all, will not 'fix' the problems that are plaguing the American economy in any substantial manner. It is a misguided subsidy and reinforcement of reckless behaviour, and a corrupt distribution of wealth.

Quantitative easing would only be a cure if the crisis had been caused by an exogenous credit shock, a sudden withdrawal of liquidity due to an event unrelated to the workings of the domestic economy like a war or an act of nature.

But this is clearly not the case. For the cause of the financial crisis was in fact a lengthy period of artificially low interest rates under the chairmanship of Alan Greenspan, which allowed all manner of financial excess and malinvestment and even fraud to fester in the real economy for a protracted period of time until it became embedded, and one might even say a dominant force, in the economy. It warped and distorted the productive economy.

Applying quantitative easing may relieve the symptoms of the credit crisis but it is merely a palliative, not a cure. It is similar to the case of a debilitated addict who, being denied his marcotics, goes into shock and suffers a heart attack. Yes, a 'fix' of the drug of choice will relieve the short term symptoms perhaps, but will do nothing for the underlying state of health which will continue to worsen.

The very low rates of interest have 'cured' the short term credit seizure in the financial markets, thereby providing time and opportunity to engage in genuine systemic reform and rebalancing to repair the distortions that caused the crisis in the first place: an outsized and corrupt financial sector, and a system of global trade that is freakishly imbalanced and manipulated by command economies and multinational corporations. That, and a lapse of western governance overcome by greed.

Until those reforms are made, the US economy will experience a series of bubbles and crises that, through the US dollar reserve currency system, will shake the governments of the world to their foundations.

The Bernanke Fed

As the maestro, Greenspan, was ultimately shown to be greatly mistaken, perhaps even a fraud, so eventually Ben Bernanke also will be shown to be cut from the same cloth, with less verbal acuity. His approach to the US banking system is naive, as one might expect from an eager student with little or no practical experience.

"Mr. Bernanke, an academic who has never worked a single day in his life. He will take anything off a cliff: a business, a McDonald's stand, the Federal Reserve. And I have to say I have a certain sympathy for him as a character. He's ok, but completely useless. I would not even hire him as my butler...Mr Bernanke is a madman, a destroyer of the value of money. And he is a wealth destroyer and an economic criminal. It is the duty of a central bank to keep the value of money. I believe today for ninety percent of Americans life is harder than it was in 1999. Basically I think they are a bunch of crooks."
Marc Faber on King World News

"There is no room for ambiguity in this story. Bernanke was at the Fed since the fall of 2002. (He had a brief stint in 2005 as chair of President Bush’s Council of Economic Advisors.) At a point when at least some economists recognized the housing bubble and began to warn of the damage that would result from its collapse, Bernanke insisted that everything was fine and that nothing should be done to rein in the bubble."
Bernanke and the Corruption of Washington Culture - Dean Baker

Ron Paul On Bernanke and the Fed