Federal Reserve Admits it Never Knew What it was Doing

By: David Haggith | Thu, Oct 20, 2016
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Janet Yellen

The Federal Reserve is, at last, acknowledging at top levels that its economists are completely baffled, its recovery is failing, that the Fed cannot raise interest and may even have to heat up its stimulants ... or we may end up with a permanently scarred and stagnant economy.

Federal Reserve bank president expresses deep reservations about Fed's recovery

Last week, Boston Federal Reserve President Eric Rosengren opened a meeting with Fed Chair Janet Yellen with the following statements:

He said the "nonconformist" behavior of the economy remains a challenge for policymakers trying to determine whether low growth and low inflation are now a permanent state of affairs.... It could mean the country's economic performance has changed for good. Policymakers are trying to determine "whether firms and households have changed behavior in ways that are likely to be more permanent than transitory, whether slow growth in productivity is transitory or permanent, and whether recent trends in personal saving behavior are likely to persist well into the future," Rosengren said. The answers will shape whether officials at the Fed and other central banks ... will have to keep nontraditional tools in hand and be prepared "to address any emerging risks to the current recovery." The fact that 10 year Treasury yields remain near or below zero on an inflation-adjusted basis, Rosengren said, "suggests a lack of confidence in U.S. and global growth prospects, and in the ability of policy authorities to offset weak growth." ~ Newsmax

Really? You figured that out all by yourselves? Good job, guys. Yes, there is a great lack of confidence in your ability to do just about anything. Yes, your plan has created an economy that is destined to remain stagnant until it dies. Yes, the economy is "non-conformist" to regular economic principles because you have engineered a recovery that is entirely based on irregular ways of thinking and have all but eliminated free markets in anything that trades in this world with your infinite ability to create meaningless money to pump into those markets. Therefore, the market of everything follows the Fed, rather than conforming to normal economically based decisions, because the Fed IS the economy now.

And all of this is a "challenge" for you because you haven't got a clue as to what genie it is you let out of the bottle. And, yes, it does mean the country's economic performance has changed for good or, at least, until your experiment in alchemy blows up so we can get back to real economics. Until then, the economy is destined to endless life support in order to remain comatose on the operating table.

We're all glad you're finally starting to see the shape of things to come. You are worse than the old-world alchemists who tried to make gold out of baser metals. You try to make money out of nothing and then pretend it has value, even as you create near-infinite amounts (trillions of dollars) of it. And, then, you believe the nothing you have puffed up with your hot air can create enduring productivity and wealth throughout the nation.

Clearly, your centrally planned economy is not running quite well as you would like or as you puppets of mastermind Ben Break-the-Banky thought it would, or you wouldn't be talking about how it is not conforming to the ways you thought it would go after all of your quantitative wheezing and free loans. Once you finish figuring out why your plans aren't working, if you need any arsenic for yourselves, I'm sure you can find plenty of people who will help you get ahold of some.

Yellen not yellin' "recovery" any more

Next, the comments of Fed Chair Janet Yellen proved equally enlightening as to how economically unenlightened the Fed actually is:

Federal Reserve Chair Janet Yellen said Friday that the slow recovery from the Great Recession has surprised economists, confounding long-held beliefs about growth and inflation. Her remarks could help explain why the Fed has been reluctant to raise U.S. interest rates. ~ Newsmax

How odd that you would be surprised by this, Janet, given that I started writing this blog years ago because I was certain your recovery would fail and that any real recovery from the disaster that was created by the Federal Reserve, which we call the Great Recession, would take more than a decade to succeed.

You are surprised because your religious beliefs about growth and inflation are completely oblivious to how free-market economies actually function. Because of this false belief system, the Fed and its modern economists completely failed to see the great abyss that was coming in 2007 and 2008. To this day, you completely fail to see that we are still standing in that same abyss. It was your mentor who sat in your chair, Ms. Yellen, who infamously said he didn't see a recession in sight during the summer of 2008 when he was standing nose-deep in the middle of one.

So, are we surprised your surprised? No. Readers of blogs like this expect you to be surprised. Being surprised by real-world economic reality seems to be the one thing you do well. I'm sure you thought you could nudge interest rates off the bottom in December, 2015, without destroying the stock market that you court and the economy as a whole and were surprised when the market immediately plunged into its worst January in market history. I'm sure you were surprised that things looked so bad by February, 2016, that you had to hold two closed-door emergency meetings with your board of governors right after one of your regular meetings and then follow that with an emergency meeting with the president and vice president, also behind closed doors, in order to try to fix the problems that were suddenly showing up quite starkly.

I suspect you were surprised when you found you could not raise interest rates four times this year as you telegraphed you might do ... and then couldn't raise them three times ... and then couldn't even raise them twice in one year ... and now appear to be preparing the way in your comments below for the possibility that you won't be able to raise them even once this year.

Yellen said sluggish worldwide growth will likely keep global interest rates low, making it harder for central banks to combat the next recession with rate cuts.

Umm. Yeah. There was no surprise in that here. I predicted a year ago that you would raise interest rates in December of 2015 for the first time in years because you were feeling great pressure to prove you could do it that year in order to show your recovery would hold. At the same time, I predicted that it wouldn't hold and that you would become paralyzed and unable to raise interest rates again after that.

I said that things would start to fall apart so badly in 2016 that even you would be able to figure out that raising rates a second time would certainly finish off your fantasy recovery. (It only exists on the high fumes of low interest that you keep breathing into its lungs in the form of nearly free loans.) Clearly, you don't call as many top-level, back-to-back emergency meetings as you did in the first part of this year unless something has gone seriously awry.

So, I venture to say that things looked quite dire and that you found a secret way in your closed-door, emergency summits to patch the economy along through the election cycle; but your comments below indicate you don't think the fix will hold much longer. Your own comments make it clear enough that things have turned out so badly you are now forced by circumstances to prepare the general public and the business world for the possibility that the economy may have to run on near-zero interest for a very long time to come.

As with the aftermath of the Great Recession, Yellen noted that economists have at times been baffled by the economy's refusal to comply with their expectations.

There it is again. This time from the big horse's mouth. Admission that the economy is completely refusing to act as you think it should — that it is not responding to your life support. And you are baffled as to why that is. You don't have a clue, or you'd give the answer to that question at the meeting where you were speaking; but you didn't.

Unfortunately, you were given the world as your play pen in which to experiment with your shiny new alchemy kit as you try to figure out how the world works. The rest of us are just here to enjoy the explosions and clean up afterwards.

Thus, you were baffled before the Great Recession, and you've been baffled ever since. You are as baffled now as Alan Greenspan was baffled when the housing market proved that it actually can slow down and even go in reverse, in spite of ever-greater Fed stimulus to that market, in spite of a nearly religious belief (at the time) that real estate never crashes. Greenspan was an economist who was baffled that diminishing returns exist as an economic law. He tried to fly into the sun, and his wings melted off. Apparently he thought the Fed had overcome gravity.

Readers of blogs like this are not baffled, however, because they understand such basic economic realities as ... you cannot fix an economy that is dying under the weight of its own monumental debt by piling up more debt. Seems simple to us, but somehow it is beyond your capacity to fathom such a concept. I'd say the Federal Reserve has peas for brains; but, really, peas can have worms in them, and worms have real brains, regardless of how small, and that's more than can be said about the creatures that inhabit your little pod of experts. You are a strange anomaly: you are experts who are dumber than the average person in the area of your own expertise. Thus, you have to admit ...

The aftermath of the 2007-2009 crisis has "revealed limits in economists' understanding of the economy," the Fed chair suggested.

Indeed it has! It has revealed that you do not even understand the very most basic economic principles, such as the law of diminishing returns, the fact that debt is not wealth, the basic premise that you cannot create demand just by expanding supply, or the idea that, if you make it easy for investors to make easy money, they will take the easy path and do no real work.

The Great Recession has revealed that the limits in economists' understanding are apparently greater than any of us imagined prior to the Great Recession. That event was a real coming out party for you and your buddies. Many of us have no delusions that you understand anything anymore. We're seriously wondering if you're capable of tying your own shoes without tying them together and falling on your faces.

Telling us what you learned from the Great Recession gives us some insight into how blind you are:

Tumbling home prices reduced consumers' willingness to spend more than economists had envisioned.

That was kind of a weird thing for you guys, too, wasn't it? To find out that, when home prices fall and people are deeply underwater in debt, you can't entice them to goose the economy with more consumption by offering them additional debt at a lower cost? I guess that was a revelation for you — that you cannot endlessly expand debt in order to keep expanding an economy that is entirely based on debt. Turns out, we've hit maximum debt where the average person doesn't want any more of it at any price, so you're forced to keep the price of new money down at near-zero.

And a steady decline in the unemployment rate has failed to lift wages and inflation as much as economic models would indicate.

You say your economic models are failing? Who would have seen that coming? You give all the new funny money to banks by the trillions for free to spend as they wish in the marketplace, and they find it is easier to make money by pricing stocks up in endless rounds of speculation just as houses got priced upward in the run-up to the Great Recession. Then it turns out the money continually gets reinvested in stocks and bonds and never on building factories and hiring more workers at higher rates to get better workers because ... who needs to work for their money when when it is being created and given away for free by the trillions and when it can be multiplied time and again by just bidding up stocks? Why build factories and hire more skilled workers when money comes that easily and that risk free?

(There were no risks because you telegraphed quite openly under the Bernanke Doctrine of New Fedspeak that you would keep creating the money and giving it away to invest in bonds and stocks for years. That's why the market went into convulsions whenever you hinted at quitting the money printing in months ahead or raising the cost of new money. But you weren't even smart enough to realize those convulsions happened because the patient was so entirely dependent on your medicine that mere talk of taking the Meds. away threw the patient into paroxysms of fear.)

So, what we are really in is a money bubble. The money bubble inflates a stock bubble and a bond bubble at the same time. You created a Fed Fantasyland, a Wonderland where stocks went up when business news was bad because bad news meant you'd keep creating and giving out your magic elixir. You created a realm in which bonds and stocks went up and down together, whereas in the real world they used to run opposite of each other, because their rise and fall had nothing to do with the economy and everything to do with the incoming supply of new Fed money. You see, in Fed Fantasia, diminishing corporate earnings were of no concern when evaluating stock prices because no one was betting on the performance of a business but just on the performance of the Fed and on whether companies would use your magic money bubble to buy back shares and drive their own stock prices up. You created a realm of complete economic fantasy, and then you are flabbergasted that things don't respond as they used to. You are amazing ... just not in the ways you think you are.

The rest of us are more like flummoxed that you can't figure out why things aren't working, and we're frustrated because we cannot figure out how to explain these basic concepts down to your level.

Ah, but the days of bubble money are nearing their end because December is almost here when you will have to either prove you were completely unable to raise interest rates by the tiniest fraction for an entire year — after the minuscule fraction that you raised them last December — or go ahead and raise them again to prove you can and, thus, kick over your own rickety recovery.

Have fun with that.

Yellen prepares public for no future interest-rate increases

And that's why you are now preparing the entire world for the possibility that you may be keeping rates low for a very long time:


Yellen said the sluggish recovery suggests that "it is even more important for policymakers to act quickly and aggressively in response to a recession" and that policymakers might need to provide more stimulus "during recoveries than would be called for under the traditional view."

In December, the Fed raised short short-term U.S. rates from near zero, where it had kept them for seven years. Fed policymakers had been widely expected to raise rates several times this year, but they have not, citing persistent uncertainty about the economic outlook.

Given that the Fed traditionally speaks in minimalist language of hints and whispers, these words are rather bold in their implication that your surprised economists see that the economy's failure to respond means you will have to mainline your stimulus even beyond the historically extraordinary levels of economic cocaine you have been doling out for free in recent years. The shot of epinephrine didn't start the patient's endlessly resuscitated heart this time around, so maybe if you just drop the patient in a vat of the stuff, that will stir some action.

Given your assessment of things to come, I don't suppose you'll be raising interest rates in December. Pour the epinephrine-cocaine Kool-Aid down his throat and into his nose and through his veins all you want, but he's not going to move. (Actually this realization on your part doesn't completely convince me you won't be dumb enough to try another interest increase just to prove you really are doctors ... because desperate people are unpredictable in their final moments.)

Thus, you and your cronies at the Bank of England have stated that you will likely let inflation grow beyond your 2% target before raising interest to curb inflation so as not to damage the economy:

In a further indication that the Federal Reserve will be inclined to let inflation run hot for a while, Chair Janet Yellen on Friday said it's useful to consider the benefits of a "high-pressure economy." Yellen said the post-financial crisis period has pushed policymakers into reconsidering the dynamics of inflation. ~ CNBC

Ah, yes. You're caught in a bind because you've been saying for years that you'd back off on the administration of stimulants once you got the patients heart rate up to a level of 2% inflation and once you got to full employment. Now, you see you are almost at that level and, yet, nowhere near being able to end your stimulus; so you are preparing the world for the idea that maybe we are in exceptional times where 3% inflation for a limited time would be a good idea just to jumpstart things. If that doesn't work, try 4?

The Federal Reserve sees no recovery in sight

Let me pre-empt you in sharing your next comment, Janet, by stating outright that you are blaming the need to go past 2% inflation by staying at near-zero interest on the past crisis, rather than admitting you've been administering all the wrong medicine: (Italics mine.)

(Reuters) – The Federal Reserve may need to run a "high-pressure economy" to reverse damage from the 2008-2009 crisis that depressed output, sidelined workers, and risks becoming a permanent scar, Fed Chair Janet Yellen said on Friday in a broad review of where the recovery may still fall short.

Though not addressing interest rates or immediate policy concerns directly, Yellen laid out the deepening concern at the Fed that U.S. economic potential is slipping and aggressive steps may be needed to rebuild it.

Yellen, in a lunch address to a conference of policymakers and top academics in Boston, said the question was whether that damage can be undone "by temporarily running a ‘high-pressure economy,' with robust aggregate demand and a tight labor market."

"One can certainly identify plausible ways in which this might occur," she said. Looking for policies that would lower unemployment further and boost consumption, even at the risk of higher inflation, could convince businesses to invest, improve confidence, and bring even more workers into the economy.

Sounds to me like you're preparing everyone for the possibility that the Fed won't be raising interest anytime in the foreseeable future. You know that inflation and employment have met the Fed's targets, so you will be out of excuses by December for not raising rates. You fear the Fed's "recovery" cannot handle even the smallest raise so you are running this idea of a supercharged economy (one where higher inflation than the target is allowed) up the flag pole ahead of your next too meetings to see how it is accepted. If it's accepted, there will be no rate increase.

You're hoping the world will pretend the you and your hooded colleagues have discovered wisdom in raising your inflation target now that the Federal Reserve has met its original target since real recovery is crumbling all around you. Things may be giving way slower than I said they would this year, but your comments show desperation, revision of tired doctrines and realization that the landscape is falling apart everywhere.

Let me just offer you and your colleagues in merry old England a piece of advise: the further down Recovery Row you go, the less bang you get for the buck or less pop for the pound. You have not overcome gravity; you have not overcome the Law of Diminishing Returns. So, even drowning the patient in epinephrine is not going to restart his placid heart. At best, you'll get one dying reflex kick. And the further you go with this, the worse real recovery will have to be when we try to get off the drugs.

So, just stop.

Just stop already.



David Haggith

Author: David Haggith

David Haggith
The Great Recession Blog

David Haggith

My path to writing this blog began as a personal journey. Prior to the start of this so-called "Great Recession," my ex-wife had a family home that was an inheritance from her mother. I worked as a property manger at the time, and near the end of 2007, I could tell from rumblings in the industry that the U.S. housing market was on the verge of catastrophic collapse. I urged her to press her brothers to sell the family home before prices dropped. The house went on the market and sold right away -- and just three months before Bear-Stearns and others crashed, taking the U.S. housing market down for the tumble. Her family sold at the peak of the market.

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