The Fed as "Pusher"

I strongly disagree with this op-ed, the NYTimes ran:

At Long Last, Stocks Get a Jolt by William D. Cohan

What happened to change the mood so dramatically, so quickly? Is the panic selling justified — or is it just the first glimmer of hope that the Fed will finally take the metaphorical morphine drip out of the arm of the capital markets and allow the forces of supply and demand[!] to set long-term interest rates?

Like the Great Depression happened because the forces of supply and demand and panic were allowed to run rampant.

Demand management is set by the government in concert with the private sector. The government utilizes monetary and fiscal policy to set demand levels - up to a point. If the private sector is bubblicious, the government should take away the punch bowl and reign it back int. If the private sector is fearful, depressed and sitting on their cash, the government should inject some "metaphorical morphine drip" and help boost demand and employment.

The economy should not have a large output gap (which grinds away at long-term growth potential and productivity) just because the private sector is malfunctioning.

Fear Is Contagious by David Glasner

...

But for a contrary view, have a look at theeditorial (“Monetary Withdrawal Symptom”) in Friday’s Wall Street Journal, as well as an op-ed piece by an asset fund manager, Romain Hatchuel, (“Central Banks and the Borrowing Addiction”). Both characterize central banks as drug pushers who have induced hundreds of millions, if not billions, of people around the world to become debt addicts. Hatchuel sees some deep significance in the fact that total indebtedness has, since 1980, increased as fast as GDP, while from 1950 to 1980 total indebtedness increased at a much slower rate.

Um, if more people are borrowing, more people are lending, so the mere fact that total indebtedness has increased faster in the last 30 years than it did in the previous 30 years says nothing about debt addiction. It simply says that more people have been gaining access to credit markets in recent years than had access to credit markets in the 1950s, 1960s and 1970s. If we are so addicted to debt, how come real interest rates are so low? If a growing epidemic of debt addiction started in 1980, shouldn’t real interest rates have been rising steadily since then? Guess what? Real interest rates have been falling steadily since 1982. The Wall Street Journal strikes (out) again.

The NYTimes editorial board did run this editorial which agrees with Krugman that the Fed has little to be optimistic about.

The Fed’s Next Move by the Editorial Board

Rents and Patent Trolls

Profits Without Production by Krugman

What Makes Apple, Google, and Microsoft Different From the Corporate Titans of Yesteryear by Yglesias

Krugman Discovers Intellectual Property: The 1 Percent are the Takers by Dean Baker

The Second Great Depression: Why the Economic Crisis Is Worse Than You Think by J. Bradford DeLong

DeLong is less critical of Clinton and Summers than Blinder is. And Clinton blurbed it!

A Potentially Tragic Taper by Krugman

The Fed Provides “Forward Guidance” on the Taper and May Be, Once Again, Too Optimistic by Jared Bernstein

FOMC Statement: Second Reaction by Tim Duy

Tradeoffs by Steve Randy Waldmann

The Simulati

Why are the fiscalists (MMTers) such pricks?

The OMT Goes to Court by Carola Binder

What's a Central Banker To Do? by David Glasner

Commenter "PeterP" (prickish ID):

I think your post is a bit self contradictory. How can the Fed manage expectations if it is not running the economy? If it did manage expectations it would in fact be running the world economy, but it can’t.

Each time monetarists are asked to show mechanisms they either invoke some stuff that is experimentally not detectable (expectations Imp) or mechanisms that cannot work in the real world (like the hot potato effect or the money multiplier effect).

"Monetarists." 

Obama Raises Possibility of Change at the Fed by Binyamin Appelbaum

True Blood premiere switches from vampire politics to threesomes by Meredith Woerner

Fed Fiesta

So if Bernanke sticks with September to taper off QE and bending to the wishes of the inflation hawks then Zero Hege / Canandian investor were right in their reading of the tea leaves. They suggested there was a quid pro quo where Bernanke obtained consensus for more QE in the face of the fiscal cliff in exchange for tapering later if things weren't a disaster. Plausible but I'd bet against Zero Hege.

Fed Watch: FOMC Meeting Begins Tomorrow by Tim Duy

What the bond market is telling the Fed by Gavyn Davies

The “lower for longer” message on rates, which has been so carefully crafted by the FOMC’s forward guidance, seems to have been thrown overboard by the bond market with remarkable alacrity as soon as the Fed has indicated that it may slow the pace of policy easing. The reason for this is that past history is replete with episodes in which the Fed has tightened policy very rapidly once its enthusiasm for easing has started to wane.

The 1994 example, when the Fed failed to guide the markets about the likely pace of tightening, is of course part of the folklore of the bond market. Less well remembered is the example of 2003, when the first signal that the Fed was slowing the pace of easing was followed by a 100 basis point rise in bond yields within a few months, even though the Fed’s forward guidance about tightening at a moderate pace was increasingly explicit.

The problem is that, once the market starts to believe that the Fed is “done”, it will inevitably start to build into the yield curve a rising probability that the FOMC will embark on a normal path of tightening before too long. In order to mitigate this, Mr Bernanke is likely this week to remind the markets that the intention to slow asset purchases “in the next few meetings” is contingent on events in the labour market, is not the start of policy tightening, and is completely distinct from any intention to start raising rates.

The Fed has of course said that it will keep short rates at near zero until the unemployment rate has fallen to 6.5 per cent, subject to projected inflation remaining under 2.5 per cent. One way of forcing home the message that this will not happen soon would be to reduce the unemployment threshold to 6.0 per cent. This would be in line with the Fed’s fundamental view of labour market behaviour, as previously argued here.

If the chairman wishes to regain control of the market’s path for forward short rates, he may need to reduce the unemployment threshold to 6 per cent before too long. But I do not expect him to go that far this week.

It's not just the Fed by James Hamilton

When it does announce tapering, the Fed will try to reiterate that the rise in short-term rates will still not come until much later. But just as QE3 added emphasis to the declaration of a commitment to an extended period of low interest rates on the way down, ending QE3 will tend to detract from that message as we start to look at the path back up.

And just as a weak economy was the primary reason the Fed embarked on QE3, a strengthening economy will be the primary reason the Fed ends it. And if the economy is strengthening, interest rates will be headed up, regardless of whether the Fed keeps buying bonds or not. It's worth emphasizing that the recent rise in interest rates has been a global phenomenon, not just something seen in the United States.

Interest rates on 10-year government bonds, weekly, June 1, 2012 to June 13, 2013 for the US, Canada, and the UK.

If you want to claim that the recent rise in rates is just an anticipation of what the Fed is going to do, the story has to be that the U.S. Federal Reserve is causing the whole world to move.

The alternative view is that it's a big world out there that will ultimately force the Federal Reserve to move.

Why Orphan Black's Tatiana Maslany deserves an Emmy nomination by Lauren Davis

The Entire Premise of True Blood Explained in 36 GIFs by Meredith Woerner (Yes!)

And we kind of miss the V-juice sex trips....

And we miss Woerner's recaps. Hopefully this afternoon.

A quick note on “helicopter drops” by Steve Randy Waldmann