October 13, 2013

An Embarrassment For Economics

I suggested a topic on the Federal Reserve nominee. “What will the Yellen regime bring?”

A reply, “More of the same. The continued erosion of the American middle class. The continued enrichment of the 1% and especially the 0.1%. More stagflation.”

Another said, “Moar printing. Continued dollar destruction. Negative interest rates. Government takeover of 401ks. National Guard parked outside toilet paper factories.”

And another, “Yellen will bring more hope that the Fed can do what it cannot do. The Fed can lend, but it cannot lend us into prosperity.”

One had this, “One of Yellen’s more famous quotes is, ‘For my own part, I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system… I didn’t see any of that coming until it happened.’”

“I glean a couple of things out of this. First, top leaders are not necessarily deep thinkers, but rather decision makers - people ‘willing to take responsibility,’ something that gives many vertigo. Second, at least there is a belated admission from a top official that there just might be a danger with securitization and conflicts of interest with the credit ratings agencies. Blindingly obvious to most of us, but something to which the financial orthodoxy has blinded itself, because these things are so lucrative for themselves and their associates.”

“On the other hand, she seems to very much believe the ‘Fed Conceit’ that money injections into the economy and asset buying can do much to raise employment. It’s a warm fuzzy belief, but ignores the role of actual wealth creation in employment. And standard of living. If all it took was manipulation of the money supply to reach full employment and a high standard of living, Haiti could do it while producing little or nothing of value and having no useful social institutions.”

“So, she believes in the ‘Fed Conceit,’ while at least theoretically acknowledging the risks of the ‘privatize the profits, socialize the losses’ economic model. Net result: Bernanke II.”

May 15, 2005. “The president of the Federal Reserve Bank in San Francisco, Janet Yellen did an interview with ContraCosta Times. ‘Is it a bubble? Nobody ever knows for sure until one pops. I wouldn’t rule out the possibility that there’s a bubble and we could have house price declines ahead.’”

January 12, 2012, the New York Times, “As the housing bubble entered its waning hours in 2006, top Federal Reserve officials marveled at the desperate antics of home builders seeking to lure buyers. The officials laughed about the cars that builders were offering as signing bonuses. They joked about one builder who said that inventory was ‘rising through the roof.’”

“The transcripts of the 2006 meetings, released after a standard five-year delay, clearly show some of the nation’s pre-eminent economic minds did not fully understand the basic mechanics of the economy that they were charged with shepherding. The problem was not a lack of information; it was a lack of comprehension, born in part of their deep confidence in economic forecasting models that turned out to be broken.”

“‘It’s embarrassing for the Fed,’ said Justin Wolfers, an economics professor at the University of Pennsylvania. ‘You see an awareness that the housing market is starting to crumble, and you see a lack of awareness of the connection between the housing market and financial markets. It’s also embarrassing for economics,’ he continued.”

“‘The speed of the falloff in housing activity and the deceleration in house prices continue to surprise us,’ Janet Yellen, then president of the Federal Reserve Bank of San Francisco, said in September. One builder she spoke with, she said, ‘toured some new subdivisions on the outskirts of Boise and discovered that the houses, most of which are unoccupied, are now being dressed up to look occupied — with curtains, things in the driveway, and so forth — so as not to discourage potential buyers.’”

“Ms. Yellen did not believe that the problems in the housing market would have broader consequences. ‘Of course, housing is a relatively small sector of the economy, and its decline should be self-correcting,’ she said.”

“For the Fed 2006 began with the departure of Mr. Greenspan, who presided in January over his final meeting as Fed chairman and was then widely regarded as the epitome of a central banker, a master who had guided the American economy through almost 20 years of remarkably consistent growth. Ms. Yellen said: ‘It’s fitting for Chairman Greenspan to leave office with the economy in such solid shape. The situation you’re handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot.’”

Bits Bucket for October 13, 2013

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