October 27, 2013

An Act Of Faith

A poster suggested this topic. “Any chance Congressional Republicans will muster the political might to put the kibosh on Yellen’s nomination? Given the political importance of the Federal Reserve Chair appointment, would it make sense to reconstitute it as an elected position?”

A reply, “Where were those same republicans when Greenspan was running the show ??”

From Forbes. “When Ben Bernanke completes his second term as Federal Reserve Board chairman in January, Janet Yellen should be more than ready to take the helm of the U.S. central bank, according to Wharton faculty and other experts. ‘She has to thread the needle between the Democrats, who want assurances for further supports for the economy, and the Republicans, who are concerned that [continuing] QE forever will give rise to asset bubbles that will set up the next crisis,’ says Phillip Swagel, a University of Maryland public policy professor and former assistant secretary of economic policy at the Treasury during the George W. Bush administration.”

“If growth and employment don’t pick up, we could be in QE for a lot longer than expected, says Kent Smetters, Wharton professor of business economics and public policy. ‘We could have a Japanese-style lost decade. The conditions are very similar: We have a bad banking sector and lots of government debt. But in many ways, we’re in a worse position, because Japan has a high household savings rate, and we have a low savings rate. Tapering could be pushed off for 10 years, starting from the beginning of the crisis.’”

“The enormous injection of liquidity by the Fed also threatens another bubble. Both the Fed and the banks have trillions of dollars on their balance sheets as a result of the Fed’s asset purchase program, says Wharton finance professor Joao F. Gomes. ‘The Fed will have to manage these amounts carefully to prevent an explosion of credit in the years ahead. The magnitude is so large — it’s never happened before — that it’s an act of faith that they have all the tools to prevent another boom and bust and inflation.’”

“Smetters concurs. ‘The Fed tripled money supply in the last four years, almost all held by banks in excess reserves. Even though we think subprime mortgages are behind us, they are not. The whole commercial side of the real estate bets will come to light next year, as the leases come up and we see the renewal rates and whether commercial loans are viable. There’s still a lot of uncertainty.’ Moreover, there’s another great ‘crisis at our doorstep — the tidal wave of [public] debt,’ Smetters adds. ‘How does the Fed keep the economy [running] when so many resources are going out to service higher debt and the budget deficit? Historically, the challenge has been met by printing money, which causes inflation. I give it a 95% chance that this crisis will come on Yellen’s watch.’”

Bits Bucket for October 27, 2013

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