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It still pales in comparison to what was done a few years ago, but, at its current pace, the Federal Reserve’s generous central bank liquidity swaps now aiding European banks will soon rival that of the 2008-2009 financial crisis as shown below, another $37 billion being added last week to bring the total up to just shy of $100 billion.
For those of you new to this story, see this WSJ commentary by Gerald P. O’Driscoll the other day and his appearance on CNBC on the same subject.
I’ve never really gotten that argument about how the Federal Reserve and U.S. government tightened too soon in the late-1930s and, as a result, induced another recession. In his column today, Paul Krugman notes:
“The boom, not the slump, is the right time for austerity at the Treasury.” So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him right by trying to balance the budget too soon, sending the United States economy — which had been steadily recovering up to that point — into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.
Yet, anyone able to look at the data back in 1937 would hardly see the U.S. economy as “depressed”, not after three straight years of real GDP growth averaging 11 percent. While perhaps not a “boom”, a “strong recovery” was certainly underway by then.
To be sure, the 1930-1933 downturn was severe, but, according to the data from the BEA above, the U.S. economy had returned to its 1929 bubble output by 1937 when all the policy mistakes were supposedly made.
According to this item at Occupy Wall Street News, the African-American faith community will join forces with Occupy Wall Street to protest economic injustice on Martin Luther King Day next month and they intend to “Occupy the Federal Reserve” in up to twelve cities across the country where regional central bank offices are located.
There’s more than a little bit of irony in the event also being referred to as “Occupy the Dream”, that is, just two years in advance of the 100-year anniversary of the founding of the Fed, what, to the biggest of the banks back then was a “dream” of a monopoly over the industry at a time when smaller regional banks were rapidly gaining market share.
So far, it’s worked out pretty well for them, if not for the rest of us.
The Federal Open Market Committee made no changes to monetary policy at their last meeting of the year that concluded a short time ago and provided no further hints at action they are likely to take next year.
They simply upgraded their assessment of the U.S. economy after the generally positive data that has been received since they met last month and, with a much friendlier board composition in 2012, will begin their work anew in six weeks.
Gone next year will be board members who cast dissenting votes on more accommodative policy changes in the fall – Richard Fisher of the Dallas Fed, Charlie Plosser of Philadelphia, and Narayana Kocherlakota of Minneapolis – while three of the four incoming voting members – John Williams of San Francisco, Dennis Lockhart of Atlanta, and Sandra Pianalto of Cleveland – appear open to more easing should the economy stumble.
The only 2012 voting member who has voiced opposition to more easy money from the Fed will be Richmond Fed President Jeffrey Lacker, so, when considering the improvement in the economy in recent months, the “nothing sandwich” from the group today shouldn’t be surprising in the least.
Markets were clearly looking for more, but they’ll have to wait until next year.
Today’s FOMC policy statement is shown below alongside the one from last month.
Since we’ll be out when the Federal Open Market Committee meeting adjourns in an hour or so, offering up yet another policy statement for an increasingly fragile global economy, this story at The Onion seemed worth sharing between now and the time that we return.
To no one’s surprise, Fed Chief Ben Bernanke came in #1 in the short list of most influential economists and, sadly, the satire website’s characterization of what he’s accomplished probably isn’t too far off the mark.
More evidence that economists in general and dismal scientists at the Federal Reserve in particular are hopelessly and dangerously detached from reality (i.e., guided by the mistaken belief that, if something doesn’t exist in their models, neither does it exist in the real world) comes via this Associated Press story about a new study by the central bank detailing how wild speculation drove the late, great U.S. housing bubble.
A new federal report shows that speculative real estate investors played a larger role than originally thought in driving the housing bubble that led to record foreclosures and sent economies plummeting in Nevada, California, Arizona, Florida and other states.
Researchers with the Federal Reserve Bank of New York found that investors who used low-down-payment, subprime credit to purchase multiple residential properties helped inflate home prices and are largely to blame for the recession. The researchers said their findings focused on an “undocumented” dimension of the housing market crisis that had been previously overlooked as officials focused on how to contain the financial crisis, not what caused it.
More than a third of all U.S. home mortgages granted in 2006 went to people who already owned at least one house, according to the report. In Arizona, California, Florida and Nevada, where average home prices more than doubled, investors made up nearly half of all mortgage-backed purchases during the housing bubble. Buyers owning three or more properties represented the fastest-growing segment of homeowners during that time.
“This may have allowed the bubble to inflate further, which caused millions of owner-occupants to pay more if they wanted to buy a home for their family,” the researchers noted.
I saw this last week when it was originally published and should have mentioned it at the time (the report from the New York Fed can be found here), but, now that it’s getting lots of attention in the mainstream media it’s a case of better late than never.
By Tim Iacono, Since 2005
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