Federal Reserve | timiacono.com - Part 55

How to Tune a Car While Driving 40 MPH

A few years ago, Ben Bernanke likened sitting in the big chair at the Federal Reserve to attempting to tune up a car engine while driving said car at 60 miles per hour.

Given that the central bank seems intent on adjusting its $85 billion in monthly bond purchases up or down on a somewhat regular basis beginning sometime later this year, it appears that car tune-up analogy is applicable again and Bloomberg’s Caroline Baum has some thoughts on the subject (the Fed, not the analogy) in this commentary today.

If I understand Bernanke, he is saying that every six weeks policy makers will examine an array of leading, coincident and lagging indicators, most of which are revised and subject to seasonal distortions, to take the economy’s pulse and reassess the forecast. From there, they will determine the appropriate amount of monthly bond purchases.

This idea is as infeasible in theory as it is in practice.

BloombergUnlike the physician who uses real-time feedback to adjust the dose of a patient’s medication, central banks operate in a world of long and variable lags. Their predictive models have a poor record. The continuation of QE has always been predicated on an improvement in “the outlook for the labor market,” rather than an improvement in the labor market per se. Call it a better jobs market once removed. The inherent flaws in the theory should be apparent.

As a practical matter, the plan is no more viable.

“The Fed doesn’t have a methodological way of calculating the relationship between asset purchases, interest rates and the economy,” says Jim Glassman, senior U.S. economist at JPMorgan Chase & Co.

He’s right. But you could say the same thing about the Fed’s traditional policy tool, the federal funds rate, and the preference for adjusting it in 25-basis-point steps, according to Neal Soss, chief economist at Credit Suisse Group AG in New York. Both have “the same element of science, judgment, and trial and error,” Soss says.

He’s right, too. But interest rates are a lot more visible.

The conclusion that this will be “an extreme case of micromanagement that is likely to run amok” seems spot on and the Fed may already be regretting what, to some, appeared to be a somewhat hasty decision back in December to launch open-ended QE.

The virtuous circle of Federal Reserve largess and rising asset prices is once again showing up in the economic data, primarily consumer confidence, but Americans are now more optimistic about their retirement prospects as well, based on the latest survey from Gallup.

Of course, what’s really significant about this data is that the outlook for retirement has changed in dramatic fashion from a decade ago. After the internet stock bubble burst in 2000, Americans were still pretty sanguine about their golden years, all the way up until the bursting of the housing bubble more than a half-decade later.

That’s when many Americans realized what we have here is a bubble economy where their retirement future is something of a crap shoot. This is probably a big reason why the positive responses have yet to exceed the negative ones in the survey above since the financial crisis and the recession that ended almost five years ago.

HAMP Mortgage Mods Extended Thru 2015

It was reported yesterday that the Treasury Department has extended the Home Affordable Modification Program two more years, through 2015. This comes despite helping just a fraction of the borrowers that it was intended to help and with alarmingly high default rates for those who have advanced to the “permanent” loan modification stage.

This subject has been covered many times over the years as indicated below:

Mar 2010 – The New Road to Serfdom – Part 63
Apr 2010 – The Government’s Loan Mod Bizarro World
May 2010 – HAMP Back-End DTIs Are Getting Ridiculous
Jul 2010 – Another Way to Look at HAMP
Feb 2011 – Loan Modification Data in Need of a Pie Chart

I don’t know if there have been any substantive changes made in how the program operates (none turned up in recent press reports on the extension) but, in the past, the major problem with the program has been that it saddles borrowers with extraordinarily high impossible levels of  debt service as shown below from 2010.

How are these loans doing in 2013? Bloomberg reported the following yesterday:

In April, the auditor overseeing the disbursement of funds said homeowners participating in the program were re-defaulting on their loans at an “alarming rate.” Between 30 percent and 40 percent of homeowners who obtained modifications in 2010 have re-defaulted, the special inspector general for the Troubled Asset Relief Program said.

Yet one more example of “extend and pretend” it would seem.

A couple of CNBC interviews worth sharing. First Doug Kass is surprisingly bullish on gold.

And, not surprisingly, Davide Stockman doesn’t think much of what the Fed is doing.

I have to agree with Rick Santelli when he says of Stockman, “What a dude!”

Do the Math

Here’s another fun video from a Grant Williams presentation, this one a mathematical perspective on the recent central bank money printing / stock market extravaganza.

Don’t let introductory topics like “The real part of any non-trivial zero of the Riemann zeta function is 1/2″ deter you – this is pretty entertaining and informative stuff.

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