Federal Reserve | timiacono.com - Part 55

Also from CNBC, it appears that most Wall Street types think that, tomorrow, the Fed will set the stage for the start of “tapering” their $85 billion money printing effort in September, at least according to the results of the survey shown below.

CNBC Taper Poll

Naturally, the two labor reports that are released over the next five weeks will play an important role in what the Fed does at their September meeting, but, absent any dramatic change, it looks like we’ll see a reduction, about $20 billion according to the poll.

It seems that rookie Scott Sumner gets the better of Peter Schiff in this discussion about Fed money printing and inflation on Larry Kudlow’s show (yes, he’s still on the air).

I was reading the CNBC transcript to the right of the video at CNBC until it displayed this:

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In Defense of Larry Summers

There’s a lot not to like about Larry Summers, but something positive emerged last week.

As you no doubt already know, along with current Federal Reserve Vice Chair Janet Yellen, Summers is one of the two leading candidates to be the next Federal Reserve Chairman and, as such, his views on Fed money printing and the lack of aggregate demand as the proximate cause of our economic woes found in this Financial Times story($) should make things pretty interesting were he to actually get the job.

First, on “quantitative easing”:

“QE in my view is less efficacious for the real economy than most people suppose,” said Mr Summers according to an official summary of his remarks at a conference organised in Santa Monica by Drobny Global, obtained by the Financial Times.

And, perhaps more importantly, on an economy’s “potential” output:

Larry SummersIn his remarks in April, Mr Summers said it was likely either the economy would accelerate, or else estimates of its growth potential would have to come down.

“If we have slow growth, we are not going to keep thinking that 5.5 per cent unemployment is normal,” said Mr Summers. “We are going to decide rightly or wrongly that the potential of the economy is less and therefore we are going to decide that we are closer to that potential and that is going to operate in favour of suggesting that we should normalise interest rates.”

You don’t hear this sort of talk from anyone other Austrian economists and, to PhD economists in the U.S., it’s about as close to blasphemy as you can get.

With the tenure of Fed Chief Ben Bernanke almost surely ending in about six months, between now and then, we are likely to hear lots of retrospectives on the job that he’s done and Floyd Norris gets the ball rolling in this New York Times article that features none other than Australian economic Steve Keen who, along with a few others, saw what was coming.

It is amazing that a lot of criticism of the Federal Reserve today focuses on what it clearly got right — the response to the debt crisis in 2008 and thereafter, a response that may well have prevented Great Depression II — and not on what it got wrong: policies that allowed the dangerous imbalances to grow and bring on the crisis.

Steve KeenWhen I talked to Mr. Keen this week, he called my attention to the fact that Mr. Bernanke, in his 2000 book “Essays on the Great Depression,” briefly mentioned, and dismissed, both Minsky and Charles Kindleberger, author of the classic “Manias, Panics and Crashes.”

They had, Mr. Bernanke wrote, “argued for the inherent instability of the financial system but in doing so have had to depart from the assumption of rational economic behavior.” In a footnote, he added, “I do not deny the possible importance of irrationality in economic life; however it seems that the best research strategy is to push the rationality postulate as far as it will go.”

The current period is not unlike the Great Depression in that, for most economists, all the bad stuff started in 2007-2008, rather than in the years leading up to the crisis. Most of the Bernanke legacy talk will center on the post-2008 period and that’s a real shame because central bank policy was instrumental in creating the mess that Bernanke inherited.

One need look no further than the 2006-era thinking that financial innovation in the form of subprime lending, etc. was really Technology-Driven Wealth Creation.

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