Extraordinary Measures

[rowyn]

The Federal Reserve announced plans to buy $600 billion in Treasury bonds.

This ... really worries me. Government bond purchases are one of the things that the Federal Reserve can do to stimulate the economy. The Fed's biggest weapon is interest rates. In 2008, when the market was in freefall meltdown, the Fed lowered its target rate range to 0-0.25%.

It's stayed there ever since.

They also bought, over the last two years, $1.75 trillion in bonds.

Now, the economy currently sucks. Unemployment is high and while the economy is technically growing, this is mostly because it's shrunk so much in the last couple of years that getting bigger is no longer challenging. So I understand why the Fed feels presured to Do Something. It would be nice to fix the problem by Doing Something.

But ... glah. I don't know how to explain this. In the fall of 2008, I was afraid that the market was going to crash worse than it had in 1929. It felt like the entire world was terrified and running in a panic that was going to destroy the entire market-based economy, with devastating results. I wasn't afraid of the Great Depression II, which was crappy but survivable: I was afraid of something much worse. I was not the only one who saw the potential for an unparalleled disaster. When the Federal Reserve and the Treasury started twisting arms and forcing deals, lowering interest rates and buying bonds, when Congress authorized TARP, I hated it ... but I understood it. They were the leaders. They needed to show confidence when everyone else was scared. They needed to say "We will make our stand. We will make sure that the system does not fall." And because they stood behind it with the full faith and credit of the US government, it didn't fall. I don't know if everything they did then was necessary -- I never will -- but it wasn't TEOTWAWKI, and that by itself is something.

The economy today remains wretched, but it's no longer teetering on the precipice. Yet the Federal Reserve is keeping its target interest rate near 0%, and still buying Treasury bonds to boost the economy. And these things are ... gimmicky. Or maybe addictive is the better word. They don't really fix anything. They give the market a chance to fix itself and discourage people from making rash decisions. People are not making rash decisions right now. And the market is not the problem with the economy. The market is, if anything, too healthy given the state of the underlying economy.

I'm not sure what the underlying economy needs. A sense of stability and that the future -- in terms of taxes, regulations, mandates -- is predictable, maybe. But I really don't think that it's rock-bottom interest rates and the Fed buying government bonds. I don't think it's anything the Fed can do. One of the causes for the housing bubble was a long period of low interest -- and the rates then were higher than they are now. This is like, I don't know, taking uppers to make yourself forget that you're out of shape when you really just need to exercise more.

And worse, if we do have another crisis of confidence, when lowering interest rates would be the best thing to do -- how is the Fed going to drop rates below 0%? Sure there are things they can do ... but at some point, taking drastic measures sabotages confidence, rather than boosting it.

I hope they know what they're doing. I really do.

Comments

[level-head.livejournal.com]

A sense of stability and that the future -- in terms of taxes, regulations, mandates -- is predictable, maybe.

In my opinion, this nails it.

And last night's election is likely to force a "do no harm" situation -- by preventing much of anything from happening. I think this will have an immediate, positive impact on business, and thus the economy.

===|==============/ Level Head

[rowyn]

I admit, I am looking forward to having a Congress that can't get much of anything done. I'm increasingly feeling that if we can't convince 60-70% of people that something is a good idea, it probably isn't that good of an idea anyway. :/

[haikujaguar.livejournal.com]

A friend of mine and I were celebrating having voted for and achieved gridlock this morning. :)

[rowyn]

Yay for gridlock! The best part is that anything they do manage to get done will have to be so popular that it probably actually will be good. :)

[haikujaguar.livejournal.com]

That part I'm not sure of... I think it's more likely that it will have to involve everyone getting to line their pockets rather than only half of them. But I have become cynical that way. :,

[shockwave77598.livejournal.com]

The economy sux because nothing has been done to fix the core problem of it being better for a company to close all but headquarters in the US and ship all the other jobs elsewhere.

I think a solution is to tie tax rate to percentage of jobs in the country with your company and all subsidiaries and contractors. If all your employees are in the states then they are paying income taxes and your company's tax stays low. If all the jobs go overseas, then your company gets to pay the income tax that your former employees used to pay. Simple and legal. If your company wants low taxes then it needs to keep Americans employed, not Chinese.

[rowyn]

I don't get the impression that the global economy is doing awesomely, either. I don't really feel like we need to keep Chinese or Indian workers from being employed in order for the US economy to do well in the long term.

[shockwave77598.livejournal.com]

Consider the Magnaquench magnet maker. Chinese company wants to buy it. US regs prevent the sale on account of crucial tech leaving the country. Buyer promises not to move the company. Sale goes through. Manufacturing is then moved lock stock and barrel to Shanghai. Many lost jobs. Military-grade secrets and tech lost. And once again, the chinese prove that they understand a very basic addage better than we do -- it does not matter who sells the apples, it matters only who owns the orchard.

[terrycloth.livejournal.com]

China is doing pretty awesome. Dunno about India.

[ladyperegrine.livejournal.com]

I love your posts on the economy. I know that I should probably feel scared after reading this, but I'm more impressed with how much you know and how easily you convey the information.

[rowyn]

Thank you for saying this. I like talking about economics -- I find the field fascinating -- but some times it's intimidating to write about it here. Like talking politics or religion, though not quite so bad.

[tuftears.livejournal.com]

I'm confused too, why is the Fed buying bonds good for the economy? Are they buying the bonds from the Treasury, or are they buying from people who bought bonds back when?

[terrycloth.livejournal.com]

I think it replaces government debt with additional cash? So they're effectively printing money?

It's sort of confusing to me, yeah.

[rowyn]

I'm not sure where the Fed gets the money to buy bonds either, but I don't think it's replacing any government debt. The idea is that buying bonds drives down the interest rates by inflating demand. This is supposed to encourage people to borrow (because interest rates are low) and to use the borrowed money to produce and purchase good and thus encourage growth.

... I don't really think it's going to accomplish anything useful, though. Lots of people were saying that the last asset bubbles was spurred by low interest rates, and rates now are even lower already. I'm not opposed to borrowing in principle, but I don't think the problem with the economy is that people aren't borrowing enough.

[rowyn]

They're buying bonds from the Treasury and holding them as assets on their balance sheet. I am not sure where the Federal Reserve gets the money to buy the bonds; they hold deposits from banks, so they may be using the deposits they receive from banks to do the buying.

Buying bonds drives down the interest rates by inflating demand. The theory is that this will encourage people to borrow (because interest rates are low) and to use the borrowed money to produce and purchase good and thus encourage growth.

[tuftears.livejournal.com]

Hmm, well, I know I'm refinancing now because interest rates are low, but that's replacing an old loan that would have paid more interest with a new, lower interest loan, I'm not sure that's helping things any.

I guess that bond interest rates are set based on how much demand there is for the bonds, and if the Fed buys bonds, the Treasury sets lower interest rates on future bonds it provides? The cause/effect relationship this would have on growth still seems shaky to me!

[rowyn]

Yeah, it's shaky to me, too. Especially given how low interest rates are already! That's why I don't like the Fed's plan. :(

[terrycloth.livejournal.com]

The 'stability' thing is a popular talking point from the republican party, but it's really kind of a cop out -- "No, you didn't actually do anything wrong, but we're scared of you and that's enough to be bad! Ha, rebut that!"

But it really doesn't make sense that corporations would be sitting on trillions of dollars because they worry that their profits might be taxed more in the future thanks to scary democrats in congress, when the obvious answer is that they're worried that with 20% of the country unemployed, no one's going to buy their stuff. Especially since despite popular portrayals on both sides, corporations as a whole like/hate both parties equally. 9.9

Which means either companies are going to have to retool for export (to where?) or... that we're not going to have a healthy economy until employment improves. And since employment is a lagging indicator -- that would be a depression, unless something can kick us out of the hole.

(or else things will slowly get better over time, since that's the natural state of affairs as far as I can tell)

[rowyn]

(Or else things will slowly get better over time, since that's the natural state of affairs as far as I can tell)

That's what I'm expecting.

I don't think the last two years of Congress have done anything particularly useful with regard to the economy (I'm pretty sure TARP did some good, though, but that was a little over two years ago IIRC). But I hardly think the current state of affairs is due to recent governance, and I don't think that a Republican Congress would've done any better. It was a terrible time to come to power.

[octantis.livejournal.com]

I suspect we're going to have to crash and burn before anybody wakes up. I think our populace at large is a giant downsie with a two minute attention span and no impulse control. It's being teased and lured around and manipulated by people getting rich off it and finding it easy to do so with buzzwords. Everything is being done for the 'Merican People! The 'Merican People want this, not that! It wants everything, and wants it now! But hell no it doesn't want to pay for it! It's all the Muslims fault!

The only thing we respond to anymore is a direct punch in the face. We'll gobble everything up, natural and artificial, and when everything is too ruined to use anymore, our society will collapse and much of it will die and rot, starting from the poorest and going up.

Maybe what remains will be chastened and enlightened for a while. If they're lucky there'll be something left to work with, a shell of a planet they can eke out a living in while looking at beautiful pictures of what it once was.

I don't think gridlock is good. Maybe it can prevent people from making worse mistakes and hastening our crash, but it also seems to stop anyone from doing anything that might prevent the crash. And we're already falling, so if nobody is able to get anything done, we will crash.

Or maybe I'm a dumbass and just need my meds to kick in, I don't know what it is for certain. Maybe I don't know nothin'. If things do come to a head, I fantasize that by then I've managed to put together a self-sustaining plot somewhere out in the desert.

[rowyn]

I'm not anywhere near so cynical as you. :) I think that the current downturn is part of the typical boom/bust cycle that free markets go through periodically, and so it'll get better eventually just like all the others got better eventually.

I didn't really want to talk about politics, though, so I'm not gonna go on about it. I can certainly be wrong, too. :)

[octantis.livejournal.com]

I'm glad you're not, it's not fun being this cynical.

To me it's not just the economy, but our planet, but I won't belabor it. I really, really prefer your outcome and would like it to apply to our reality as a whole.

as an aside, someone double check this...

[tahkhleet.livejournal.com]

...my you were calm at the time. :)

but that was a good policy. Panic certainly didn't help me o_O

I was told actually the fed isn't "getting" the money from anywhere. The treasury is giving them money, which is it's power, and the Fed is spending it. it's trying to use currency devaluation to wriggle out of some of the debt and it only works if the majority of other major markets don't do the same damn thing. Which they almost always do. Usually the person who starts off the round of devaluation gets a little ahead, and distributes the loss through the national savings at a more favoured ratio. The others do it anyway because it lowers the relative competitive advantage given to the first devaluator. It's basically Roushambeau (sp?) for who's not going to be the patsy and take a hit to their economy for no gain at all. (which is what happen to people who refuse to devalue their currency at all)

Or so I heard.

Re: as an aside, someone double check this...

[rowyn]

That's interesting. I should look into this, although I'm not sure where to start. Hmmm.

[jurann.livejournal.com]

What they NEED to do is deflate the real-estate market and bust banks in the chops for sitting on houses without moving them. =P Some estimated THREE MILLION HOMES are sitting vacant in the US right now, those homes could be housing over NINE MILLION PEOPLE - and this is just what's being REPORTED. There are a lot of pretty valid theories (a la Patrick.Net for example) that the banks are intentionally mis-reporting numbers to make the problem look smaller than it really is. Nobody's buying real estate right now, which has the banks continuing to break down and fall a slow death (though they're gonna fall harder still when the housing economy deflates to where it SHOULD be) despite the super low interest rates. And the reason folks are not buying is twofold: nobody's LENDING and everyone KNOWS that the market needs to deflate. Buying now means you'll be underwater in 6 months to 5 years, whenever the market prices finally hit bottom and stabilize. In the meantime, smart folks like me are building a sizable down payment for when that day comes.

[rowyn]

I agree with you that the housing market needs to fall further and foreclosures need to be processed and sold faster. I think there's some foot-dragging on the part of banks, but I don't think the root of the problem is solely (or even mostly) within the realm of the banking industry to control. There's a huge unwillingness on the part of the government (which owns or guarantees 90% mortgages in this country) to admit that housing prices are still inflated, for instance. :/ I ... don't know how to fix this. I don't want to see another market near-collapse, or actual collapse, certainly, and I think some of the propping-up of prices is trying to prevent that. :(

[jurann.livejournal.com]

Well, you have a catch-22 then.

The top issue is that ARMs (a concept that was entirely a banking idea, and politicians (namely Reps) looked the other way when banks started offering them) permitted people to buy homes WAY out of their income range, because the banks found a new way to grab people by the balls and knew that the mortgages were gov't backed. Nominally, mortgage lenders won't even CONSIDER you for a mortgage if the home you're buying costs more then three times your annual household income (so if you and your spouse bring in $150,000 annually, you'd be limited to a $450,000 home by the lenders - period). With ARMs, they were willing to reach out up to 5 or even 6 times people's household income for a year, which really was just a giant formula for rape because it's completely irresponsible. BUT what that allowed the banks and appraisers to do is create a giant artificial swell in value - because hey, we'll lend money to people for these RIDICULOUSLY EXPENSIVE homes! And everyone makes more - the bankers make more because they're charging higher interest on higher value homes, the appraisers win because they're hired and paid by the banks and are riding the real estate value wave, and the realtors win because their commission fees are a percentage of the home value. So you had a system where it was in EVERYONE'S best interest on the sales and lender side to inflate the value, while still being able to sell homes.

The bottom issue in the catch-22 now is that ARMs have been outlawed, and lenders have gotten REALLY tight-pursed about new loans and mortgages. They have gone back to the traditional levels of realism where 3 times your annual household income is the upper limit to a mortgage, and they are judging credit more harshly than they did during the Carter administration now. Which means virtually no one can buy a home in the current over-inflated market. So the market value has to come back down to realistic/normalized values in order to start moving again. The banks aren't motivated to foreclose on unpaid mortgages because it means they will have to start paying property taxes, and they KNOW they won't be able to move those homes and get out from under them without deflating the prices.

So ultimately the banks and appraisers and realtors need to suck it up, live off the cream they've been artificially collecting for the last 10-15 years, and do the market a favor by re-adjusting the value of the market back to realistic levels. The smart ones took all of their rape money and invested it into stable growth options - the ones who didn't are bawwing and butthurt that the scam's up.

[genkitty.livejournal.com]

We're currently trying to buy a house, and our buyers' agent hates dealing with short-sales (in foreclosure, not yet foreclosed) because the sellers' lenders move at a glacial speed to approve/reject offers from buyers. To the tune of waiting for months for them to respond, to the whole process taking 4-6 months to close. We were pleasantly surprised to have one of our offers actually get a response in under 2 weeks (a rejection).

It's crazy down here in the Tampa area!