Larry Summers Calls Fed Bank Stress Test Results ‘Absurd’
bloomberg.com
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So central banks printing trillions of dollars (aka Quantitative Easing) to prop up asset prices (and thereby drastically increasing income inequality in developed countries) had nothing to do with record low interest rates?
These people sure have a way of "explaining" things without really explaining anything at all.
And if QE were the whole of the story behind low interest rate I would really expect much higher inflation than what we're seeing.
M1 = cash/cash equivalents
M2 = M1 + short term deposits
M3 = M2 + long term deposits
QE increased the monetary base by creating creating bank reserves (M3 long term deposits), re-capitalizing banks and companies after the financial crisis triggered collection chains many , giving them a clean sheet to borrow/loan again and make good on prior obligations (the ones that hadn't exploded).
In order for QE to affect inflation, banks would have to loan out these reserves, converting M3 money into M1/M2 - currency in circulation.
Banks only loaned out a fraction of the $4T they were given by the Fed.
The whole story is a global lack of demand in developed countries for loans/capital to help businesses invest.
Many companies aren't buying new machines (what would they buy?), and they aren't hiring new skilled workers (what skills do they need with no new machines?) - large contributing factor to wage stagnation.
Instead they are cutting costs - outsourcing departments, renting server time, looking to ML/AI to reduce reliance on costly humans with stagnating skill sets.
Interest rates are the cost of borrowing money. Interest rates are low because the demand for money and investment capital is low. There's a large supply of money and a decreasing amount of safe, productive places to invest it.
Banks get paid 0.25% on excess reserves. If they can find better returns elsewhere than 0.25%, they'll try to convert those reserves into loans. 0.25% is better than nothing but still pretty awful ROI wise.
The Fed started paying interest on reserves "to establish a lower bound of the federal funds rate (FFR)" - it's another way to limit downside and ensure what rate banks are lending reserves to each other (instead of having that rate be 0% because none of the banks actually want/need more reserves). The FFR is useless to the Fed as a tool when it reaches 0 "zero lower bound" and there is no demand for the inter-bank exchange of reserves.
https://www.frbsf.org/education/publications/doctor-econ/201...
Everybody wins -- except for the general public, however. To them it's just "blah blah blah $INSERT_POLITICAL_SPIN_HERE"
At the time these policies were enacted, deflationary spiral was a real risk. And the politics in 2010-2014 meant that increasing the money supply in any way besides handing it directly to rich people would be blocked by the Tea Party people. So we got QE instead of, say, big infrastructure projects or something.
The fact that inflation has stayed persistently low despite all of that and the recent fed rate hikes says that something else is afoot.
The really scary thing? The 'adults in the room', 'real experts', etc have no theoretical model that explains this. They're people with 40 years experience in saying this is impossible. Yet none of them are fired -- they're still churning out think pieces in DC and people still take them seriously.
Paul Krugman has actually written about that for many years now. First for Japan in the 80s, then applying the model to the more recent events. His blog is a good source for short snippets explaining it. The keyword of interest here is "liquidity trap", see e.g. https://krugman.blogs.nytimes.com/2013/04/11/monetary-policy...
Nobody cares that they were wrong because they're not trying to get it right. They're propagandists. You never heard a peep from them during Bush, then the sky was imminently going to fall as soon as Obama was elected. Now they're quiet again. If they were actually deficit hawks, they'd have loved Bill Clinton and Obama, and hated Bush and Trump.
I was talking more about Brooking Institute types who are supposed to be trying to get it right.
You have a subtle bias there. Both Bush and Obama essentially doubled the _debt_.
I don't really see this as bias, but as fact telling. The Tea Party was intensely 'interested' in budget deficits during Obama's reign, despite the fact that he mostly governed as a center-right, he made permanent Bush's tax cuts, had a stimulus package that was almost half business tax cuts, and accepted austerity (sequester). By contrast, Bush massively increased government spending and liabilities, which mean when the bottom dropped out of the economy in 2008, the debt was going to increase tremendously. Where was the Tea Party in 2000-2008? Somehow they were unable to see $1.1 trillion being flushed down the toilet in Afghanistan and Iraq, and didn't seem to care about the Pentagon not even being able to account for hundreds of billions of 'misplaced' dollars lost in their balance sheet.
This makes the principled 'fiscal conservatism' of Republicans look feigned and disingenuous, and merely used as a scare tactic to rally around when they are in opposition in order to attack government. Magically, deficit concerns disappear once they get into power, like the $1+ trillion deficit they just created with their latest tax cut package.
If you want to change the debt level, you change the deficit and then apply time. $X/year * Y years = (X*Y) difference in debt. It's literally the only way to do so.
Is that honestly controversial or hard to understand? We're talking 8th grade algebra here.. you don't even need to generalize it into calculus.
I think a possible explanation is that deflationary pressure is still extremely high and that a deflationary spiral remains a risk.
It's hard to explain things to laymen, especially in subjects like economics, where everyone thinks they've got a complete understanding of the mechanics after watching a couple YouTube videos.
The supply of financial capital is high, so borrowers are not willing to pay high interest rates. I see nothing wrong with the explanation of why low rates persist.
>a phenomenon which he explained as excess savings [of already rich people] pursuing a shortage of investments [that benefit those already rich people].
There is an enormous backlog of infrastructure work that needs to be done in the US, and around the world, that would benefit everyone and the environment, but since it doesn't result in [immediate] measurable returns that can be sold to investors, these are not investments worth investing in.
Money existing for the sake of making more money is pretty useless in the long run, but that's where we're at. Ideally, money would be used to accomplish an end result, such as increasing living standards for all.
Source: https://www.economist.com/the-economist-explains/2014/05/04/...
If things haven't change much (i.e if we think we can't do much to reduce inequality), there are many reasons to fear war and/or chaos.
Here's a hint. Trillions of dollars were printed (and are still being printed) by central banks.
This is a central part of Piketty's case in Capital in the Twenty-First Century. Capital just builds up over time, unless something happens to destroy it.
Of course I can't argue against money printing being a cause; I don't know the numbers. It seems there are likely several significant contributing causes.
Certainly major catastrophic events has a larger effect, but you don’t need one.
Denmark and Canada also share a property: They are small (population-wise) nations with heavyweight neighbors. Any effect you see is likely to be totally confounded by interactions with those neighbors. E.g. Canadian billionaires may tend go to America, so Canadian inequality "falls". But obviously this isn't doable for the world as a whole.
The refuge of an expert who maybe isn't as much an expert as he thinks he is. Not saying that's you GP, but A) laymen aren't as dumb as you think, B) they don't have an incentive to obfuscate things to preserve or justify their status as an expert, and C) the field of economics suffers enormously from the curse of mathematics. The deeper you go, the less relevant it tends to be at predicting the real world.
I recently took a month to start digging through a slog of economic theory to try to counter my own Dunning-Kruger effect in the field and had to stop because it just made me angry at the sheer scale of uncompensated positive feedback loops and reliance on statistical multiplexing that our economic system is built on. Any system that depends on all depositors NOT needing their assets back at the same time is fundamentally a scam.
A system like Fractional Reserve which is inherently inflationary biases the entire system against those with the smallest and least inclined to grow income streams from the get go.
Economics is difficult when you JUST look at money movement to facilitate virtual growth. When you start looking at economics as a means to an end to get PHYSICAL work or change done instead of just in the vacuum of a theoretical accountant's model, you can see some very disturbing trends in the direction things are going.
And again, that's just from someone from the outside looking in who isn't relying on their economic expertise to win them their daily bread.
Full disclosure, my research revolved more around the ways in which "conservative" (not political, but minimum risk tolerant) investment behavior incentivizes and guaranteed corporate behaviors which optimize for growth figures at all costs, damn the externalities. I'm becoming one of the people who thinks we've been doing things really wrong since about the 80's, but the foundations were laid long before that; we just didn't recognize it because humans generally suck at handling long period trends where the period is > a human lifespan, and labor had enough clout to eke out a greater chunk of the revenue stream at the "cost" of creating a slow growth economy in terms of capital gains by non-practicing investors (I.e. investors who weren't themselves laborers, but were living off managing their wealth's capital gains). Don't ask for data though, my day job has precluded me from being able to do the hard part of the research... (Actually doing it.) I at least think I've almost got the falsification criteria worked out though. Just need to sit down and figure out what data I actually need to give me a complete picture to reason from.
You can get stuck in a state where your discourse becomes like an Ouruboros, nice and circular, never getting anywhere.
Occasionally you have to question whether or not your fundamental assumptions are still valid.
For most of our country's history, even WITHOUT the post 80's economic zeitgeist to guide us, we did just fine treating worker's with respect, and a fair wage.
We have transformed in the span of 30 years years into a highly polarized, economically fractured, industrially poor nation. Our political discourse has gotten worse and worse, and trust is at such an all-time low that we're doubting not just our government's capacity to lead and protect us, but also each other.
I've met people from just about every side of the socio-economic spectrum, and even a few of the last remnants of the "Greatest Generation", who LIVED through the Great Depression. My thoughts have thus far been convincing to most with sufficient time to elucidate them.
Something is FUNDAMENTALLY wrong. I'm not saying ALL economists and their economics are Quacks. I'm even somewhat fond of Taleb, if only because he is one of the few who had the courage to even DOUBT. The field, however, is due for a reckoning, and a reconciliation with reality,and the Unknown unknowns.
As I stated in a previous post, there are too many structural problems built into the way our system works. No natural system can stay cohesive under conditions demanding continual growth in an environment with finite resources. It doesn't happen. Ever. Computing, biology, physics, mathematics, control theory, chemistry, anthropolgy, politics, logistics, and most importantly HISTORY has shown over and over again that while periods of massive development and growth DO happen, eventually, the inputs required to sustain it or the excessive outputs it generates overwhelms the operating environment's capacity to supply\absorb it/them. Something has to give.
I'm not willing to auction off the only legacy I have worth passing down for the next generation for short term gains. Which is increasingly the direction we as a nation seem to be developing toward economically. It's my opinion, and a verifiable fact to anyone willing to even make a halfway credible attempt at tracing the steps that have led us to where we are now, analyzing the forces that were at play, and taking the time to try to LEARN from the trials and successes of the past. Don't just take my word for it. DO some research. Convince yourself. Don't leave it to someone else. I don't want a damn person to follow me on faith. Convince yourself, and go whatever direction you desire, but for the love of all that's holy, be honest. The info is out there.
I'm willing to entertain my theories are wrong, as they almost certainly are, that's why it's called research. Why should the field of economics not be willing to entertain the same?
Anyway. Certifiable crank signing off.
Or, Al "Chainsaw" Dunlap, a CEO famous for his "Mean Business" approach, and walking into a company, firing thousands, which would drive up the Stock prices by accordingly, and walking away with copious piles of cash from the savings of not having to pay the workforce. He was only able to actually DO that in the post-Reagan era, however, as good early attempts at doing so in the 50's and 60's were met with outright hostility from Unions and employees alike, up to and including death threats (not that I condone that, but keep it in mind to illustrate that Management had reason to FEAR Unions, and the collective mass of employees they represented).
If you look at early 20th century Unions, part of the reason they were so successful was that they exploited network effects to overcome the advantages offered by the high amount of Capital wielded by Industrialists. You can't out wait your company, because the Union coffers are so small in comparison to what the Company gets from investors... Including those who have their retirement managed as an index fund (when such things eventually became popular). However, if you getting messed with by Company X suddenly caused the workers of Company Y to strike, who was a buyer from Company X, and so on down the line, you INSTANTLY force the management into a position where they HAVE to come to the table and negotiate. It also puts pressure on industry leaders to crack down on bad actors amongst their number, for fear of a strike cascading and enveloping them in drama because the bad actor was being a wanker.
The Taft-Hartley Act, however, put an end to that. It illegalized the practice of secondary striking, lumping it in with things like jurisdictional and wildcat striking as an "Unfair Labor practice". While Wildcat and jurisdictional strikes were undeniably incredibly disruptive, and sometimes violent; a peaceful secondary strike was a way of sending a strong, clear message to abusive management. You mess with one of us, you mess with ALL of us.
The Taft-Hartley Act, born out of the ire of a couple REALLY poorly timed strikes by Mining Unions in the midst of WWII, was the beginning of the end of the Golden Age of Union influence. The same influence mind you that made the Baby Boomer's general economic blueprint work. You got higher pay and better benefits through the increased oomph provided by collectivization.
However, those benefits had to get paid out of somewhere. The market ended up taking the brunt of it. Growth numbers were there, and "reasonable enough" (it got most Gen X/Millenial parents where they are), but NOTHING like the numbers you started to see in the post-Reagan era. Those numbers that were achieved during that time were largely spurred through increased globalization/outsourcing, further degradation of the effectiveness of Unions through loss of faith by their members due to the tying of their hands by Taft-Hartley, and a successful anti-Union Public Opinion campaign by conservatives (generally). If you want to get what I mean, think about what a Union Shop is. If you think it's a shop that won't hire you because you are not in the Union, you are incorrect. It is a shop where by being hired you BECOME part of the Union. Big difference. Many tried to paint organized labor as the muscle pushing the common man out of a job, when nothing could be further from the truth.
Globaliztion in particular had a dramatic damping effect on organized labor's ability to get things done. As Manufacturing and the likes moved to other countries, the Unions that kept pay as high as it was found themselves out of place. They couldn't influence what was going on overseas, and what good would it do for American workers, even if they could?
Right now, you have an economy basically working for the shareholders. Which DOESN'T tend to include most new people entering the workforce, because the mentality to maximize those growth numbers to attract investment is first and foremost in the economic zeitgeist, and short of business coming back into the States, and Labor being able to reorganize successfully (which is still nigh impossible courtesy of Taft-Hartley shifting the bias in favor of the holders of Capital by preventing the exploitation of network effects) you will likely see the current economic trends continue. Namely, stagnant wages, increasingly expensive stock, goods prices continuing to increase outstripping wage growth, and capital continuing to consolidate in a smaller and smaller portion of the population.
Give the book Going Postal: Rage, Murder, and Rebellion in Reagan's Workplaces to Clinton's Columbine and Beyond by Mark Ames a read.
Also take a look into the history of Labor Unions in the United States. Wikipedia is as good a place to start as any as long as you audit your sources.
It's a very OLD process that had it's roots as far back as the Industrial Revolution in the U.S. but every bit worth the time to read up on.
This is probably going to be too little, too late. Anyone with half a brain should be able to see the downturn coming soon. Simply looking at global macroeconomic indicators like Shiller P/E, Yield Curve, stock market indices against GDP or unemployment rate over the last two decades makes it clear the market has run extremely hot and is running on hot air by now.
I won't know what will be the final trigger — 45 playing with fire in the pseudo trade wars or the upcoming cryptopocalypse: All I know is that once the downward spiral has been triggered, everything will happen very fast.
Whatever the "stress tests" might have predicted in a bull market: I don't think anyone will have cared to predict tipping points and negative feedback loops once the underlying assets get worthless. There's just way too much disincentive for banks to building up capital (especially with negative interest) vs. speculating with it in order for this scheme being able to work.
If you want my 2 cents: Hope for the best, but brace for the worst.
How are you so sure about this? You dont provide any evidence or reasoning and state is as a fact.
One argument people that make similar claims is the "never in history has an economic expansion like this continued", which is true. The argument is, based on history, we should see a downturn soon. But then you go on to mock the stress tests for relying on history.
There is no specific criticism of the "stress tests" but you just write them off as meaningless. Then you throw in a few buzz words like tipping points, feedback loops, speculation and negative interest rates.
I'm skeptical of stress tests and bank incentives as well but your comment isn't really making the best case for the argument and strikes me as uniformed
That is to say, if people are willing to take a lower rate for 10 years because they think interest rates won't be nearly as high in say 3 years.
Another aspect to it is that the shorter the maturity, the more the yield is determined by set rates, whereas the longer you go out, the more it's just the auction process of markets setting the yield. This is part of where you get the idea that raising rates too fast can potentially be troublesome, you can end up inverting the curve that way.
The impact of a no deal brexit will be felt everywhere because that's who the UK as part of the EU is trading with.
Real interest rates have been decreasing in the long run over hundreds of years. This reflects the institutions of society becoming more permanent and less risky. In a world of low interest rates, P/E multiples naturally become high. Over the last couple of decades in particular, the financial world has become globally intertwined, and it has become increasingly unlikely for any event to truly upset the status quo. Institutions are more fixed than ever, so valuations should be as well.
If the high valuations remain high, then a lot of financial wisdom developed in the last 100 years will have to be rethought. Saving for retirement is a different calculation when your returns are dominated by P/E expansion rather than dividends and earnings growth.
Over the next 30 years that balance shifts. As people will be taking more money out of the stock market due to cashing in 401k's than they put into the stock market which will have significant impact.
I cut my teeth building the scenario response models. I think the best improvements resulting from these exercises have been structural. Many banks have used it as an opportunity to improve their data and reporting infrastructures, which were often stuck in spreadsheets.
Also how does better data infra make for better crisis response for a bank?
I can’t see how it would make a huge difference..... unless of course it means that the reporting structure is giving critical information to decision makers which it wasn’t before.
How good/bad was it before the upgrade? (Did you have to start from scratch and pry excel out of everyone's hands?)
http://blogs.reuters.com/felix-salmon/2009/11/29/how-larry-s...
And the comments are closed. Neat.
Despite the recovery of the "lost" or invested 1.8 billion, the story gives no good impression of Larry Summers.
That seems kind of shaky to me.
http://bilbo.economicoutlook.net/blog/?p=40313
A very human bias is to believe and follow those in positions of authority, despite long and verifiable records of abject failure and incompetence.