•Job Losses Point to Slower U.S. Recovery as Unemployment Climbs to 9.8%
•U.S. Stocks Drop as Payroll, Factory Order Reports Raise Recovery Concern
•Obama Explores Additional Steps for Economy After `Sobering' Jobs Report

Baseline Scenario
http://baselinescenario.com/2009/10/02/fed-chest-thumping-for-beginners/

Fed Chest-Thumping for Beginners
with 15 comments

I generally avoid writing about monetary policy, since every economics course I’ve taken since college has been a micro course, and besides Simon is a macroeconomist, among other things. But since just about everyone in my RSS feed has been linking to Tim Duy’s recent article on the Fed, I thought I would try to put in context for all of us who don’t understand Fed-speak.

Duy takes as his starting point a series of statements by Fed governors and bank presidents indicating “hawkishness,” which in central banker jargon means caring primarily about inflation, not economic growth. (”Doves” are those who care more about economic growth and jobs, although, just like in the national security context, no one likes to be known as a dove. This itself is a disturbing use of language, since it implicitly justifies beating up on poor people, but let’s leave that for another day.)

Hawks also like to talk a lot about “credibility,” which means a reputation for being willing to fight inflation. People use the word credibility in this context because the conventional wisdom used to be that national governments would not be willing to take tough steps (raising interest rates) against inflation because that would cost jobs, and hence votes in the next election. So central banks had to prove that they were willing to raise interest rates and put people out of work, even though that might be politically unpopular. Now that our Fed governors and bank presidents are accountable to just about no one, beating on their chests and proclaiming how willing they are to be tough in the face of the political winds rings a little hollow to me — especially in a “middle-class” country that considers inflation to be a greater evil than unemployment. Arguably, the situation has reversed; it has become so accepted that the primary job of a central bank is to fight inflation, despite the Fed’s dual mandate (to both fight inflation and promote stable economic growth), that fighting inflation has become the politically safe thing to do. But I digress again.

This is what Duy sees:

Kevin Warsh of the board of governors: “If ‘whatever it takes’ was appropriate to arrest the panic, the refrain might turn out to be equally necessary at a stage during the recovery to ensure the Fed’s institutional credibility.”
Richmond Fed president Jeffrey Lacker, from Bloomberg: “The Federal Reserve will need to raise interest rates when the economic recovery is ‘firmly’ in place, even if unemployment lingers near 10 percent, Federal Reserve Bank of Richmond President Jeffrey Lacker said.”
Philadelphia Fed president Charles Plosser: “[J]ust as the Fed has taken aggressive steps in flooding the financial markets with liquidity during this crisis to reduce the possibility of a second Great Depression, it will also have to take the necessary steps to prevent a second Great Inflation. Our credibility depends on it. … The Fed will need courage because I believe we will need to act well before unemployment rates and other measures of resource utilization have returned to acceptable levels.”
Can you feel the testosterone?

Duy argues that all this manliness is misplaced. The Fed hawks’ basic argument seems to be that, because it acted so aggressively to stimulate the economy last year, it will have to act equally aggressively to dampen growth at some point — just to send a message. And to send that message, they need to be willing to raise interest rates while unemployment is still 10% (Lacker) or “well before unemployment rates and other measures of resource utilization have returned to acceptable levels” (Plosser).

Now, there may be something to this. Duy points out that the hawks seem to be worried about recreating the debt bubble of the last decade through too much cheap money. If cheap money is going to flow straight into overvalued houses, then that’s a problem. But Duy says that that is a failure of regulation. Low rates are supposed to stimulate capital investment by businesses, which is what long-term economic growth depends on. But earlier this decade, despite low rates, capital investment never returned to 1990s levels, because all the cheap money was flowing into housing instead — for reasons we know.

“Are we really worried about a lending explosion by itself, or that the regulatory environment remains so weak that financial institutions will quickly repeat the experience of this decade’s debt bubble? …

“With the primary build out of the internet backbone complete, the US appeared to experience a dearth of traditional investment opportunities (I suspect that the need to expand production domestically was made moot by an international financial arrangement that favored the establishment of productive capacity overseas), and, like water flowing downhill, capital was thus allocated this decade to residential investment, which, we now know was more about consumption than investment, and the resulting economic activity was anemic by historical standards.”

The solution, then, is better regulation to protect against misallocation of credit to the next asset bubble. Simply raising rates will choke off an asset bubble, but it will also choke off real investment by businesses.

This goes back to what StatsGuy said in a post here:

“In order for the Fed to actually be able to fully use monetary policy to keep the economy humming at full throttle, we need financial regulation (to avoid new liquidity being channeled into bubbles instead of real investment), better capital asset ratios (to help moderate moral hazard and asymmetric risk), and limited expectations of future dollar devaluation (which currently result from our huge debts, and China’s continued mercantilist policies that keep the dollar propped up). …

“But what happens if we fail to fix the structural issues? Well, the answer is not good. Without the right scalpels and scaffolding, the Fed will use a sledgehammer – taking away the punchbowl during booms and giving it back during busts. Except that it will almost always get the timing wrong – taking away the punchbowl too fast and give it back too late, due to poor regulation and dollar instability, and its own anti-inflation intellectual bias and obsession with its credibility.”

In other words, if you’re going to throw in the towel on regulation, then there is no place for cheap money to go except the next asset bubble. You might as well try to prevent that, but then you are consigning the real economy to a long, slow decline since you have no way of getting monetary stimulus where you need it (factories, not new condo towers).

So there seem to be two possible futures. If we repeat the Greenspan policy of low rates during a boom, we’ll just create a bubble all over again, since none of the underlying factors (weak consumer protection, weak bank regulation, etc.) have changed. Or if the hawks win (both in the Fed and in Congress, which controls fiscal stimulus), we’ll have high unemployment for a long, long time, since no one will have the guts to risk higher inflation. Being a “hawk” has become the safe, comfortable choice — even in a week when monthly job losses were up and weekly new unemployment claims were up.

By James Kwak

I see, over there on the left in the JBS home page, an image of a supposed ancestor of modern man and I think... from the cradle comes a walker. These walkers walked on the land and went out from familiar places into the unknown. They kept walking and through it all left their remnants on the lands leaving behind the ones who had become weary of walking. Still some walked on and ever came upon lands that, in this way, had never been walked on before. Traces remain in the travels, found in the bloods of the walkers who quit walking and sprouted other walkers that didn't feel the need to walk further than the boundaries of the frontiers. (Now, it is told and substantiated with DNA that maybe less than 50 walkers came into the Western Hemisphere and walked southerly.)

Through all the walking and all the danger, it is now known that the richest mix of blood from the deepest ancestry happens to be located where... at the Copa!!!

Rio Rio... it was a very, very long walk!!

(I began this wanting to make some comparisons to "conservatives" being closer to Ardi than modern man, but, I got sidetracked in my walk.)

So, buy the "primicons" books, listen to their spiels, accept without scrutiny that what they say is true, and stay in the grey.

That's the safest thing to do... don't walk, just stay where you are.

Oh no, there's that word "EXPLORE"

Don't want to do that under any circumstances!!!

Get over yourself spencer, I'm only glad Chicago didn't get the Olympics because there was so much Obama cronyism over it...

Here's some things to think about:

PrimiCons of another stripe preach this:::::::::

Sheikh Al-Munajid is known for his controversial statements and fatwas - including a fatwa stating that Mickey Mouse should be killed. He called the 2008 Beijing Olympics the "bikini Olympics" and referred to them as "satanic," and has stated that women must not exercise in public. He has also discussed how Western "beasts" use public toilets and wear colored underwear "to conceal all that filth."

"Muhammad Al-Munajid: Allah said that the black-eyed virgins are beautiful white young women, with black pupils and very white retinas, whose skin is so delicate and bright that it causes confusion. Allah said that they are like hidden pearls. They have wide eyes, and they have not been touched by man or jinn. They are virgins, who yearn for their husbands. They are all the same age, morally and physically beautiful. They are like precious gems and pearls in their splendor, their clarity, their purity, and their whiteness. They are like hidden pearls - as pure as a pearl within a shell, untouched by man. Each one of them is so beautiful that you can see the bone-marrow through the delicate flesh on their legs.

The Prophet Muhammad says that in Paradise, a man gets the strength of 100 men when it comes to eating, drinking, passion, and sex."

And let me be clear... I have realized success and I have had it taken away by the forces of what I thought was regulation and tyranny. During that time of assigning blame, the evident truth was that people I had entrusted my welfare and financial well being were more concerned with their own self interests than with any loss of honor they might have suffered for not living up to their pledges and obligations. If they would have paid me for my outlay in support of them in their endeavor, in all probability, me and my kids wouldn't be living at the poverty level right now.

It wasn't the regulation regime that flushed me out of some prosperity. It was other business people that I had worked with for many years.

But, it was easy to place blame anywhere.

In recollecting this particular thing...

I hired a lawyer to try and collect the $50K. After several months, he realized that there was not any chance of retrieving monies and he dropped my case by filing a motion in court that if "I" ever collected any money from the horse lover that he was entitled to 1/3 of the settlement.

So, I had to hire a lawyer to protect myself from the lawyer I had hired to protect myself from the lawyer that the horse lover had hired to protect himself from any lawyers who would...

Ahhh, ain't this good?!! Wonderful way to spend sleepless nights!!!

I can sympathize. I've known many small business owners whose Achilles' heel was that they were soft on the collections. I don't understand why because collecting is the single most important part of running any business, and it must be done with a zest and gusto at least equal to that which is used in providing the basic service.

We ask for payment within 30 days of delivery of our reports. At 30 days they get a polite e-mail asking them if it's fallen through the cracks. At 45 days they get a not so polite e-mail and a phone call. If the payment is not made within 60 days following the original invoicing, I start living in their e-mail box and voice mail. You probably know enough of me from this blog to know how undesirable a situation that would be. Also, if it goes more than 60 days, we never do services of any sort for that client again, no matter how big the account or how prestigious.

So far, only had to take one person to court (won plus damages) and only had to fire one other client, out of over 500 we regularly do business with.

Your only problem, plain and simple, is that you let people take advantage of you, and perhaps you think that's somehow more noble than being an SOB like I am. Or not.... I can't read your mind. But, I will tell you this: your near-povery levels will continue unless and until you learn to make your business associates pay PROMPTLY.