In a move that some are calling QE3, the Federal Reserve announced yesterday that it will engage in a policy called “the twist” – selling short-term bonds and buying long-term bonds in hopes of artificially reducing long-term interest rates. If successful, this policy (we are told) will incentivize more borrowing and stimulate growth.

I’ve freely admitted before that it is difficult to identify the right monetary policy, but it certainly seems like this policy is – at best – an ineffective gesture. This is why the Fed’s various efforts to goose the economy with easy money have been described as “pushing on a string.”

Here are two related questions that need to be answered.

1. Is the economy’s performance being undermined by high long-term rates?

Considering that interest rates are at very low levels already, it seems rather odd to claim that the economy will suddenly rebound if they get pushed down a bit further. Japan has had very low interest rates (both short-run and long-run) for a couple of decades, yet the economy has remained stagnant.

Perhaps the problem is bad policy in other areas. After all, who wants to borrow money, expand business, create jobs, and boost output if Washington is pursuing a toxic combination of excessive spending and regulation, augmented by the threat of higher taxes.

2. Is the economy hampered by lack of credit?

Low interest rates, some argue, may not help the economy if banks don’t have any money to lend. Yet I’ve already pointed out that banks have more than $1 trillion of excess reserves deposited at the Fed.

Perhaps the problem is that banks don’t want to lend money because they don’t see profitable opportunities. After all, it’s better to sit on money than to lend it to people who won’t pay it back because of an economy weakened by too much government.

The Wall Street Journal makes all the relevant points in its editorial.

(more…)

From the Associated Press:

The U.S. Federal Reserve’s tacit acknowledgment that America’s economic slowdown is likely to persist for quite a while sent global stock markets skidding Thursday as investors brushed off the central bank’s efforts to spur growth and focused instead on its gloomy assessment.

Oil tumbled too but the dollar held its own against the euro, which has been weighed down in recent weeks over concerns that Greece might go bankrupt. Hong Kong’s Hang Seng led the retreat lower earlier during the Asian session with a near 5 percent dive.

The losses began Wednesday afternoon in the U.S. after the Fed announced a highly anticipated program to trade in $400 billion worth of short-term bonds for the same amount of longer-term bonds. The goal is to ensure low borrowing rates for a long period, thereby helping to stimulate the housing market and other economic activity.

(more…)

From the Associated Press:

The Federal Reserve is running out of options to try to boost a slumping economy and lower unemployment. So policymakers are expected to reach 50 years back into their playbook for their next move.

Most economists expect the Fed to announce a plan Wednesday to shift money in its $1.7 trillion portfolio out of short-term securities and into longer-term holdings.

The plan could lower Treasury yields further. Ultimately, it could reduce rates on mortgages and other consumer and business loans, too.

(more…)

For nearly three years as Americans have struggled through this Great Recession, President Obama has given speeches that relied on failed Keynesian economic theory and the politics of class warfare and envy. As his big government policies have spent this nation to the brink, the employment picture continues to worsen.

Tonight, President Obama will deliver a major economic address before a Joint Session of Congress. The MacIver Institute expects it will be more of the same rhetoric and promotion of government solutions we’ve been hearing for the last 3 years.

The timing of the speech also conflicts with the pomp and circumstance surrounding the kickoff of the 2011 NFL season. As a Packers’ fan and in the spirit of public service, I directed our staff to comb through the hundreds of speeches President Obama has already made to give you a concise two-minute preview of his latest ‘big speech.’

(more…)

Pacific Investment Management Company (PIMCO), the world’s largest manager of bonds, has just released research analysis titled: “Saying No to Keynes and Fiscal Folly”. The report is a dramatic departure for PIMCO; who had fully embraced the Keynesian “pump priming” economics of stimulus spending, bailouts, and corporate interventions. But with the American public now opposed to Keynesian government spending by a stunning two to one margin; PIMCO may just be the first of a coming swarm of powerful elites to abandon Keynesianism for self-preservation.

The PIMCO has made big money on the credit crisis over the last three years. PIMCO’s management stated that their firm’s strategy was to “shake hands with the government” by investing money in areas that would benefit from the government’s rescue efforts. With the stock market in tatters, investors rushed to place huge bets in PIMCO’s bond funds. The U.S. Federal Reserve even hired the company firm to manage $500 billion in distressed mortgages. But a few months ago PIMCO made a disastrous investment decision by selling all of their U.S. Treasury Bond investments, just prior to the United States credit rating was downgraded and value of government bonds rising by up to 20%.

Now that PIMCO is losing money on that handshake with the government, they seem to be turning on their former masters. PIMCO’s recent report offers three key conclusions:

• Taxpayers have been hoodwinked into believing the cost from profligate government spending is low relative to the benefits.
• The Keynesian revolution ignited a decades-long abuse of the core principle of Keynesian economics: for government to increase spending when private sector aggregate demand weakens and stymies job growth.
• The central banker is left to shoulder the burden, seeking all the while to pressure the fiscal authority to amend the abuse of Keynesian economics and decades of fiscal folly.

Most people do not realize that the American Revolution was a revolt against efforts by Great Britain to collect brutally high taxes from the colonists to pay the massive debts Great Britain accumulated in the Seven Years’ War with France.

(more…)

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

Download Podcast | iTunes | Podcast Feed

On today’s edition of Coffee and Markets, Francis Cianfrocca and Ben Domenech talk about Rick Perry’s comments on the Fed, and Florida’s Adam Hasner talks about his run for the Senate.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

Perry Doubles Down on Fed: Open Up and Be Transparent
GOP Field Launches Sharp Attacks on the Fed
Florida Senate Race Heats Up Early
Adam Hasner Speaks at Redstate
(more…)

America is in shambles from sea to shining sea. Unemployment is at Great Depression levels. Real Estate is collapsing. The stock market is crumbling. Retail sales are vanishing. Consumer confidence is plummeting. Inflation is skyrocketing (on the products that matter- energy and food prices). And of course, our U.S. Triple A credit rating is gone for the first time in history.

America is staring at economic disaster- Obamageddon. We are the Titanic, headed straight for the iceberg. Even delusional 500 point up days on Wall Street will not change the frightening long term picture. The iceberg is straight ahead.

Obama and his socialist cabal have channeled Hoover and FDR, who turned an ordinary bust into The Great Depression with a toxic strategy of more government, more spending, more debt, more entitlements, more rules and regulations strangling business, higher minimum wages, more power to unions, higher taxes, more printing of money by Fed, and trade tariffs. This is the Obama blueprint squared.

Here’s where the story gets downright frightening. This time the results are going to be dramatically worse than 1929. This time we are facing The Greatest Depression ever. Obamageddon.

Why? Because The Great Depression had NONE of problems and obligations we are now facing.

(more…)

Ben Bernanke’s shocking FOMC announcement on Tuesday — that its zero-interest-rate target would be extended for two more years through the middle of 2013 — drove Dow stocks up over 400 points. But this new policy had no stock market carry-over on Wednesday, when the Dow plunged over 500 points.

But we have not heard the last from Ben Bernanke — not by a long shot.

Buried in the last paragraph of this week’s surprise FOMC announcement was this huge statement: “The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.”

This is a brand-new statement. And in all likelihood it was purposefully open-ended. A Fed source suggests that this sort of stuff is usually left out of sight and buried in Fed committee minutes, released well after the FOMC meeting, and not put boldly in the actual policy statement. So clearly, it’s very important.

What might it mean?

(more…)

This month the General Accounting Office (GAO) released a report on the financial crisis and came to the same conclusion as Judicial Watch: The government has failed to provide a rationale for its unprecedented intrusion into the private sector through the massive bailout scheme initiated in 2008. And more transparency is needed to get to the truth.

When questioned about their rationale for the bailouts (by Judicial Watch, the GAO and others), government officials simply repeat their standard line: There were “unusual and exigent circumstances” that warranted extreme measures.

Those extreme measures included the Federal Reserve authorizing credit to “troubled” private financial institutions. (Not since the Great Depression had the Fed authorized a loan to a non-banking entity.) If such measures were not taken, we were told, the institutions would collapse, thereby spreading a “contagion” throughout the global financial system.

This thin explanation is simply not good enough said the GAO. You can read the full report here. In my view, here are two key takeaways (as reported by CNBC):

1. In explaining the basis for these exceptional credit extensions, Federal Reserve Board officials cited the continuing strains in financial markets and concerns about the possible failures of these dealers at the time. However, the Federal Reserve Board could not provide documentation explaining why these extensions were provided specifically to affiliates of these four primary dealers.
2. …without more complete documentation, how assistance to these broker-dealer subsidiaries satisfied the statutory requirements for using this authority remains unclear. Moreover, without more complete public disclosure of the basis for these actions, these decisions may not be subject to an appropriate level of transparency and accountability.

On this subject of transparency, Judicial Watch has launched a comprehensive investigation of the government’s rationale for the bailouts on behalf of our client and former Federal Reserve employee Vern McKinley. We have a number of lawsuits related to the bailouts of Bear Stearns, AIG, Lehman Brothers, and others working their way through the system. And, in fact, on July 18, we filed a “Petition for Rehearing En Banc,” with the U.S. Court of Appeals for the District of Columbia Circuit in our lawsuit over the Bear Stearns bailout (McKinley v. Board of Governors of the Federal Reserve System, Case No. 10-5353).

Like the GAO, with this FOIA lawsuit Judicial Watch simply wants to know the Board of Governors of the Federal Reserve System’s justification for authorizing the Federal Reserve Bank of New York to provide “temporary emergency financing” to Bear Stearns through JP Morgan. (JW did learn from Treasury documents we unearthed that Bear Stearns was considered “worthless” at the time the Federal Reserve Bank of New York handed JP Morgan $30 billion to take over the company.)

The government is stonewalling our request, saying that information related to this question is protected under the “deliberative process privilege” of FOIA law (Exemption 5). As you might imagine, documents supposedly relating to the “deliberative process” can be most the most illuminating about government decision-making and whether it is on the up-and-up.

Unfortunately, an appellate court panel bought the government’s argument.

On June 3, 2011, the panel ruled that if a government agency simply makes the claim that information can be withheld under Exemption 5 the courts must assume that releasing the information will harm the agency’s decision making process – even if no proof of harm is put before the court.

Judicial Watch is now requesting that the appellate court hear the matter en banc (or in full, rather than merely a three-judge panel). Here’s a squib from our brief.

By substantially lowering the government’s burden of demonstrating that material may be withheld under the deliberative process privilege, the panel created a sweeping exemption that is in direct conflict with decades of decisions holding that material may be withheld under the deliberative process privilege only if a government agency demonstrates that disclosure of the withheld material would harm the agency’s decision-making process. [Emphasis added.]

Really this boils down to a very simple issue. We believe the American taxpayers deserve to know how and why the government committed trillions of dollars of their money to prop up failing financial institutions. But the government says it’s none of our business. (Just like the Obama administration says their debt ceiling “crisis” plans are none of our business either.) Unfortunately, if allowed to stand, the panel’s ruling could severely undermine FOIA law.

The government’s position on these bailout documents is offensive and corrupt. And we’re glad the GAO has called attention to that with its report.

For weeks, we have been treated to comic opera in D.C.’s theater of the politically and economically absurd. On the stage, the actors—President Obama, the Secretary of the Treasury, congressional leaders—hop about, shouting moronic lines about the national “default” that will occur unless the government’s statutory debt limit is raised, reciting Chicken Little lines about how such a default will trigger worldwide economic catastrophe. According to a report in the July 5th issue of the Christian Science Monitor,

Facing an Aug. 2 deadline, Congress and the White House are stepping up face time to avert what the Treasury Department has called “catastrophic economic and market consequences” of a default on the national debt.

Think about this statement. Have governments defaulted in the past? Of course, they have, on hundreds of occasions over the centuries. Have these defaults triggered “catastrophic economic and market consequences”? No. When a government defaults, there are consequences, of course, including heightened reluctance of lenders to lend to the deadbeat government in the future or at least to lend at such favorable interest rates. Often partial payments of principal and interest are arranged or debts are restructured. The world keeps spinning.

(more…)

If you look at statements made by Ben Bernanke over the last several years on the US economic outlook, they are not a model of consistency, let alone confidence building.  Indeed, they reflect an economy that appears to be stopping and starting – subject to the vagaries of the world not driving the world’s economy. Many other economists are similarly uncertain as to why our economy is in such trouble.  Real-world Americans, however, have no such confusion.

In April of 2010, the Federal Reserve Chairman said the economy had “staying power.” In August of 2010, Bernanke said, “The economy remains vulnerable to unexpected developments.”  Early last month he stated: “U.S. economic growth so far this year looks to have been somewhat slower than expected.”  Later in the month, he let us know that “We don’t have a precise read on why this slower pace of growth is persisting.”

On the other hand, we hear stories of banks and corporations flush with cash.  For his part, Obama appears focused on luxurious corporate jets and the Left tells us (falsely) that taxes are at the lowest they have been in 50 years.

So why is the economy underperforming to their great confusion or surprise?

There are many reasons – but one central one.  First, among the many reasons, are businesses’ fears of the costs of doing business in the future, including the costs of Obamacare. Adding to those fears are the costs of regulations (Obama’s and state regulators) and, of course, higher taxes.  Also among the many reasons are the national debt and the debt of our states.  Those amounts are so far past rationality and are paired with future entitlement requirements that are way beyond unsustainable.  Combined, they produce economic fear, which translates quickly into economic caution which equals less economic activity.

(more…)

When Ronald Reagan ran for President in 1980, it was said of him that he was not the “sharpest knife in the drawer.” The old joke went that in his role in the 1951 role in Bedtime for Bonzo, the chimp that played Bonzo was smarter than the presidential hopeful.

It’s true that President Reagan, for all his charm, may not have been a rocket scientist. However, what he did have – and what many politicians today lack – were defined morals, principles, and ethics. More importantly, he relied on those assets to guide him through many troubling times as President.

In 1981 when Reagan took office this country was in dire straits economically. Stagflation that resulted from Jimmy Carter’s pursuit of altruistic ideals had led to high unemployment, an energy crisis that culminated in gas lines, and awful prospects for future economic growth. Sound familiar?

Among Reagan’s actions as President that re-energized this country economically were tax cuts, deregulation, and interest rate hikes to kill inflation. All things considered, these policies worked phenomenally well, and the US entered a 20-year period of growth led by a manufacturing resurgence.

(more…)

Sometimes we wonder if what has become obvious to a majority of Americans really has eluded our ruling class in Washington.  “We don’t have a precise read on why this slower pace of growth is persisting,” said Federal Reserve Chief Ben Bernanke at the Fed’s June 22 press conference.  President Obama also recently shared with us his insight regarding the sorry state of the economy with this gem:

“There are some structural issues with our economy, where a lot of businesses have learned to become much more efficient, with a lot fewer workers. You see it when you go to the bank and use an ATM — you don’t go to a bank teller. Or you go to the airport, and you’re using a kiosk, instead of checking in at the gate.

Small wonder then that the latest Bloomberg poll reveals that only about one third of Americans believe the economy is in better hands now than it was under the Bush Administration.  That is a remarkably poor assessment of the job the people feel the President and his economic team (whoever and wherever they are) is doing managing our economy.

These data are consistent with the most recent assessment of consumer confidence, which has sagged to new lows with only 17% of American households expecting conditions to improve over the next six months.  Should anyone be surprised? The Administration seems to be betting on Keynesian strategy from a 1930’s playbook.  It didn’t work then and it isn’t going to work now, and the people know it.

(more…)

Remember the big banks? You remember, the ones that took huge risks that went sour, and then used their undue influence with the Treasury Department and the Federal Reserve to frighten Congress into bailing them out and in the process put the country further into debt? And then didn’t lend out the money?

Well, they’re at it again, this time using their lobbying influence to insert a provision into much-needed patent reform legislation that essentially lets them violate patents with impunity.

It’s an example of one of the more offensive things that happens in our political system: Some interest with big money can’t get what it wants through the legitimate process, then loses repeatedly in court, so finally turns to its friends in Congress for a “favor.”

In this case, a number of small inventors were granted patents on various processes that turn out to be very important to the financial services industry.

Now, as a reminder, this is part of the genius of our innovation system. Small inventors come up with some ingenious invention that turns out to be enormously useful, and they get rich in the process by licensing the technology to those who value it. This is not some distortion of the patent system—it’s the intention of the patent system. And don’t forget that property rights—including intellectual property rights—are specifically designed to protect the little guy against the big guy. Big guys have lots of assets and weapons at their disposal, and tend to run over little guys to get what they want, but a just system respects the property rights of little guys such that big guys can’t just run over them.

(more…)

From the Associated Press:

The Federal Reserve acknowledged Wednesday that the economy is growing more slowly than it expected. But it said it will complete its $600 billion Treasury bond buying program by June 30 as planned and announced no further efforts to boost the economy.

Ending a two-day meeting, the Fed repeated a pledge to keep interest rates at record lows near zero for “an extended period,” a promise it’s made for more than two years.

Fed officials said in a statement that they think the main causes of the economy’s slowdown, such as high gas prices and supply disruptions from Japan’s disasters, are temporary. Once those problems subside, Fed officials said the economy should rebound.

(more…)

In the 26 months since the stock market bottomed in March of 2009, stocks have risen 80%+ as the economy regained its footing after the 2008 financial crisis and ensuing market crash.

As impressively, the market has made such tremendous gains with only one significant correction, which ironically began almost a year to the day before the one in which we now find ourselves. Now, with the markets tumbling, many are unsure of why or how far they will fall.

To be blunt, the basic problem with the markets at present is that since the bottom investors haven’t been adequately compensated for the risks they’re taking in the markets. Sure stocks prices have risen, but that buying has been in anticipation of growth in revenue being passed onto shareholders. After all, when investors buy stocks what they’re really paying for is a share of dividends to be paid in the future (plus the break-up value of the company).

Unfortunately, since the bottom of the 2008 crash interest income paid to Americans has made almost no recovery (thanks to the Fed’s policy of maintaining low interest rates for “an extended period of time”). Dividend income, meanwhile, has ticked up just slightly and is still nowhere near pre-crash highs, and Personal Income Receipts on Assets has completely failed to keep pace.

(more…)

It seems hypocritical that MIT faculty member and recent Nobel Laureate, Peter Diamond, would lash out in a New York Times Op Ed titled: “When a Nobel Prize Isn’t Enough”, for not being confirmed by the U.S. Senate to the Board of Governors of the U.S. Federal Reserve. It was only after twice failing to receive Senate support that the good professor miraculously received his Nobel Memorial Prize in Economic Sciences from the Royal Swedish Academy of Sciences in October of 2010.

Nobel Prizes were once considered to be prestigious honors awarded by panels of impartial experts in recognition of lifetimes of cultural and scientific achievement in the fields of Physics, Chemistry, Physiology or Medicine, Literature, and Peace. But with Peter Diamond in 2010 joining Barak Obama in 2009, Paul Krugman in 2008, and Al Gore in 2007; the Nobel has been reduced to just another example of a left wing political action committee bestowing faux credibility on fellow travellers to influence American political policy.

President Obama on April 29, 2010 nominated Janet Yellen, Sarah Bloom Raskin, and Peter Diamond to fill vacancies on the Federal Reserve Board. Ms. Yellen, a liberal, and Ms. Rasking, a moderate, were quickly confirmed based on their sterling intellectual credentials and known discipline in maintaining the type of confidential information necessary to lead America’s central bank. But the nomination of labor economist Diamond came as a stunning surprise to the financial community. Dr. Diamond had absolutely zero professional experience with Fed’s day to day regulation of banking, implementation of monetary policy, or setting of interest rates. The only relevant credentials Dr. Diamond could muster was his ardent “policy preferences” in favor President Obama’s $800 billion spending stimulus, big bank bail-out package, QE1 stimulus, QE2 stimulus, Obamacare, and demand for higher taxes.

Dr. Diamond was never shy about trumpeting his intention to use the clout he would gain as an unelected member of government to advance his Keynesian dreams of mandating that the banking system implement social policy initiatives.

(more…)

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

Download Podcast | iTunes | Podcast Feed

On today’s edition of Coffee and Markets, Brad Jackson is joined by Pejman Yousefzadeh and Elizabeth Blackney discuss the exit of Austan Goolsbee from Obama’s economic team and the need for a QE3.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

Austan Goolsbee leaving White House
Austan Goolsbee Exit: Obama Adviser Leaves Behind Frustration, Political Dysfunction
Charlie Cook: Owning It
All eyes on Bernanke, but QE3 has sailed
The next Fed nominee

Follow Brad on Twitter
Follow Pej on Twitter
Follow Elizabeth on Twitter

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

Download Podcast | iTunes | Podcast Feed

On today’s edition of Coffee and Markets, Brad Jackson and Ben Domenech are joined by Francis Cianfrocca to discuss the slumping markets, China’s holding of U.S. debt and Peter Diamond’s child-like tantrum.

We’re brought to you as always by BigGovernment and Stephen Clouse and Associates. If you’d like to email us, you can do so at coffee[at]newledger.com. We hope you enjoy the show.

Related Links:

Stocks Slide, Led by Banks
China Has Divested 97 Percent of Its Holdings in U.S. Treasury Bills
Peter Diamond to Withdraw Fed Gov. Nomination
Francs: No, Mr. Diamond, the Fed Doesn’t Need Your Expertise

Follow Brad on Twitter
Follow Ben on Twitter
Follow Francis on Twitter

(more…)

With a flamboyant downgrade of the outlook for economic growth, jobs, and profits, Wednesday’s 280 point Dow plunge to launch the so-called June stock swoon is a warning shot across the bow.

The Dow tanked alongside a batch of dismal economic data. The ISM manufacturing index, ADP employment, Case-Shiller home prices, and consumer confidence are all pointing to 2 percent growth or less, rather than the kind of 5 percent growth we ought to be getting coming out of a deep recession.

The economy now looks like a Government Motors engine that’s stalling out. Or perhaps, with energy and food inflation, and housing deflation at the same time, the economy is acting like a pinball machine on permanent tilt.

There’s a key message here: Big-government stimulus never works.

(more…)