Results 1 to 7 of 7

Thread: FED Chairman Ben Bernanke's Jackson Hole Speech 'Translated'

  1. #1
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default FED Chairman Ben Bernanke's Jackson Hole Speech 'Translated'

    with many thanks to Michael Sedacca of for the 'FED SPEAK' translation ...


    (snip)I've done a careful read-through of Bernanke's Jackson Hole speech and made some comparisons to notes I made from his 2010 and 2011 speeches. Given the progression of the financial crisis since then, the speech is focused around which "nontraditional policies" have been effective, and how. I would note that this speech bears a lot of similarities to his 2010 speech, in the way it is laid out from top to bottom.

    •Bernanke states that the goal of the Fed's purchases is to force investors to rebalance their portfolios with "other assets." Later in the speech, he mentions that asset purchases help push investors into more risky assets; in previous speeches, he has mentioned "longer-duration, risky assets."

    •This was by far the most interesting part of the speech to me: He mentions James Tobin's suggestion that after the Great Depression the Fed should have purchased longer-term securities since short-term rates were already near zero. He also notes that Milton Friedman argued for large-scale purchases of long-term bonds by the Bank of Japan to help overcome deflation in Japan. Anyone see a theme here? I did a word search of his previous Jackson Hole speeches and there was no mention of either of these economists.

    •The most ironic thing to me was that Bernanke said there is some evidence that periods of QE (which he calls LSAPs, meaning large-scale asset purchases) has boosted stock prices.

    •Bernanke also notes that by Fed calculations, QE has boosted output by 3% and has created two million private sector jobs. This is the first of many mentions of the output gap in the speech.

    •In the rate guidance section, he discusses new communication methods for the FOMC's language of keeping the "rate low through an extended period of time." He discusses the fact that the rate is determined by "familiar determinants, such as inflation and the output gap." There was not as much here as I had expected, in terms of tackling the question of communication.

    •He is worried that additional purchases may impair the functionality of the securities markets. He also notes that the Fed may become too big in the Treasury and MBS market, and thus impair liquidity. Additionally, he worries that with additional purchases the Fed may lose "public confidence" that it can exit the market at a further date. Can't blame him here -- if the Fed starts to sell, it might start a 1-800-GET-ME-OUT effect, as the Fed is a giant amongst giants in these markets compared to other central banks and governments. He also worries that the Fed's balance sheet may get too big and inflict financial losses on itself if "interest rates move in an unexpected manner." With a weighted average of 9.31 years, the Fed's DV01 (dollar loss per 1bp move in interest rates) is about $1.52 billion in Treasuries alone.

    •The magic sentence: "The costs of nontraditional policies (QE) appear manageable," and he does not "rule out the further use of such policies if economic conditions warrant."

    •Some of the reasons he lists for the lack of a robust recovery include a weaker housing market, less of a housing recovery than he would have liked, and that housing activity remaining at lower levels than would be desired to contribute to the recovery. He also states that limited credit availability is holding back growth.

    •He does state that monetary policy is not as effective as broader fiscal policy and cannot achieve the same results as broader, more balanced fiscal policies. This is a punt to the politicians -- or it blames them, depending on how you see it.

    •He references his 2002 speech, which I find most interesting. During this speech, he has effectively laid out his game plan for how he would attempt to tackle future financial crises. If you haven't read it, I highly suggest it.


    In conclusion, I think that while this speech had some similarities to his 2010 speech, it is much more cautious. It definitely makes the case that the Fed is not in a position to conduct additional large-scale asset purchases (or LSAPs) unless conditions deteriorate significantly. I'm hearing very similar conclusions from the other people in the market that I talk to.

    It also makes the case that the Fed would probably buy mortgage debt vs. Treasury debt, if they do so at all.

    I also think, given some of his comments, that we may see new communication on certain targeting in nominal GDP (the output gap), inflation, and unemployment. But that is just speculation, and it could be confirmation bias.

    I also thought it was odd that he mentions "limited credit availability" as something that is holding back growth. This is at odds with what I have been told by those in the banking and financial industry. In the majority of cases, the problem is that most people do not want to take the risk of starting loans. There's also the case where those who want loans can't get them, and those that can, don't want them. Admittedly, I might be reaching a bit there, but this might be the difference in the academic view and the real-world view.

    Now we wait for Draghi and the ECB next Wednesday, which is arguably the much more important event."(snip)

  2. #2
    Banned Eric Stoner's Avatar
    Joined
    Oct 2006
    Location
    NYC
    Posts
    5,150
    Thanks
    1,261
    Thanked 1,430 Times in 888 Posts

    Default Re: FED Chairman Ben Bernanke's Jackson Hole Speech 'Translated'

    Here we go again. The definition of insanity is continuing to do the same thing expecting a different result. Right ?

    By 11 to 1 the Fed Bd. Of Governors voted to keep interest rates at their current level into 2015 AND to buy some $40 billion of mortgage backed securities a month !
    This is QE 3. Would someone please explain how and why this round will work any better ( and will generate more jobs ) than QE1 or QE2 ? Why does the Fed insist on printing more money and putting that money into the hands of those LEAST likely to lend it out ? What will keep them from just buying more government debt ? This is "faith based" monetary policy : " We BELIEVE that the sellers of mortgage backed debt will use the sale proceeds to make loans and we HOPE that all this extra money sloshing around the economy will not weaken the dollar or cause inflation." The only thing missing is the "Change".

  3. #3
    Veteran Member
    Joined
    Jul 2011
    Posts
    455
    Thanks
    53
    Thanked 175 Times in 109 Posts

    Default Re: FED Chairman Ben Bernanke's Jackson Hole Speech 'Translated'

    Quote Originally Posted by Eric Stoner View Post
    Here we go again. The definition of insanity is continuing to do the same thing expecting a different result. Right ?

    By 11 to 1 the Fed Bd. Of Governors voted to keep interest rates at their current level into 2015 AND to buy some $40 billion of mortgage backed securities a month !
    This is QE 3. Would someone please explain how and why this round will work any better ( and will generate more jobs ) than QE1 or QE2 ? Why does the Fed insist on printing more money and putting that money into the hands of those LEAST likely to lend it out ? What will keep them from just buying more government debt ? This is "faith based" monetary policy : " We BELIEVE that the sellers of mortgage backed debt will use the sale proceeds to make loans and we HOPE that all this extra money sloshing around the economy will not weaken the dollar or cause inflation." The only thing missing is the "Change".
    That is for public consumption.... The Fed is about keeping asset prices up.... And indirectly "The Wealth Effect." This has been true since the depression started..... But you will never hear them say it.
    The country has been looted.

  4. #4
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: FED Chairman Ben Bernanke's Jackson Hole Speech 'Translated'

    note the action in the US dollar exchange rate ( down 1% ), gold and silver prices ( up 2-4% ) , corn and soy prices ( up 2% ) , oil prices ( up 1% ) ... but of course the US stock markets got a 1.5% 'pop'.

    from

    (snip)"Translating from Fed-Speak, the purchase of mortgage-backed securities is Quantitative Easing. Unlike QE1 and QE2, no dollar amount or time-limit was placed on the program. The Fed essentially announced it will be purchasing $40 billion in MBS per month until further notice.

    This is a monster, huge, gargantuan change from prior operations. QE1 "cost" $1.7 trillion. QE2 was half a trillion, give or take. The new plan isn't really QE3, because it's never scheduled to end. It is an entirely different, frightening animal.

    What makes it scary is contained in the next paragraph:


    If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability. In determining the size, pace, and composition of its asset purchases, the Committee will, as always, take appropriate account of the likely efficacy and costs of such purchases.


    Employment is weak and is expected to be despite the Fed's best efforts. In response, the Fed is opening the spigots even further and vowing to continue to do so until this failed strategy starts working. There's a certain willful spunkiness to the plan, but in terms of economics it's little short of bizarre.

    Bottom Line: The Fed has made up new rules by lifting all restraints on existing policies. Should they desire different stimulus, the Fed will need to invent a whole new policy. It's a bullish move in the sense that pouring more money into the system inflates values. Stocks, gold, oil... basically everything except the dollar "should" go up in value.

    Longer term we're now way, way into unknown territory. As Bernanke himself often says, monetary policy isn't a panacea. Then again, the same man just gave the economy the biggest injection it's ever seen. How will it all end? Literally nobody knows, but for now stocks are higher, bears are furious and bulls are giddily confused.

    Also, the president just got re-elected. But that's a for a different column."(snip)


    The unspoken worry here is that America's creditors i.e. China, Japan, Saudi etc. have now received a clear message that the US intends to 'inflate' away some of our deficit via devaluation of the US dollar. There has already been some 'quiet' rebalancing of the foreign exchange reserves of these countries out of the US dollar and into precious metals. This could now accelerate.

    And of course thanks to the US dollar devaluation, US dollar denominated prices for oil and gasoline, food, imported lowest cost option goods etc. will increase as well. However, with a FED commitment to continue zero interest rate policy, there is a snowball's chance in hell that US workers will be receiving pay increases. This will likely translate into 'working class' Americans spending a greater percentage of their stagnant paychecks on 'necessities' , leaving less money to be spent on non-essential consumer goods and services. Additionally, US businesses will see their 'input' costs increase at the same time that customers will have less money to spend on the non-essential goods and services they offer. This is likely to tip the USA back into recession ( if it's not there already ).
    Last edited by Melonie; 09-13-2012 at 03:06 PM.

  5. #5
    Banned Melonie's Avatar
    Joined
    Jul 2002
    Location
    way south of the border
    Posts
    25,932
    Thanks
    612
    Thanked 10,563 Times in 4,646 Posts
    Blog Entries
    3
    My Mood
    Cynical

    Default Re: FED Chairman Ben Bernanke's Jackson Hole Speech 'Translated'

    and here are a few potential 'unintended consequences' ... from


    (snip)"Let us now explore a few things that could rock this beautiful banana boat:

    1) The price of Oil. The life blood of modern global based trade, could well spiral upwards out of control. For the first time in history, the national average gas price for the 2nd week of September were over $4.00. Not a good look for a largely consumption based economy.

    2) Will this unprecedented action blow up the Petro-Dollar? As of this September 6th, China and Russia have decided to trade oil in non-petro dollars. Also, Iran can sell their oil to them without worrying about US sanctions. This is a huge development which has not fully sunk in to the general public yet. Perhaps the rest of the world will soon refuse to play ball with a the juiced up Fed as a cheating opponent. Will Asia increasingly turn away from the US capital markets, spending its hard earned reserves elsewhere? I sure as hell would.

    3) Agricultural commodities. The price of domestic Corn & Wheat are already at or near all time highs. A devalued USD caused by excessive money printing increases the cost of imported foodstuffs as well. QE3 will only make matters worse. Again, not a good look for a consumption based economy.

    4) Much of the recent social upheaval / military conflicts in MENA, have at their roots the caustic effect of high food & oil prices in the region. The US open ended QE policy is exporting inflation, and therefore misery to many impoverished parts of the world. Will the continued instability in the area rapidly lead to even larger major military conflicts which we can already ill afford, not to mention the ominous oil price spike that would ensue?

    5) The last thing that Europe needs right now is a weaker USD. Germany the only remaining ezone economic engine will suffer significantly, as their exports become less competitive vis a vis the US. The poor pathetic periphery counties will have zero chance to compete at all. While the ECB's printing money ability has increased within the past year, they don't have the same structural capacity as the U.S. to do so. Ben's destruction of the USD will adversely affect Chinese exports as well. We could soon see a collective Japanese/Chinese/European intervention in the currency markets buying up the USD to counter the effects of QE3, and this could quickly descend into Jim Rickard's dreaded currency wars.

    6) ZIRP forever. Are we not penalizing all savers by keeping rates so low for so long, and thus keeping the money they would have earned in their savings accounts from ever entering the real economy? And won't inflation and a weaker dollar further erode their purchasing power? Ben's policy hurts most retired folks living off a fixed income, and all who have a conservatively allocated retirement account they are counting on for future living expenses. Also, anyone who buys insurance, will now have to pay higher rates because insurance companies can't make money on their premiums anymore. Again not too cool for a consumption based economy.

    7) Every municipality, town, city and state that consistently adds to their conservative Government bond holdings, will now earn less income from those fiscally prudent investment portfolios. The Fed's forever ZIRP policy is now effectively forcing comptrollers of already dangerously over leveraged fiscal budget balance sheet all over the country to take on even more risk, by shepherding them towards a questionable search for higher yields. Sounds dicey to me at best.

    8 ) QE does little to promote job growth. QE1 cost $1.7 trillion. QE2 cost $600 billion. Using Bernanke's math, it cost the Fed $2.3 trillion to create two million jobs. The average annual salary in the U.S. for 2010 was $41,674. By the math given to us by Bernanke himself, each job created by QE has cost the Fed $1,150,000. Doesn't seem to be very cost effective. Can't we figure out a better way to spend the Nation's limited financial resources. Is bailing out a busted bloated banking system all that matters in the world! Where is the outrage???

    9) Effect on the Federal deficit. The continued unabashed monetization of debt actually encourages the fiscal cliff to become the greatest divide. Why would the easy money law makers be induced to significantly cut Governement spending if they are not penalized for further borrowing. Giving too much candy to a baby is usually not a good thing. Money for nothing and your chicks for free, is that the new American way?

    10) The wealth effect. The Bernanke puts way too much emphasis on the positive impact of a "feel good" consumer. He has directly mentioned the stock market & consumer sentiment as very important drivers of further economic growth. Does he not realize that most people actually don't own any stocks, other than a 401K, which cannot be touched until retirement. The average consumer uses regular savings to make additional discretionary purchases, not 401K gains. By keeping rates near zero, their meager savings returns are not even keeping up with real inflation, which is much higher than he admits to begin with. Not to mention that real wages have been staganant for decades now. Dr. Feelgood has it backwards, the man on main street feels mainly the pain of QE, and not the gain.

    11) QE3 and home prices. You would have to draw the 10-year yield down close to zero in order to get more people then are currently refinancing to refi again. This further MBS purchasing program by the Fed will only bring in a handful of new refinancings for the banks, and if you were looking to buy a home, you still have the same problem of selling your current residence because you owe more then its worth. This means you need to qualify for a new loan with your old mortgage counting as reoccurring debt. Not many can do this. As far as new home buyers go, interest rate levels on mortgages are not the problem, they are already at historic lows. This Mortgage purchase program announced as part of QE3 has much more to do with the Fed buying the MBS from Fannie and Freddie, because no one else will want to touch these zombies once the draw down requirements are imposed on the Federally chartered mortgage finance companies after the 1st of the new year. I'm afraid there is no housing boost news here at all, just more duct tape & baling wire.

    12) QE3 Inflation acceleration. Unlike the mega yet sterilized bond buying announced by ECB, the FED's reckless QE3 to infinity program does not mention anything about sterilization. This implies that there is no promise to contain the newly minted money via sterilization operations whatsoever, as was the case with QE1, QE2, and all other previous mortgage security purchases, instead it appears that the fubar fabricated funds will free flow directly into the economy, on a potential unlimited basis. $85 billion created per month out of thin air, $40 billion of which are perpetual unsterilized high octane fuel injections into an energetic economic engine is simply mortifying monster truck madness. This drastically increases the immediate dangers of an inflationary inferno flame out.

    13) Effect on future US interest rates. Here is where I believe we may see an immediate and very lethal blow back. If we are to assume that this new QE to infinity policy will quickly ignite new growth / jobs for the economy as advertised, it will also inevitably put upward price pressure on non-discretionary essentials such as food and energy, which have clearly shown their propensity to move up in tandem along side every previous QE operation. This real inflation felt at the ground level will not only reduce direct consumption by the cash strapped classes, but it will also force the cash flush classes away from low interest earning financial accounts of all kinds, and into existing hard non producing assets of every kind (commodities, PM, art, land, real-estate). Furthermore, prudent investors will soon understand that most corporate earnings suffer mightily from inflation, and thus will stay away from equities at these elevated levels. The elite financial institutions will face a double wammy here; not only will they lose straight low end deposit savers, but they will also suffer massive equity & bond account draw downs from the more affluent. At the end of the day, if they are going to keep excessive capital flight from accelerating, they will have no choice but to raise rates of return on funds deposited with them.

    Higher rates are just what the Bernanke was trying to avoid! Get ready for a midair mid flight stall into a deadly death spiral captain Ben, you have clipped your own wings. We are heading straight into an inflationary depression storm of epic intensity. Inflation in the things we require, and deflation on the things we already own. The greed trap has been hatched from the heavens above, same as it ever was.

    Up until now, the stock market has enjoyed the free QE bus ride no questions asked, however when the prosperous peeps are surprisingly startled by the tremendous thundering QE3 tailpipe backfire blast, they will quickly realize that the vehicle is running on nothing but fumes, and will all jump off at once before it runs out of regular real gas. Be sure to be the first ones out before the passengers crash the plexiglass doors."(snip)

  6. #6
    Veteran Member
    Joined
    Jul 2011
    Posts
    455
    Thanks
    53
    Thanked 175 Times in 109 Posts

    Default Re: FED Chairman Ben Bernanke's Jackson Hole Speech 'Translated'

    Yes... This is a real problem.... While those closest to the money creation will reap the benefits..... With assests appreciating in price & more opportunity to loot.... And I'm not sure the wealth effect will in fact have any trickle down..... The rest of America will feel the pinch at the pump..... More than negating any trickle down that might occur.
    The country has been looted.

  7. #7
    Banned Eric Stoner's Avatar
    Joined
    Oct 2006
    Location
    NYC
    Posts
    5,150
    Thanks
    1,261
    Thanked 1,430 Times in 888 Posts

    Default Re: FED Chairman Ben Bernanke's Jackson Hole Speech 'Translated'

    Quote Originally Posted by mikef View Post
    Yes... This is a real problem.... While those closest to the money creation will reap the benefits..... With assests appreciating in price & more opportunity to loot.... And I'm not sure the wealth effect will in fact have any trickle down..... The rest of America will feel the pinch at the pump..... More than negating any trickle down that might occur.
    What "trickle down " ????? That is the whole problem. Ben's model is built upon trickle down LENDING not spending.

Similar Threads

  1. Replies: 7
    Last Post: 06-16-2011, 11:46 AM
  2. Ben Bernanke 'loses control' of the US FED
    By Melonie in forum Dollar Den
    Replies: 0
    Last Post: 05-24-2011, 03:28 AM
  3. Replies: 10
    Last Post: 09-24-2010, 08:21 AM
  4. Replies: 0
    Last Post: 06-23-2010, 03:37 PM

Bookmarks

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts
  •