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Hedge fund managers fight the Fed – and lose Comment on this post ↓
May 17th, 2013 by Warren Swil

Brilliant NYT analysis omits central role

of Congress in prolonging the Great Recession

Federal Reserve Bank Chairman Ben Bernanke. Photograph: U.S. Federal Reserve Board of Governors official web site. Click image to visit Bernanke’s bio.

 JESSE EISINGER’s  brilliant analysis of the spat between hedge fund managers and the chairman of the Federal Reserve Bank in Thursday’s The New York Times was so full of massively important points, even Prof. Paul Krugman had a hard time figuring out which is the most important in his online-only response.
Eisinger, who works for the independent nonprofit ProPublica, explained with razor-sharp analysis why the Masters of the Universe have been so wrong about inflation and the Fed “printing money” … and this has been a favorite topic of columnist Krugman for many months now.
The Fed’s balance sheet has ballooned to more than $2 trillion since the onset of the Great Recession as it has flooded the markets with new money to keep interest rates at historical lows.
Hedge fund managers and certain segments of the economics profession have, all the while, been screaming “danger” – that runaway inflation and the collapse of U.S. government debt is just around the corner
As Eisinger so brilliantly put it: “They fought the Fed and the Fed won.”

This chart from the Federal Reserve Bank of St. Louis graphically depicts why the hedge fund managers – and many economists – have been so wrong in their criticism of Fed policy. Source: Federal Reserve Bank of St. Louis.

BUT ONE ASPECT of the debate both Eisinger and Krugman omitted from their analyses was, in my humble opinion, a central point: the Fed cannot fix the economy on its own.
In fact, Congress has been working at cross-purposes to the Fed since mid-2009.
The federal budget deficit has been declining for months. Krugman has repeatedly warned that this is counterproductive.
John Maynard Keynes wrote so many years ago, that, when demand collapses the consumer of last resort, the government, must step in to increase it by running large deficits. This was one of the major lessons the economics profession learned from the Great Depression of the 1930s.
When President Obama took over an imploding economy from George Bush in 2009, his top priority was to get a stimulus bill through Congress.
But at less than $1 trillion it was too little and not long enough, as Krugman has noted frequently.
Since then those blowhards on Capitol Hill have done nothing except talk about cutting the deficit.
Precisely the wrong medicine for what’s ailing the US economy.
Thus we have on the one side the Federal Reserve desperately priming the pump, while Congress is sucking the life out of economic activity in the country by slashing spending.
Ironically the two professors from Princeton – Fed Chairman Bernanke and columnist Krugman – have been proven right time and time again.

EISINGER CORRECTLY points out that former Fed Chairman Alan Greenspan was a dismal failure when it came to preventing the Internet stock bubble of 1999 and encouraging the housing bubble as it inflated in 2005.
But even Bernanke, despite his reassurances, seems to think that Fed is powerless to spot a bubble in the process of inflating.
Granted, the science of economic forecasting is inexact at best. But if there is anyone in the world with sufficient data pouring in from so many directions to be able to spot a bubble in progress, it is the Fed.
Eisinger notes that certain asset prices are rising fast again, especially real estate. But are we seeing the start of another bubble?
Core inflation remains below two percent. Interest rates have never been lower; that means investors globally still have faith in the greenback. The dollar is rising against many major currencies. Just look at what has happened to the Japanese yen of late.
In fact Japan, finally, is following Bernanke’s lead. Its new central-bank chairman, under strict orders from Prime Minister Shinzo Abe, has begun printing money furiously. The long moribund Japanese economy is beginning to show signs of life.
This is not a frivolous debate.
The hedge fund managers and bond ghouls may simply be attempting to protect their status as the “one percent,” but their influence on monetary policy as far too significant to ignore.
The Fed’s actions and the inaction of Congress affect every single one of us in America. Just ask one of those millions of people who have been without a job for longer than a year.
If I had been sitting in at the 4 o’clock budget meeting at The New York Times on Wednesday, I would have whispered in Executive Editor Jill Abramson’s ear that the Eisinger analysis belonged on Page One.
I have little hope that members of the House and Senate will come to their senses and stop fighting the Fed. But, it is also true that the Fed cannot fix the economy on its own.
Let us hope that our representatives and senators have read both Eisinger’s piece and Krugman’s response. Otherwise we are doomed to continue this tepid recovery for years to come.

 



One Response  
  • krugman's ghost writes:
    May 17th, 2013

    This is spot on.
    Of course those idiots in Congress are more concerned about their reelection campaigns – and the moneymen who finance them – than doing anything that might help the rest of us.
    Nicholas Kulish in today’s New York Times advances this story even further with his analysis of the stark differences between Japan and the European Union.
    While Japan posted a “robust” growth rate of 3.5 percent because of its aggressive monetary policies – that are less than six months old – the EU is mired in stagnation at best thanks to the inability of Angela Merkel’s government to get past its paranoia that the 1930s will be revisited if they ease monetary policy.
    What’s the definition of insanity again? Isn’t it doing the same thing over and over again and expecting a different result?


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