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crossposted from ello because does anyone read ello anymore?

This is super late, but in looking back at responses to my post on reparations this bit from Tim Worstall caught my eye:

“Thus today’s value of what was stolen from the slaves is that $1.75 trillion. Which is, when you look at it, a formidable sum of money. Except, actually, it isn’t. The net wealth of the entire country is around $80 trillion or so. So it’s a trivial percentage of the national wealth. Or we could look at it another way. There’s 42 million or so African Americans (defined as having some possibly slave and black antebellum ancestry) so the capital sum would be some $40,000 for each of them. Which, while a nice enough sum to receive isn’t the sort of life changing sum some might think might be due in reparations.”

This is wrong, but the fact of its wrongness itself goes to show how much many folks underestimate the dire economic straits of black America.

According to the FRB’s invaluable Survey of Consumer Finances, the net wealth of all of black households is around $1.7 trillion. So even that $1.75 trillion infusion (which is the most minimal estimate of the amount reparations ought to be my calculations produced) would double the net worth of black America as a hold.

Put another way, two-thirds of black households have less than $40,000 in net wealth. So this wouldat least double the net wealth of two thirds of black households.

Put another way, the entirety of black America has just over $921 billion in debt. So that $1.75 trillion could wipe out all debt held by all black Americans (in practice, just over two-thirds of black households have debts totaling less than $40,000, so it would leave some black households with some debts).

So given that $1.75 trillion is ‘a trivial percentage of the national wealth’ maybe we should just give it to black America then? I doubt they’d find it so trivial.

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So late last year Matt Yglesias found a simple and concise way to create a good-enough estimate of the value of all privately-held American land, using the Fed’s Z1. He did not, however, go on to take the most-obvious next step, which was to use FRED to compile all the relevant series to calculate the entire time-series.

I have taken that bold step. Behold – the real value in present dollars of all privately held American land since FY 1951:

it's good to have land

Oh, look – a housing bubble!

But because this is the Age of Piketty, why stop there? Thanks to the magic of the internet and spreadsheets, all of the data Piketty relied on in his book is freely available – and perhaps even more importantly, so is all the data Piketty and Zucman compiled in writing “Capital is Back,” which may be even more comprehensive and interesting. So using that data, I was able to calculate land as a share of national income from 1950-2012. Check it out*:

 this land is my land; it isn't your land

 

Oh look – a housing bubble!

And why stop there? We know from reading our Piketty that the capital-to-income ratio increased substantially during that time, so let’s calculate the land share of national capital:

 

image (5)

Oh look – a…two housing bubbles?

It’s hard to know what to make of this at first glance, but after two decades steadily comprising a quarter of national capital, land grew over another two decades to nearly a third of it; and after a steep drop to under a fifth of national capital in less than a decade, just about as quickly rebounded, then plummeted even faster to under a fifth again.

So the question must be asked – why didn’t we notice the first real estate bubble, just as large (though not as rapidly inflated) as the first? There are two answers.

The first answer is – we did! Read this piece from 1990 – 1990! – about the “emotional toll” of the collapse in housing prices. Or all these other amazing pieces from the amazing New York Times archive documenting the ’80s housing bubble and the collapse in prices at the turn of the ’90s.

The second answer is – to the extent we didn’t, or didn’t really remember it, it’s because it didn’t torch the global financial system. Which clarifies a very important fact about what happened to the American economy in the late aughties – what happened involved a housing bubble, but wasn’t fundamentally about or caused by a housing bubble.

For context, here’s the homeownership rate for the United States:

get off my property

 

The 00’s housing bubble clearly involved bringing a lot of people into homeownership in a way the 80’s bubble did not; that bubble, in fact, peaked even as homeownership rates had declined.

There are a lot of lessons to learn about the 00s bubble, about debt and leverage and fraud and inequality, but the lesson not to learn – or, perhaps, to unlearn – is that a bubble and its eventual popping, regardless of the asset under consideration, is a sufficient condition of a broader economic calamity. Now, it does seem clear that the 80s housing bubble was in key ways simply smaller in magnitude than the previous one; it represented a 50% increase as a ratio to national income rather than the doubling experienced in the aughties even though both saw land increase similarly relative to capital. But there have been – and, no matter the stance of regulatory or, shudder, monetary policy, will continue to be – bubbles in capitalist economies. The policy goal we should be interested in is not preventing bubbles but building economic structures and institutions that are resilient to that fact of life in financialized post-industrial capitalism.

*Piketty and Zucman only provide national income up through 2010, so I had to impute 2011-2012 from other data with a few relatively banal assumptions.

Ryan Avent had a fantastic post Tuesday dismantling the rationale of the Fed, and specifically Jeremy Stein, for basically casting macroeconomic improvement to the wind for the sake of ill-defined financial stability. If you read Ryan’s post you’ll see precisely why this is backwards and, indeed, as likely as not to backfire.

The relatively meager contribution I’d like to make to the discussion is simply this – if the Fed truly believes that financial instability, despite being wholly absent from their legal mandate, is sufficiently important to trade off other desirable outcomes to pursue, then they should pick a target. One of the better decisions the Fed has made in recent years is more openly and rigorously defining targets – specifically, clearly defining the thresholds in widely-available and transparent measures of unemployment and inflation that may lead the Fed, once crossed, to raise interest rates, and disclaiming any potential rate raises before then. If the Fed wants us to take their approach to financial stability seriously, they should pick a variable or index and a threshold value and announce it. Absent doing so, we’ll all have to wonder whether less rigorous impulses undergird the Fed’s eagerness to find new reasons to raise interest rates even as unemployment is high and inflation low.

So these are the three largest components of GDP, all indexed to 1960:

gdpfedgraph

Clearly one of these is not like the others, but the well-known fact that investment, not consumption or government spending, is mostly what fluctuates with the business cycle is very visible. I wanted to dig a little deeper, though, especially to compare the current recession to priors. So I made this graph:

sum gpdi nosmooth

Bars are unbroken periods of percent change in GPDI; their height is the total percent change in the period, their width is the length.

Here it is smoothed a bit using a highly-advanced method called “arbitrary eyeballing”:

sum gpdi smooth1

And this time with feeling:

sum gpdi smooth2

While none of these three graphs is perfect, looking at all of them the various recessions we’ve experienced and their depth and breadth become quite clear. And it seems striking that our current mess represents a vastly larger and longer decline in private investment then any prior recession since WWII.

So let’s break down GPDI; the biggest component is the broad heading of “fixed non-residential investment:”

longnonresinvest

Looking at the log (which is quite often a good idea, see James Hamilton for more) you can see that this recessions seems notably but not dramatically more severe than past downturns, and that we are on a decent track for recovery.

But here’s residential structures:

logresstructures

Wowzers. Two facts worth noting: residential investment has fallen off a cliff and is nowhere near recovering; the so-called “housing boom” is barely visible.

That becomes a little clearer, though, when you look at single-family construction vs. multifamily and “other” (dorms, trailers, etc):

singlefamily

multifamily

other

Single-family construction clearly gets a little wacky during the mid-aughties, whereas multifamily is catching up from slacking on trend; since then, multi-family is rebounding while other is wishy-washy and single-family is really terrible.

What’s remarkable about all this, though, is that you can with some confidence say non-causally that recessions are, for all intents and purposes, fluctuation in housing construction.

In the past, we’ve had recessions, interest rates are cut, recession over. Now, interest rates can’t be cut, and we’re not building enough housing, and therefore there’s too much unemployment (especially among the young who are largely the building class):

unemp1

In fact, relative to older folks, this is the worst the young have had it since the 70s:

unemp2

Now, why does lowering interest rates reverse recessions? There are many good reasons, but to some extent they’re all about setting expectations. When the Fed “cuts rates,” what is doing is what its doing is just buying lots of government securities, which is what “quantitative easing” is; the difference between the former and the latter is the ends, not the means. The former is a kind of credible expectation setting of broader outcomes – “we will buy bonds until interest rates are where we say they should be, dammit.” The latter sets a much narrower expectation that doesn’t necessarily imply broader changes in the economy.

Now, there is an idea out there that Paul Krugman calls “the confidence fairy,” which he belittles…and he’s right (at least in practice)! As it is formulated by conservative pols and pundits as a partisan cudgel, it basically amounts to a non-sequitur; recessions, ergo, implement the tangential policies we support regardless of economic conditions (derp).

But I’m not sure the confidence fairy is entirely a fiction. In what I think is a bit of a cousin to Steve Waldman’s story of finance as the world’s most important confidence game, it seems like in the past recessions have been alleviated because the Fed creates self-fulfilling prophecies – by buying bonds to depress interest rates, they incentivize individuals to invest based on an implicit assumption about future growth dependent on their investment. And it all worked rather nicely until we hit the ZLB:

The thing that the Fed has fundamentally failed to do is pull their usual trick; they haven’t convinced anyone that the economy will be better tomorrow, so they’re not doing the things today that will create that improvement.

This, in a roundabout way, is where I get to responding to Ryan Cooper’s terrific article making the case for helicopter money. Helicopter money is a good idea. I like it. I support it. It is a humane, fair, and efficient way to help everyone get through hard times. But my gut tells me its not, on its own, enough to kickstart us out of the funk our economy is in. While the biggest reason the 2008 tax rebate didn’t help the economy was its puniness relatively to the impending crisis, it was doubly hobbled by the fact that it was a one-off with no guarantee of being repeated (which it hasn’t, though the payroll tax cut was it’s cousin). Ryan supports giving the Fed the power to mail checks unilaterally, not by implicitly supporting a fiscal-side program, which is a great idea – coordinating the king and the wizard can be a tricky game. But even then, a $2000 check can be extraordinarily helpful in the medium term to people in need, but it in-and-of-itself does not a housing construction recovery make. Helicopter money works best, and may work only, as the whip hand of a credible promise by the Fed of meeting a broader economic target; it can, though, be a very persuasive whip.

Kevin Drum, riffing off yesterday’s epic Mt. Gox and BTC implosion:

Bitcoin, after all, is the ultimate fiat currency: just a bunch of ones and zeroes on a computer with no intrinsic value. But so are all currencies. The difference is that it’s more obvious with Bitcoin because the entire enterprise is actively marketed as nothing more than algorithmically-created data. It’s one of their big selling points.

So that forces you to think about what the ultimate value of a Bitcoin can be. And if there isn’t any, then why do dollars and yen have value? Why do IOUs passed around in prison camps have value? Or babysitting chits? Once you figure out what ultimately underlies the value of these various fiat currencies, you’ve taken a big step toward understanding why some currencies are better than others and why playing games with the debt ceiling is so stupid.

Which reminds me that I wanted to knock down this whole notion of “fiat currencies” in the first place.

Money is a technology devised as a solution to a bundle of collective action problems centered around network effects and the transaction costs of exchange above a certain threshold of scope and scale. It works really, really well, but it has a few problems. A key problem (though not the only or, perhaps, even the most important of which) is the one of storing value – money is only useful if its value doesn’t fluctuate too much, too unpredictably, too soon. However, there are incentives for whomever issues the money (as well as counterfeiters) to take actions that result in just those kinds of fluctuations, as well as outside pressures that make such fluctuations more likely. Therefore, almost every money issuer ever has taken some sort of steps to regulate the value of its currency and the rate at which that value changes.

One solution to this was to make the money out of rare, durable, verifiable elements. One solution was to have private actors issue money and caveat emptor. One solution was to have a bunch of state technocrats issue paper redeemable for said elements. One solution was to have a bunch of state technocrats issue paper redeemable in more paper and pinky-swear not to allow the value of the currency to fluctuate. One solution was to create a self-perpetuating algorithm that fixed the supply of currency units. There were also other solutions.

I think trying to sort those and the myriad other solutions to the money problem into “fiat” and “backed” is as irrelevant as it is obscurant. In each of those schemes there are two identifiable foci from which value regulation derive and distinguish various schemes from each other:

-The algorithm – the rule governing the value path of the currency.

-The credibility – the likelihood of the currency following the value path promised by the algorithm, and the accountable party for those outcomes.

This makes actual, categorizable sense of the differences between various monetary regimes. The algorithm of a gold-standard is “the value of this currency will always be equal to a certain quantity of gold, and you can always exchange your paper for that quantity” and the credibility is in the issuer, whether it’s a private bank or the central bank. Nothing stops me from issuing a gold-backed currency tomorrow, but nobody would use it because my promise to redeem all the SquarelyBucks I’m issuing for shiny gold coins is, sadly, totally lacking credibility. The algorithm of a “fiat” currency is “the value of this currency will never decline by more than ~2% annually” and the credibility is in the issuer, in this case Janet Yellen, the FOMC, and the institutional apparatus in which they operate. The algorithm of Bitcoin is “the money stock will never exceed 21mm BTC” and the credibility is in the nature of the currency’s code which until recently seemed very well-designed to prevent counterfeiting.

The genius of Bitcoin is that it takes the algorithm out of human hands; the tragedy of Bitcoin is that its algorithm is stupid, for two reasons. The first was that Bitcoin’s algorithm was borne out of an ideology which believed that central banks inherently lacked credibility and that therefore central bank currency inflation, even hyperinflation, was not just possible but inevitable, especially in light of the various Federal Reserve responses to recent economic shocks. This ideology is wrong:

tipsy

TIPS Spread

The second reason is that there are better algorithms even if you believe in that (wrong) ideology. A good example would be “one BTC will always equal one 2009 USD no matter what happens to the value of USD over time.” This, of course, is way more complicated than the BTC algorithm as a coding matter, because it would have to either trust CPI or another inflation measure or somehow routinely update an internal proprietary index based on accessible price data, a tricky thing to do into perpetuity. If someone wanted to program and release that cryptocurrency, BTW, it would be a fantastic economic experiment. But that’s not BTC, which instead fixed its money supply, and lacking any private or public chartalistic price anchor allowing for large, unpredictable, rapid fluctuation in its value, thus defeating the purpose of money itself.

I hereby therefore petition that we suspend all discussion of “fiat” currencies and “backed” currencies and instead discuss rules and credibility.

(Thanks to Mike Sproul and Nick Rowe for kicking this around with me in the comments of this post)

Matt Yglesias wrote a fun post on how massive conservative spending on elections may be causing conservative strategist inflation. What I think this post highlights implicitly is where the broader class of inflationistas goes wrong.

Let’s imagine that the Koch brothers wizarded the $400 million they spent on elections out of thin air. That created part of the conditions for inflation.

But there is a second, much more important condition for inflation – supply side constraints. The fact is that there are only so many elective offices, so many candidates, so many strategists and video produces and email spam writers. When you plow more and more money into a supply-constrained market you get rising prices without a corresponding increase in quality or quantity. That’s inflation.

For inflation to happen on an economy-wide scale you need not only for the monetary authority to create lots of money, you also need that money to exceed any corresponding increase in total output. So to believe that the Fed is about to hyperinflationatize us all into the Dark Ages you’d have to believe that there aren’t any more resources to mobilize with all that money, which is bonkers because lots of people don’t have jobs. Here is a cool map showing unemployment rates in lots of countries. They’re high. Is there nothing productive they could be doing?

Maybe not! Maybe you think that supply and production in energy markets can’t support more employment and that’s what makes now like the 70s. I disagree! But you have to make that case too, not just that “ZOMG FED PRINTING SO MUCH DOLLARS RUN FOR THE GOLDEN BUNKERS.”

Let’s model a kingdom. In this model, the kingdom is a closed economy, and (very importantly) it is “well-normed” – it has strong norms relating to governance and society that tend to be widely honored and respected.

This kingdom is governed by two individuals: the king, and the wizard. Most formal power, as well as the titles of head of state and head of government, is vested with the king. The king has formally unlimited powers to tax and spend, raise armies, and adjudicate disputes, but in practice is limited by norms, sense of duty (symbolized in a sworn oath to serve in the interest of the whole kingdom and its subjects), and the patience of subjects; therefore, the king tends to maintain inherited intuitions to which their power has been delegated, like courts and military bureaucracy. The crown is hereditary – the first-born child of the king (this is a gender-progressive kingdom) inherits the crown, and in the past, though there have been occasional hiccups, most transfers of power have been peaceful and orderly.

The king must retain a wizard, who is charged in vague terms with independently securing the safety, security, and prosperity of the kingdom. The wizard bears a hat that grants them vast yet mysterious magical powers. Unlike the crown, which is symbolic, the wizard’s hat is in fact where the magical powers are vested, and is not hereditary. When the existing wizard dies, the king selects the next wizard, who receives a lifetime appointment. Extremely strong norms dictate that the king select whomever is widely acclaimed the wisest scholar in the kingdom, regardless of their personal feelings towards that individual or inclination to select an ally as wizard. Often the wizard will survive the king.

As stated above, the wizard has vast powers, but they are mysterious and to some extent ill-defined. There is no user manual for the wizard’s hat, and often throughout history wizards have surprised themselves with the consequences of exercising their powers. Therefore, norms have developed that the wizards exhibit strong restraint in exercising their powers, even in times of emergency. Extremely strong norms have also developed against the king making formal or open requests of the wizard, as well as against the wizard interfering in the quotidian or terrestrial business of the king. In the past, there have been some violations of this norm in both direction, but for the most part it tends to persist. Consequentially, the wizard tends to be reclusive, speak carefully and opaquely, and avoid commitments to use their powers. There is much dispute among the subjects of the kingdom to exactly what the wizard is doing or could be doing, and when the wizard ought to exercise their powers.

Your assignment: model the governance and economy of this kingdom.

I’m quite surprised to find myself in agreement with the Tea Party but here we are:

Some House Republicans have proposed a bill which would kill the 1-dollar bill and replace it with a mandated dollar coin, The Hill‘s Peter Kasperowicz reports.

Rep. David Schweikert (R-AZ) and two other House Republicans introduced the Currency Optimization, Innovation and National Savings (COINS) Act last week, saying the U.S. would save $184 million a year by moving to the dollar coin.

But Massachusetts Sens. Scott Brown (R) and John Kerry (D) have introduced a competing bill called the Currency Efficiency Act which is supposed to protect the paper dollar from what they’re calling the "massive overproduction" of the "unpopular one dollar coin."

"The one dollar coin is misleading because it costs taxpayers so much more," Brown said. "In fact, we have over $1 billion worth of extra one dollar coins sitting idle in vaults and that’s set to double over the next several years." Their bill would stop $1 coins from being minted while the current surplus of $1.2 billion in dollar coins exist.

The Dollar Coin Alliance claims that Kerry and Brown are just covering for a business in their home state, Crane & Co., which supplies the paper used to produce dollar bills.

"Unfortunately, it seems the senators have chosen to protect a local business at the expense of the American taxpayer," former Arizona Rep. Jim Kolbe, the honorary chair of the Dollar Coin Alliance, said, according to the newspaper. "At a time when the government needs to be looking to save every dollar, we can’t continue to play the same Washington game of serving narrow special interests with half-measure legislation."

NPR’s Planet Money investigated the use of dollar coins earlier this year, finding pallets of them sitting around in Federal Reserve storage unused.

In a 2010 report to Congress, the Federal Reserve said the coins were being held "with no perceivable benefit to the taxpayer" and that banks are sending them back in increasing numbers, according to NPR.

"We have no reason to expect demand to improve," the Fed said. "We also note that a 2008 Harris poll found that more than three fourths of people questioned continue to prefer the $1 note."

Now I’m not sure if the Kerry-Brown axis is really just a front for Big Paper, but other than that everyone is right here – the dollar coin is unpopular. But it also represents vast savings for the government and should be widely adopted, and that’s why Congress ought to go the unpopular route and scrap the dollar bill. It’s more efficient and more ecologically sustainable. Plus, we’d get to circulate all the dollar coins we already printed. The euro doesn’t circulate any bills less than €5 in value but while that might annoy people at the margins that’s been the one thing about the euro that hasn’t incited riots and social unrest.

Forget the policy; regarding the politics of Operation Twist, here’s an interesting take from Jonathan Bernstein over at Greg’s place:

What I think the key is to understanding the leaders’ action is to remember at all times the precarious situation McConnell and, especially, Boehner find themselves in: They just aren’t Tea Party true believers, and everyone knows it — which means they are constantly only one step ahead of being labeled RINOs and drummed out of their positions. Not only that, but they constantly find themselves in the unfortunate position of having to agree to pass things — appropriations, the debt-limit increase — that will be signed by the Kenyan socialist in the White House. So, from their point of view, any rhetoric that will play to the crazies while not imposing actual legislative obligations on them is a pure win. Fed-bashing, from this perspective, is a natural fit.

And via zerohedge here’s some wisdom from Michael Feroli of JP Morgan:

Another question is how the political pressure will affect potential dissenters. In the absence of this letter we would expect up to three hawkish dissents once again — provided the Fed takes some action — and possibly one dovish dissent from Evans. However, the letter from the Congressional leaders cited in support of its view "significant concern expressed by Federal Reserve Board Members," among others. (Presumably the letter meant FOMC members, as Federal Reserve Board members have been generally supportive of Bernanke’s policy). There is a chance that Committee members who have some reservations about Fed policy may now be less likely to dissent, to avoid validating the views expressed in the Congressional letter, as surely all on the FOMC — hawk or dove — would find this political meddling repugnant. It’s probably still the case that we get another handful of hawkish dissents, though there is now a chance the Committee circles the wagons in response to the political pressure and we get fewer than three dissents.

This, I think, is fascinating. If both of these guys are generally right, then the GOP leaders played to their base but managed to piss off the Fed enough to guarantee that the Fed would enact (in theory) more stimulative policy. This of course only dampens GOP chances of winning the White House next year. So the reactionary extremist base that has captured the GOP is creating such a toxic dynamic within the party that it can’t even pursue its own interests in the simplest fashion.

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