Wednesday, August 12, 2009

Has the Fed Forgotten About Money Supply?

Or are they just focusing on expanding balance sheets while the banks are not loaning out the money? FT's LEX column almost gets what is going on:

The Federal Reserve has little time for money. Not dismissive of the contents of your wallet, per se, the US central bank sees limited value in measures of money as economic indicators. The Fed stopped tracking the broadest measure of US money in 2006, arguing it had not been used in interest rate decisions for some time. Now, it brands its response to the economic crisis “credit easing”, reflecting its focus on banks’ balance sheets, rather than “quantitative easing”, or boosting the money supply.

This is unfortunate. By its preferred measure of success, the Fed is having a shocker. Outstanding consumer credit has been contracting for five months straight, falling $10.3bn from May to June and down 4.9 per cent on an annual basis. Credit throughout the US economy is flat-lining or in decline, as banks tighten their lending standards and over-burdened businesses and households begin to pay down debt accumulated during the boom.
Although the Fed is calling what they are doing "credit easing", what they really mean is keeping short-term interest rates down. There is very little focus on actual credit or money supply. How could there be, since most of these measures are either in decline or have stopped climbing? Does Bernanke really want this situation, or does he believe he is "easing credit" simply by keeping rates low and adding to balance sheets, even though the banks aren't lending the money out.

These are very unusual times, tread carefully. Given the current situation, a double dip recession appears very likely, with an accompanying decline in the stock market.

1 comment:

  1. I'm not convinced Bernanke doesn't get it. Echoing the Bank of International Settlements assessment of June 29, the Congressional Oversight Panel on Aughust 11 said, “...troubled assets remain a substantial danger to the financial system. Treasury has taken aggressive action to stabilize the banks, and the steps it has taken to address the problem of troubled assets, including capital infusions, stress-testing, continued monitoring of financial institutions‘capital, and PPIP, have provided substantial protections against a repeat of 2008. These steps have also allowed the banks to take significant losses while building reserves. Nonetheless, financial stability remains at risk if the underlying problem of troubled assets remains unresolved.”

    In publicly-available data reviewed by the Panel, the 19 stress-tested bank holding companies have reported $657.5 billion in Level 3 assets (considered most likely to be impaired); $132.9 billion in annualized loan losses; $264.6 billion in past due loans; and $8.9 trillion in credit default sub-investment grade exposure. In sum, on the question of the size and current state of the troubled assets pool, based on values banks have assigned to their assets, COP indicates that as much as US $9.95 trillion in troubled assets remain on bank books.

    In other words, elites are clinking to the misguided notion they can avoid horrendous losses in wealth by shoring up a virtually bankrupt financial system. The clock is ticking on this approach, and the fall will be breathtaking.