Sunday, October 9, 2016

Creatures of habit

I do a lot just by habit: getting dressed in the morning, brushing my teeth, even sitting down at the computer. Habit is more effective than memory when you have a memory like mine.


At my old job, before I retired, we did a lot out of habit. Whenever we got a new project to work on, the first question was always "What similar project did we do before?" We relied on previous projects to answer "How did we solve that problem?" questions for new projects.

It was a so-so technique. It did answer a lot of questions, but making improvements was almost impossible.


Sometimes I wonder if the Federal Reserve makes decisions out of habit. When a problem arises do they ask "How did we solve that problem before"? It sure looks that way: Need to promote growth? Lower interest rates. Need to fight inflation? Raise interest rates. Need to promote growth? What'd we do last time? Lower interest rates. Already at the zero bound? Lower rates anyway, even if you have to go negative.

They don't go negative on the idea of lowering interest rates, no no. They make the interest rate negative, because habit tells them they must. No matter that interest rates don't go negative. Habit wins the contest. They're not going to change their method. They do what habit tells them.

Over at the legislative branch, they do things out of habit too. Everything they do is designed to boost growth. There is some disagreement about the right way to boost growth, yes, but the goal is always to boost growth. They never have to stop and think about that. And when confronted with inflation, their habit is to turn to the Fed.


I showed this graph before:

Graph #1: Growth Rate of the Monetary Base
See the two red circled areas? The one is just before the Great Depression. The other is just before the Great Recession. Lightning never strikes twice, right?

What problem could they possibly have been solving when they looked back at the Roaring '20s and let the same thing happen again in the first decade of this century?


Now look just to the right of those red highlights. See the big spikes? Short, fat ones after the first red circle. Tall, skinny ones after the second. Spikes both times.

We know what problems they were trying to solve with the big spikes. They were trying to solve the problems they created by letting base growth fall for a decade. Twice.


That's an old graph, #1. Doesn't show what happens after the big spikes. Last time yes, base growth went down below zero and created the 1948 recession. This time... Well, here's the new graph:

Graph #2: Growth Rate of the Monetary Base
This time, after the big spikes, base growth went down below zero again. It looks like they are trying to create another recession.


Oilfield Trash said...

I like the graph but IMO all the current FED’s efforts (and I suspect the same was true in the 30’s) is to stabilize the commercial banking sector.

Below is the FED’s QE time line:

• November 25, 2008: Press Release: $100 Billion GSE direct obligations, $500 billion in MBS
• March 18, 2009: FOMC Statement: Expand MBS program to $1.25 trillion, buy up to $300 billion of longer-term Treasury securities
• March 31, 2010: QE1 purchases were completed at the end of Q1 2010.
• August 27, 2010: Fed Chairman Ben Bernanke hints at QE2: Analysis: Bernanke paves the way for QE2
• November 3, 2010: FOMC Statement: $600 Billion QE2 announced.
• June 30, 2011: QE2 purchases were completed at the end of Q2 2011.
• September 21, 2011: "Operation Twist" announced. "The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less."
• June 20, 2012: "Operation Twist" extended. "The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities."
• August 31, 2012: Fed Chairman Ben Bernanke hints at QE3: Analysis: Bernanke Clears the way for QE3 in September
• September 13, 2012: FOMC Statement: $40 Billion per month QE3 announced.
• December 12, 2012: FOMC Statement: Announced completion of "Operation Twist", expanded QE3 to $85 Billion per month.
• May 22, 2013: In Testimony to Congress, The Economic Outlook, Fed Chairman Ben Bernanke said “If we see continued improvement and we have confidence that that is going to be sustained, then in the next few meetings, we could take a step down in our pace of purchases.” (aka "Taper Tantrum").
• June 19, 2013: In Chairman Bernanke’s Press Conference, Bernanke said "If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year."
• December 18, 2013: FOMC Statement: Announced "tapering" of QE3. Note: QE3 tapered $10 billion per month at each meeting of 2014.
• October 29, 2013: FOMC expected to complete QE3 (next week).
I have a graph stripping out excess reserves showing the easing from 2008 to 2014.
From the 1990 to 2001 recession bank equity more than doubled. From 2001 to 2008 recession it more than doubled again. I cannot understand how this reconciles with your tight money view. I would expect the flow of base money to reduce in an environment of growing commercial bank equity. Why would the FED need to increase the flow of base money? If anything they should have increased reserve requirements of the commercial banks.
Your last statement
“This time, after the big spikes, base growth went down below zero again. It looks like they are trying to create another recession.”
Since 2014 commercial bank equity has almost doubled again. I agree with you it will not turn out good.

The Arthurian said...

Hi, O.T. Nice timeline. I was thinking about what you said, and messing with your graph.

I understand that bank assets minus bank liabilities equals bank equity. But I don't understand why you are subtracting excess reserves. Is it because they are not "in" the economy?

You didn't subtract requires reserves because they are required for money that *is* in the economy. So maybe that's it.

I am tempted to say: But bank equity is not "in" the economy, either. It is not among the assets that support transactions by being used as media of exchange. (Or so I assume.)

I don't know. But let me tell you about my tight money view. It is better than Sumner's. Sumner says we know money is tight because NGDP is not growing.

I say money is tight because it is tight relative to the amount of debt that money has to service. (Money got less tight when the debt service ratio fell since 2008, but not really because most of the debt still exists.)

People talk about "stretching" a dollar. I see borrowing money as a way to stretch dollars, and I see accumulated debt as a measure of how much the money has been stretched.

To say it another way, I see broad money as a measure of how much narrow money has been stretched. That's why I look at the ratio of debt to M1, or debt to base.

If I take your graph and use your (a-b)-(c/1000) as the numerator
And for the denominator use (TCMDO - FGTCMDODNS )
(all debt less the Federal debt)
I see a low before and during the 1991 recession,
I see a low before and during the 2001 recession, and
I see increase from Q3 2002 to Q2 2005 and a slowdown thereafter.
But maybe I'm seeing things.

If I take the excess reserves out of your calculation and just use (a-b) as the numerator
and just use TCMDO debt for the denominator
I see a high from Q3 1992 to Q2 1999
and a high after Q2 2009
and a low from Q3 1999 to Q1 2009.
... and a disturbing drop after Q2 2013.

Seeing Q1 2009 as a "low" depends on seeing a straight-line connection between the earlier high and the later high, so again maybe I'm seeing things.

But relative to accumulated debt, even your bank equity looks low to me.