Bernanke's Clone: Sarah Raskin Says "Trust Us."
Sept. 30, 2011
Sarah Bloom Raskin is a member of the Board of Governors of the Federal Reserve System. She is a lawyer. She is a banking lawyer and has earned her living for her entire career as a government banking regulator.
On September 26, she gave a Bernanke-imitating speech on the rotten job market: "Monetary Policy and Job Creation." Does it come as a surprise that she promotes monetary inflation as the solution to unemployment?
She began: "Today I want to discuss how monetary policy can promote the objective of maximum employment in a context of price stability." She offered a footnote. Just what we need: speeches with footnotes!
"I will set the stage by reviewing current labor market conditions, and then I will talk about the tools that the Federal Reserve has been deploying to foster job creation and promote a stronger economic recovery." Just like Bernanke! Tell everyone what they already know, and then defend the FED's policies that, so far, have not worked.
"I will do my best to make these points in plain English rather than economic jargon, but feel free to correct me if I lapse back into it--my children certainly do." Clever! As if someone is going to raise his hand and say, "That's obvious nonsense, and you know it."
So, I will be raising my hand. Frequently.
Her speech begins as a typical Bernanke speech always does: telling us what we already know.
The global economy began slowing in late 2007 and early 2008 and turned downward sharply in the autumn of 2008 when the financial crisis intensified, resulting in the worst recession in many decades. By the end of 2009, the unemployment rate reached a horrifying 10 percent, corresponding to more than 15 million Americans being out of work, with all of the attendant social consequences, including lost income and wealth, mortgage foreclosures, family strains, health problems, and so on.
The key words: and so on. On and on and on: there have been no solutions.
Officially, the recovery from the recession began in the third quarter of 2009, but the pace of recovery has been modest. We have learned from recent comprehensive revisions of government economic data that the recession was deeper and the recovery weaker than had previously been thought. Indeed, the most recent reading on real gross domestic product (GDP) in the United States--the one for the second quarter of this year--still has not returned to the level that it had attained before the crisis, and the increases in economic activity over the past two years have been at a rate insufficient to achieve any sustained reduction in the unemployment rate.
So, 45 months of Federal Reserve policies have produced . . . nothing much. She's got that right!
The latest employment report issued by the Bureau of Labor Statistics was bleak. Private-sector employers added only 17,000 nonfarm jobs in August, far fewer than the already weak average monthly gain of about 110,000 recorded over the previous three months. The headline unemployment rate was 9.1 percent, representing about 14 million Americans who were out of work in August.
Bleak. Yes. But it gets worse.
Nonetheless, as many families know, the headline unemployment numbers don't fully capture the weakness in labor market conditions. Beyond the headline number, an additional 8.8 million workers were classified as "part time for economic reasons" in August because their hours had been cut back or they were unable to find a full-time job. In addition, about 2-1/2 million Americans were classified as "marginally attached" to the labor force because even though they wanted to get a job, they had not searched for one in the past four weeks. And almost half of that group--nearly 1 million individuals--have given up searching for employment altogether, because they do not believe any jobs are available for them.
Thanks. We needed that!
Here she actually says something relevant:
The economic data in this regard correspond to what I have seen firsthand over the past several years. I have traveled to once-robust manufacturing cities in the Midwest and have observed vacant lots, burnt-out factories, metal scrap heaps, and foreclosed homes. I have visited unemployment insurance offices and job training centers, and I have met lots of people who have been out of work for more than a year or two--out of work for so long that some of them are embarrassed to show their resumes to potential employers.
In short, the statistics don't lie. There really is a disaster out there.
Now, what to do about it? "These circumstances have called for forceful policy measures." They certainly have. They still do.
I will now talk about the conventional and unconventional actions that the Federal Reserve, for its part, has taken to foster economic recovery and job creation.
Here we come to the sales pitch. But let us not forget: the recession began in late 2007. The FED has made announcement after announcement about its many "tools." Result: an ongoing disaster. This is the FED's huge PR problem. Nothing it has done has worked.
She points to the FED's most recent actions. But she neglected to explain why over three years of ad hoc measures have not worked.
The conventional tool of monetary policy is to modify the near-term path of interest rates. To be more specific, a reduction in current short-term rates and a corresponding downward shift in private-sector expectations about the future path of such rates will tend to reduce borrowing rates for households and businesses, including auto loan rates, mortgage rates, and other longer-term interest rates. This policy accommodation also tends to raise household wealth by boosting the stock market and prices of other financial assets.
There is that word: "accommodation." What does the new policy do to accommodate anything? Mortgage rates are lower. The housing market still declines. New houses are not being built: 300,000 a year, down from over 1,000,000 in 2005.
With greater household wealth and cheaper borrowing rates, consumers tend to increase their purchases of houses, cars, and various other goods and services.
Not if they don't qualify for loans. Not if there is no equity in their homes. Not if they don't want any more debt, which they don't.
But that does not faze Mrs. Raskin. She has visions of sugar plumbs dancing in her head. The economy should now take off.
In response, businesses ramp up their production to meet the increased level of sales. Moreover, with lower costs of financing new equipment and structures, businesses may be inclined to increase their own spending on investment projects that they might previously have seen as only marginally profitable. In the near term, firms can meet increased demand by resorting to temporary and part-time workers, but over time they have strong incentives to increase the number of regular full-time employees. Consequently, the monetary accommodation leads to greater job creation, though sometimes with substantial time lags.
I see. Businesses will borrow more, especially small businesses that create most new jobs. Problem: so far, they haven't, despite three years of falling interest rates. The National Federation of Independent Business keeps saying that small businesses are not hiring, have not been hiring, and do not intend to hire.
Then she attempts a bait-and-switch move. She began talking about long-term rates, which have been falling steadily for a year. She then switches to the federal funds rate, which is at zero, and has been, because banks are not borrowing to cover reserve deficiencies. Why not? Because they have $1.7 trillion in excess reserves. Bankers are in panic mode.
The Federal Reserve has used this policy tool aggressively since the onset of the financial crisis. In particular, the federal funds rate target, which stood at 5-1/4 percent in mid-2007, was subsequently reduced to a range of 0 to 1/4 percentage point by the end of 2008, and that target range has been maintained since then.
Notice the passive voice: "was subsequently reduced" and "has been maintained." This hints that something reduced it and has maintained it. Something has: terrified bankers. She never mentions this possibility.
Indeed, because currency has an implicit interest rate of exactly zero, economists generally agree that a zero interest rate is the effective lower bound for the federal funds rate because investors could simply choose to hold cash if a central bank tried to drive short-term interest rates significantly below zero. In effect, therefore, the FOMC has been deploying its conventional policy tool to the maximum extent possible since late 2008.
The FED's policy tool has been the equivalent of pushing on a string. The banks are not lending.
If we attribute falling rates to FED policy, then there why hasn't it worked? The first section of her speech offers evidence that it has not worked. She knows this. So, she invokes the traditional excuse of every apologist for every failed policy. "What if the policy had not been used? Think of how bad things would be."
Rather than reviewing the vast academic literature regarding the effect of conventional monetary policy, I will simply pose the counterfactual question: What would have happened to U.S. employment if monetary policy had failed to respond forcefully to the financial crisis and economic downturn?
How do we answer this? Why, by using economic models. What models are these? She did not say. Tested for how long? She did not say. Tested by whom? The FED, presumably. How verified? She did not say.
Economic models--the Fed's and others--suggest that if the federal funds rate target had been held at a fixed level of 5 percent from the fourth quarter of 2007 until now, rather than being reduced to its actual target range of 0 to 1/4 percent, then the unemployment rate would be several percentage points higher than it is today. In other words, by following our actual policy of keeping the target funds rate at its effective lower bound since late 2008, the Federal Reserve saved millions of jobs that would otherwise have been lost. Of course, substantial uncertainty surrounds various specific estimates, but there should be no doubt that the FOMC's forceful actions helped mitigate the consequences of the crisis and thereby spared American families and businesses from even greater pain.
What does she mean, "if the federal funds target rate had been held at a fixed level"? Short-term interest rates always fall as a recession escalates. They were close to zero in 1933. She wants us to believe that FED monetary policy forced down rates. The recession forced down rates. It is keeping them low.
Given the magnitude of the global financial crisis and its aftermath, the Federal Reserve clearly needed to provide additional monetary accommodation beyond simply keeping short-term interest rates close to zero. Consequently, like a number of other major central banks around the world, the FOMC has been deploying unconventional policy tools to promote the economic recovery.
Wait a minute! What evidence is there that FED's monetary policies forced down the FedFunds rate? The FED shrank the monetary base in 2010, and the FedFunds rate stayed at zero. It had already been at zero for over a year at the beginning of 2010.
Conclusion: The FED has had no effect on the FedFunds rate.
In particular, we have provided conditional forward guidance about the likely future path of the federal funds rate, and we have engaged in balance sheet operations that involve changes in the size and composition of our securities holdings. Broadly speaking, these policy tools affect the economy through channels that are similar--though not identical--to those of conventional monetary policy. I'll now spend a few minutes describing how each form of unconventional policy can be helpful in promoting a stronger economic recovery.
She is a true Bernanke clone. Having failed to show that the FED's previous policies did what they were intended to do, and having admitted that the economy is still in the tank, she now spends lots of time telling people what existing policies will do.
She promises . . . transparency! Does this mean accepting an audit of the FED by the General Accounting Office? Of course not. But transparency nonetheless.
An essential element of good monetary policy is effective communication. In a democratic society, central banks have the responsibility to clearly and fully explain their policy decisions. Good communication is also essential for strengthening the effectiveness of monetary policy. Expectations about the future play a key role in the decisionmaking of households and firms: how much to spend, save, work, invest, or hire. Moreover, when financial market participants understand how the central bank is likely to react to incoming information, asset prices can adjust in ways that reinforce the central bank's expected policy actions and thereby support the central bank's objectives. Finally, clear communication can help anchor the public's long-term inflation expectations and hence improve the extent to which the central bank can take forceful actions to promote job creation in a context of price stability.
I ask: (1) Why wasn't the FED transparent before? (2) What has changed? (3) When? (4) Why?
"With the federal funds rate constrained by its effective lower bound, effective communications with the public have become more important than ever." Why? The FedFunds rate has not changed in over two years. What's new? On this score, nothing.
Since December 2008, the FOMC has been providing conditional forward guidance about the likely path of the target federal funds rate. From March 2009 through June 2011, the Committee's forward guidance indicated that exceptionally low levels of the federal funds rate were likely to be warranted "for an extended period." In August, we decided to be more specific about the timing, and our two most recent meeting statements have indicated that "economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013."
This is classic! Banks' increase of excess reserves accounts 100% for the low FedFunds rate. Banks do not borrow from each other, because they have plenty of reserves. The FED has no say in the matter unless it charges banks to keep excess reserves at the FED. Yet the FED takes credit for the banks' "we ain't lending any more" investment policy.
Forward guidance can provide monetary accommodation by leading investors to expect a longer period of low interest rates. As I noted earlier, a downward shift in the expected path of the federal funds rate is associated with reduced longer-term interest rates and generates a significant boost to consumer and business spending. Simulations of the FRB/US model and other evidence suggest that forward guidance can be a potent tool of monetary policy.
There is mo guidance. The FED just sits there. The FedFunds rate does not move.
Next, she calls monetary inflation "asset purchases."
Since late 2008, the FOMC has engaged in two rounds of large-scale asset purchases (LSAPs). The first round of LSAPs involved purchases of about $1.4 trillion in agency mortgage-backed securities (MBS) and agency debt securities and about $300 billion in longer-term Treasury securities; those purchases were executed during 2009 and the first quarter of 2010. The second round of LSAPs--often referred to as QE2--involved an additional $600 billion in purchases of longer-term Treasury securities and was completed at the end of June of this year.
These asset purchases were big bank bailouts. They were also funding of the Treasury for Hank Paulson's unilateral nationalization of the mortgage markets three years ago this month.
She mentions operation twist.
This maturity extension program--referred to by some as Operation Twist--should exert downward pressure on longer-term interest rates and help make broader financial conditions more accommodative, thereby supporting a stronger economic recovery. Indeed, recent work by an economist at the Federal Reserve Bank of San Francisco suggests that a similar policy put in place in 1961 had effects on longer-term interest rates that were roughly comparable to those of QE2.
So, she invokes a 50-year-old policy in a year in which there was no recession. That's FED scholarship for you!
Another significant policy action taken at last week's FOMC meeting is that the principal payments from our holdings of agency securities will now be reinvested in agency MBS rather than in Treasury securities. Our announcement appears to have been successful in narrowing the spread between rates on agency MBS and Treasury securities of comparable maturity. That spread had widened substantially since earlier this year, and the continuation of such a trend could have pushed up mortgage rates and adversely affected the housing sector.
Mortgage rates are lower. I may take that subsidy: lower monthly payments. But the economy remains in the tank. How will subsidizing me change this?
Then she says she thinks that the policy she voted for is a good policy. I ask: So what?
In my judgment, the Federal Reserve's deployment of our policy tools has been completely appropriate in promoting maximum employment and price stability.
Was it wise? She says we can never know for sure. No one can. Especially critics of the FED.
Ideally, such policy decisions would be informed by precise quantitative information about the effects of each tool. In reality, however, the estimated effects of the FOMC's policy actions are subject to considerable uncertainty. Such uncertainty is intrinsic to real-world monetary policymaking at any time but is particularly relevant under circumstances where the scope for conventional monetary policy is constrained by the zero lower bound on the federal funds rate, leaving unconventional tools as the only means of providing further monetary accommodation.
So, we are supposed to believe that a decision made by salaried bureaucrats was better than the free market's capital-allocation process. Why should we?
She goes on: "Although these monetary policy tools have been successful in pushing down interest rates across the maturity spectrum" -- there is no evidence that monetary policy did this -- "the magnitude of the transmission to economic growth and employment has been somewhat more muted than I might have expected." Somewhat muted? It has been invisible! "Indeed, it seems plausible that the effectiveness of our policy tools is being attenuated by a number of unusual persisting factors, including an excess supply of housing and impaired access to credit for many households and small businesses." In short, nothing has worked.
She continues: "Under normal circumstances" -- but this is the worst recession since 1930-33, i.e., abnormal to a fault -- "residential construction is an interest-sensitive sector of the economy that has played an important role in contributing to previous economic recoveries--especially the brisk recovery that followed the steep downturn in 1981 and 1982." But FED monetary policy under Volcker was tight in 1981-82 -- the opposite of FED policies today. "In the wake of the bursting of the housing bubble" -- which was caused by FED policies under Greenspan -- "however, the housing sector has remained exceedingly weak. In effect, there is an excess supply of housing that seems likely to decline only gradually despite the record-low level of mortgage rates. Thus, in this crucial sector, one can argue that lower interest rates have not shown through to higher activity in the same way that would be expected under more usual recoveries."
In short, the housing market is in the tank and shows no signs of recovery.
Consumer spending is also being restrained by the excess supply of housing, which has put downward pressure on home equity values and household wealth. A substantial portion of homeowners now have negative home equity and are effectively unable to refinance at historically low mortgage rates. Many more have seen a drastic decline in the value of their homes, which would typically serve as collateral for home equity lines of credit or second mortgages.
Then of what possible benefit is operation twist? If homeowners have no equity, they can't re-finance at the new, lower rates.
The slow progress in repairing and restructuring households' balance sheets may also be lowering the normal responsiveness of consumer spending to a decline in market interest rates. In particular, lenders continue to maintain relatively tight terms and standards on credit cards and, to a lesser extent, other consumer loans. Consequently, many households may be unable to take advantage of the lower borrowing rates that are available to those who have a high net worth and pristine credit records.
Yes, yes, yes: this is why FED policies have had no visible effect. Homeowners whose mortgage debt is greater than the market value of their homes will remain so until the housing market recovers. It shows no sign of recovering. Mrs. Raskin does not suggest otherwise.
"Many small businesses also appear to be facing unusual obstacles in obtaining credit." There is zero evidence of this. The NFIB keeps reporting that small businessmen have all the credit they want. They don't want credit. They want a recovery. The NFIB survey for September reported this:
Four percent reported financing as their #1 business problem. So, for the overwhelming majority, "credit supply" is not a problem. Ninety-three percent reported that all their credit needs were met or that they were not interested in borrowing. Seven percent reported that not all of their credit needs were satisfied (the record low is 4%), and 50% said they did not want a loan (15% did not answer the question, presumably also uninterested in borrowing). Twenty-five percent of the owners reported that weak sales continued to be their top business problem so new investments in new equipment or new workers are not likely to "pay off" by generating enough additional earnings to repay the loan required to finance the investment.
But Mrs. Raskin plowed ahead anyway: "If times were more typical, we would expect a smooth transmission in which lower interest rates would fuel credit expansion that would be used to finance expanding payrolls, capital investment, inventories, and other short-term operating expenses." If times were normal, the FED would not be in turtle mode, hunkering down in the face of widespread criticism and skepticism. Mrs. Raskin would be giving happy-face speeches with no footnotes.
Nonetheless, the latest Federal Reserve Senior Loan Officer Opinion Survey on Bank Lending Practices, which was taken in July, indicated that although domestic banks continued to ease standards on their commercial and industrial loans, the net fraction reporting easing on such loans to smaller firms (those with annual sales of less than $50 billion) remained low and was well below that of loans to large and middle-sized firms.
Then she adds more misinformation. "In its August survey, the National Federation of Independent Businesses reported a noticeable increase in the proportion of small businesses reporting that credit has become more difficult to obtain." On the contrary, small business report that they can get all the credit they want. They don't want any. "These businesses not only expect credit to become tighter in coming months but--like other businesses--have turned sharply more pessimistic about the broader economic outlook."
Just for the record, so have I.
"Finally, and perhaps most comprehensively, it is worth observing that the financial crisis has undermined the wealth of many Americans. Low- and moderate-income families entered the recession with little financial buffer against the adverse effects of wage cuts, job loss, and drops in home values." We knew that. The FED has not changed that. "Combined with widespread unemployment, housing and stock price declines, and increasing rates of mortgage defaults, foreclosures, and bankruptcies, the assets of many American families have been significantly eroded. The effect of these developments may be to attenuate the revival of normal consumption patterns that would otherwise be dictating increases in consumer demand and growth." So, what else is new?
What is the solution? Why, more monetary expansion, of course.
Even if the usual effectiveness of monetary policy is being attenuated by the factors that I have mentioned, that conclusion should not be taken as implying that additional monetary accommodation would be unhelpful. Indeed, the opposite conclusion might well be the case--namely, that additional policy accommodation is warranted under present circumstances.
We can be sure that Mrs. Raskin will vote with Bernanke.
We can trust them!
My FOMC colleagues and I have recently been faced with complex decisions about the use of unconventional policy tools under extraordinary economic and financial conditions. And while we may not all agree with every decision, I believe that the public can have a very high degree of confidence in the fundamental integrity and soundness of our decisionmaking process.
Her message: Trust us. We know what we're doing. "When my colleagues and I are doing our job correctly, we are neither hawks nor doves but owls--that is, we are trying to be as wise as possible in deploying all the tools we have to fulfill our legal mandate."
Question: What should we call them when they are not doing their jobs correctly? How about dodos?
Finally, in light of the economic hardships that are facing our nation, I want to underscore that the Federal Reserve is fully committed to doing everything we can to promote maximum employment in the context of price stability.
Mrs. Raskin has done yeoman service. She has echoed Bernanke. She has imitated Bernanke's style. She has chanted the FED's mantra: "to promote maximum employment in the context of price stability."
Bottom line: the economy is weak and getting weaker. Board members' speeches reflect the economy.