Posts by "macrosam"

One thing that may have gone unnoticed today but 3mo LIBOR ticked up for the first time in a few days, which is a bit odd if the liquidity concerns have been taken off the board.

I would have expected more of a rally/short squeeze from the LTRO results than what we've seen.

Aiding the bid in GBP today:


By Scott Hamilton
June 29 (Bloomberg) -- Bank of England Markets Director Paul Fisher said that the central banks mandate is clear on what to do if inflation pressures in the economy persist in the medium term.
While we need to be sensitive to the risk of tightening policy prematurely, Fisher said, should it appear likely that inflationary pressure is sustained at a higher level into the medium term, then it is clear what our mandate would require us to do. Fisher made the comments in a speech on June 14 in Liverpool, England. The remarks were released today by the bank.

I don't dispute what you are saying but what my point is that sometimes, regardless of fiscal and monetary policy, it will take time to emerge from a recession. It may take 5 years, it may take 10 years, and that is what the case is when there is a balance sheet recession in place. Poor policy will prolong that recovery or turn it into a Depression. Effective fiscal and monetary policy - policy that prevents further balance sheet destruction while creating an environment where balance sheet repair and restoration are allowed to occur - still may require a good deal of time. What most critics of policy don't seem to accept is that even with effective policy, a recovery may require a decade to emerge from the collapse of years and decades of excess. That is why when immediate results are not seen, governments move towards fiscal consolidation, and monetary policy tightening, the same flaws of impatience and desire for immediate gratification that fuels assets bubbles.

When we don't see explosive GDP growth resulting from policy, well, we're not supposed to. Frankly, just keeping GDP flat via policy is a triumph.

(continued yet again)

Economists and market pundits are missing the point when they criticize the effectiveness of fiscal and monetary policy in a balance sheet recession (as academia, the IMF, OECD, Fed, etc, misguidedly criticized Japan's policies) for not fostering more GDP growth. The Keynesian role of governments during these recessions is not to borrow and spend in order to GROW, rather to borrow and spend to BRIDGE the gap, restore the money supply, and buy individuals and corporations enough time and to provide a conducive environment in which they are allowed to restore their balance sheets using the free cash flow they are able to still generate during this time. Not much different that backstopping a bank to prevent bank runs as all financial institutions are technically insolvent at any one point in time should all depositors demand their loans back in a simultaneous fashion.

One area I disagree with Koo on is the effectiveness of monetary policy. Koo seems to think it is almost entirely ineffective, but I see it as preventing further balance sheet destruction by propping up the asset values, the asset side of the balance sheet so that less repair and restoration is needed, presumably leading to a faster recovery. If your home value falls from $500,000 to $250,000 but would have fallent o $175,000 if not for Fed programs (MBS, treasury purchases, low rate environment), that is $75,000 less of deleveraging/recapitalization that individuals and financial institutions will need to endure.