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Equity rally led by investors piling into banks: likely wrong move

Investors adding new money to the market and to the bank sector in particular, drive the current rally in US equities. Two reasons: deregulation and higher interest rates. We have discussed the deregulation issue already, creating a longer-term risk to the economy, as investment banks can now play chicken with the Fed all over again, and spreading risk throughout the financial system. Expectations for higher short-term rates, sooner rather than later, have given another reason to invest in banks. We have seen this cycle many times over the last few years. When the Fed threatens or even delivers rate rises, the… Read More

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Bank of Canada Triples down on inflation targeting

In “Getting to the Core of Inflation” we read: Over the past 26 years, we have reduced consumer price index (CPI) inflation and maintained it at a level close to our 2 per cent target, with no persistent episodes of inflation outside our inflation-control range of 1 to 3 per cent. Because inflation has been low, stable and predictable, Canadians have been able to make better economic decisions and achieve better economic outcomes. That’s a solid track record, so, as you can imagine, it would take some compelling evidence for us to consider major changes to the policy. Given its effectiveness,… Read More

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I do not know much about Daniel Tarullo, the recently resigned board member of the Federal Reserve. He is a lawyer who spent a lot of time inside the Clinton administration working on international law, international financial regulation and banking law – and must have watched the implementation of Basel I very closely. After Clinton left the White House, he became a law professor at Georgetown but stayed close to the development of global banking regulation that gave rise to Basel II. He had an inkling that monetary policy might cause problems In his exhaustive description of the creation and… Read More

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The crime of 2008

In 1997, Bernanke (with Gertler and Watson) wrote “Systematic Monetary Policy and the Effiects of Oil Price Shocks“: THE PRINCIPAL OBJECTIVE of this paper is to increase our understanding of the role of monetary policy in postwar U. S. business cycles. We take as our starting point two common findings in the recent monetary policy literature based on vector autoregressions (VARs).’ …Put more positively, if one takes the VAR evidence on monetary policy seriously (as we do), then any case for an important role of monetary policy in the business cycle rests on the argument that the choice of the monetary policy rule… Read More

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Comes news that Daniel Tarullo is resigning his post in April on the seven-member U.S. Federal Reserve Board of Governors, the arbiter of nation’s money supply.  That leaves three vacancies. As noted in this space, despite declining headline unemployment rates, the U.S. economy never really recovered from the 2008 Great Recession. Labor participation rates have never rebounded, home ownership rates have tumbled, and GDP took a 10% (evidently permanent) haircut from potential. Every year, the U.S. gives up trillions of dollars of lost output, despite inflation being below target. Too-tight money is the primary culprit. Trump Appointees And Remembering Reagan… Read More

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The fantasy world of conventional central bankers where money has no role

Lawrence Christiano writes “The Great Recession: A Macroeconomic Earthquake”. The summary reads: The Great Recession was particularly severe and has endured far longer than most recessions. Economists now believe it was caused by a perfect storm of declining home prices, a financial system heavily invested in house-related assets and a shadow banking system highly vulnerable to bank runs or rollover risk. It has lasted longer than most recessions because economically damaged households were unwilling or unable to increase spending, thus perpetuating the recession by a mechanism known as the paradox of thrift. Economists believe the Great Recession was not foreseen… Read More

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What is the stance of UK monetary policy?

Many top economists are showing much confusion over the current state of the UK economy. There was near unanimity that a vote for Brexit would bring disaster. Clearly, the only “disaster” has been the fall in the currency, something that wreaks havoc only on foreigners owning assets denominated in GBP. A lot of havoc has been wreaked on the brains of the top economists too, from both right and left. They teach in their macroeconomics courses that devaluations lead to a shift in the AD curve to the right. Even in countries with awful politics, currency weakness continually protects the local economies from… Read More

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What do markets believe?

The November 2016 election gave “birth” to the “reflation story”. There was a lot of excitement, with long-term yields, the dollar, stocks and inflation expectations all rising. But this is illusory. Since mid-2014, the economy was testing new depths. Soon after Janet Yellen took the helm, the Fed embraced the “tightening talk”. In late 2015, it even went ballistic, raising rates for the first time in 10 years and saying it expected rates to increase at least four times during 2016. The market reaction was a “bloodbath”. That forced the Fed to turn tail, so in the spring the markets… Read More

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Missing the forest for the trees

In commenting on the GDP release, James Hamilton writes: But I’m struck by the fact that the low levels of business fixed investment are mirrored by low spending on new home construction and autos, two consumer-based components of GDP that historically usually exhibit similar cyclical dynamics to non-residential fixed investment. Shows these charts: And continues: Business investment, housing construction, and auto purchases are categories of spending that have always been very vulnerable to cyclical downturns. They’re the prime target when firms and consumers feel they need to cut spending and are apprehensive about the future. In many ways, what we… Read More

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As David Glasner recently noted, no plank of orthodox macroeconomics is more sacred today than that international free trade is good, and that even large and chronic trade deficits don´t matter. But an overlooked 2012 paper from the New York Federal Reserve, entitled House Price Booms, Current Account Deficits, and Low Interest Rates, raises serious concerns about chronic trade deficits, particular given the deeply entrenched ubiquity of property zoning. The paper posits, “One of the most striking features of the period before the Great Recession is the strong positive correlation between house price appreciation and current account deficits, not only… Read More

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