The Federal Reserve acknowledged on Tuesday that its confidence in the economic recovery had dimmed, and announced that it would use the proceeds from its huge mortgage-bond portfolio to buy long-term Treasury securities.
This after all the money they printed to directly help out banks (these numbers understate the issue):
The Fed bought $1.25 trillion in mortgage-backed securities, and another $200 billion in debts owed by government-sponsored enterprises, primarily Fannie Mae and Freddie Mac, and completed the purchases in March. The Fed had planned to allow the size of that portfolio to shrink gradually over time as the debts matured or were prepaid. Instead, the Fed will reinvest the principal payments in longer-term Treasury securities.
As a friend of mine noted, no wonder Modern Monetary Theory (the distinctly unmodern discovery that the government can, hey, print money) is taking off in certain circles. After all, if the government can print money for banks, why not for jobs?
The reason not, folks, is that if you do that, oil will go back to levels which will crash out the economy.
The real, actual, economy, is not one spreadsheet. It consists of people doing things, and the vast majority of those things require energy. The ur-energy is still oil. And no, there is not enough oil to go to full capacity utilization—because doing so will kick gasoline well over $5/gallon.
Until that problem, among others, is fixed, the economy is never going to be really good for Americans ever again. Every attempt to fix things which does not fix energy, will not work for any useful length of time.
David H
MMT has got at least one thing right — the govt should (always) spend $$ to guarantee full employment. That, more than any neoliberal austerity BS, will reduce deficits over time. But then the neoliberals aren’t really interested in balanced budgets, that’s just a blunt instrument in the full-tilt class war they’re waging.
anon2525
After all, if the government can print money for banks, why not for jobs?
The reason not, folks, is that if you do that, oil will go back to levels which will crash out the economy.
That’s not the reason not to print money to create jobs.
That’s the reason not, folks, to create jobs that don’t begin addressing the burning of fossil fuels.
Instead, print money and designate that the money only be spent on jobs that reduce the burning of fossil fuels.
anon2525
Here we go again:
Isn’t it more like “Here we stand pat?” (At least they’re not buying more MBS.)
anon2525
Here we go again:
Isn’t it more like “Here we stand pat?” (At least they’re not buying more MBS.)
(Fixed the HTML.)
Mike the Mad Biologist
“Every attempt to fix things which does not fix energy, will not work for any useful length of time.”
But even minimizing misery for a few years until we ‘fix energy’ would be a substantial good.
Tom Hickey
“As a friend of mine noted, no wonder Modern Monetary Theory (the distinctly unmodern discovery that the government can, hey, print money) is taking off in certain circles. After all, if the government can print money for banks, why not for jobs?”
The Fed can provide liquidity to banks through the interbank market, but it cannot give banks capital. As lender of last resort, the Fed can provide liquidity at low interest that allows banks to recapitalize more easily. But the Fed cannot capitalize them directly by giving them money “free.” On the other hand, when Congress appropriates funding for whatever reason, the Treasury disburse the funds as Congress directs.
The Fed is empowered to conduct operations that exchange reserves for tsy’s. Tsy’s are simply reserves saved at interest in the form of government securities instead of notes. The bulk of these notes and securities is virtual, existing on spreadsheets rather than paper. The effect of the Fed purchasing tsy’s for its book reduces the amount of interest that gets paid into the economy. This is deflationary, not inflationary. It creates no new net financial assets.
The only way that nongovernment net financial assets get increased is through deficits through Congressional appropriations. The Treasury then disburses the funds as directed, mostly by crediting bank accounts. Tsy issuance is simply a monetary operation that drains the excess reserves generated by currency issuance so that the Fed can hit its target rate (FFR) in the overnight interbank market. At the macro level, the net financial assets created by the budget deficit get saved as tsy’s. This is simply a change in asset composition, like transferring a demand deposit to a time deposit or a CD. When the Fed purchases tsy’s, it changes the asset composition from tsy’s back to reserves. There is no change in nongovernment net financial assets. Since banks don’t lend reserves but get reserves as needed after a loan is made and a deposit is created, changes in the monetary base do not directly affect the quantity of bank created money either.
Tom Hickey
“And no, there is not enough oil to go to full capacity utilization—because doing so will kick gasoline well over $5/barrel.”
It will take a significant increase in oil price to make alternatives competitive and spur investment. So bring on the $5 oil.
anon2525
The Fed can provide liquidity to banks through the interbank market, but it cannot give banks capital.
What should we call it if the Fed. Res. pays money to banks for MBS (“exchanges”), but the MBS are not “secure”, that is, they are mortgages that are not going to be repaid or are going to be repaid at much less than their nominal value?
http://thenewmortgagecompany.files.wordpress.com/2010/07/10-key-charts-mortgage-bubble-vs-property-bubble-by-housingstory-net.jpg
My mobster voice: “So, the Fed. Res. did not give the banks capital, it simply made a poor exchange.”
anon2525
It will take a significant increase in oil price to make alternatives competitive and spur investment.
That is Friedmanite thinking. We should not be waiting for “the market” to decide that it wants to use non-fossil-fuel energy. The planet is heating up. We should pay attention to what scientists are saying and the democratic majority should act through its legitimate use of power on what is in its best interest (the population’s survival and the survival of the biosphere).
One way that it (the democratic majority) can act is to direct the gov’t. to spend money to employ people and resources to build a non-fossil-fuel-burning power generation and distribution system, along with an electric transportation system.
Tom Hickey
anon2525, We should pay attention to what scientists are saying and the democratic majority should act through its legitimate use of power on what is in its best interest (the population’s survival and the survival of the biosphere).
I agree this “should” happen, but in this political climate, it is not going to happen politically. It will take a hike in carbon prices one way or another. It doesn’t look like the Dems are going to be able to pass much of climate bill with total GOP opposition and a few blue dogs opposed, too. That leaves a market imposed solution.
Tom Hickey
anon2525, What should we call it if the Fed. Res. pays money to banks for MBS (”exchanges”), but the MBS are not “secure”, that is, they are mortgages that are not going to be repaid or are going to be repaid at much less than their nominal value?
I look at this as essentially a liquidity operation also. The MBS are largely agency debt, and the US owns Fannie and Freddie now, so the government will end up paying for any defaults regardless of who is holding the debt. It was implicit that agency debt was government guaranteed, now it is pretty much explicit.
anon2525
I agree this “should” happen, but in this political climate, it is not going to happen politically.
And CO2 is not going to stop behaving as a greenhouse gas or stop dissolving in the ocean, making it more acidic. So, the onus is now on us. The idea needs to spread that some action needs to be taken, possibly a national strike, many smaller strikes, or civil disobedience.
bystander
Until gasoline hits well over $5/(gallon? litre?) there is no incentive to seek alternatives. And, coasting along to preserve some price less than $5/(gallon? litre?) is to consign an awful lot of people to misery. The misery of getting to alternatives will be shared regardless of when the transition occurs. Why must the href=”http://www.99ers.net/”>99ers be asked to suffer longer than anyone else? and, it’s not just the 99ers of today. More will be joining their ranks as time goes on. the feedback loops in an actively contracting economy insures that.
I understand the point you’re trying to make, Ian. But, waiting until the elite are sufficiently inconvenienced to seek a alternatives on their own seems like a special case of madness, to me. Although, I’m not sure that’s what you’re advocating.
Bernard
as long as gas/oil is “cheaper” than alternative sources, we are screwed. that is quite simple. alternatives will never have a shot until oil is more expensive. we already “fund” the oil companies to keep the price lower than it would be without all the taxes/subsidies. if America is going to get off of “oil” enough to make a difference, the sooner the better.
i distinctly remember Jimmy Carter and the response to his ideas about oil and alternatives. we STILL haven’t done anything to get off of OIL. and we won’t until the price is high enough to force REAL changes. delaying the inevitable is not wise when there is so much destruction in staying with oil
amazing to think people don’t realize how costly OIL really is, wars in Iraq, and that the sooner we make the effort the quicker we will no longer be blackmailed by OPEC. how long has OPEC controlled America’s economy? since the Oil Embargo in 73. so it’s not like we aren’t being held hostage by our dependence upon oil
we have been held hostage since the oil embargo showed who owns America.
Tom Hickey
Bernard, you are exactly right that the true price of oil is way in excess of $5 a gal now, when externalities that are presently being socialized are figured in. You are also correct that alternatives will not kick in significantly until the nominal price rises at the pump. President Bush was also correct — one of the few times he was — when he said that Americans are addicted to oil. Anon2525, there is not going to be a general strike because it is the American people that are demanding the continuation of cheap oil. It’s part of the addiction and government is expected to be the enabler, and it will be until it can do so no longer. That time is approaching. The dilemma, as Ian, points out, is cheaper oil ($3) and high unemployment, or jobs and rising gas prices.
anon2525
…there is not going to be a general strike because it is the American people that are demanding the continuation of cheap oil. It’s part of the addiction and government is expected to be the enabler, and it will be until it can do so no longer.
People need to change their mindset because if they wait until it is too late (if it isn’t already), then climate change will be irreversible and catastrophic. It will also be quite bad if people wait until it is too late to transition from fossil fuels to solar&geothermal because there will then be insufficient energy available to make the transition, if there isn’t already. Certainly, the approaches used for progress in the past of waiting for election cycle after election cycle with small, incremental improvements is not going to be sufficient.
lambert strether
1. Ian, surely “kick gasoline well over $5/barrel” is a typo?
2. anon2525, “People need to change their mindset…” No, we need to change people’s mindsets. I grant I’m not sure how to do that, and if we had markets that functioned as anything other than casinos, the market might be doing it. But we don’t…. Maybe we need OA — Oil Anonymous. “Step 1: We admitted we were powerless over oil. That our lives had become unmanageable….” Ha ha, only serious. AA, its rhizomic growth model, might be the only sustainable way of doing political work on a national level.
El Gringo Colombiano
Ian,
I’d like to see you go in on Obama/Corporatist Spokewhore Robert Gibbs, & his inane comments. Eviscerate these douches!
Ian Welsh
Yes Lambert, should have been $5/gallon, of course. Thanks.
Ian Welsh
El Gringo, I think everyone else has eviscerated Gibbs well enough. In particular, as usual, Greenwald whaled on him pretty well. Obviously he’s a hippie-punching douche bag, but, eh, what’s new. Obviously, either we are a tiny minority who doesn’t matter, in which case why is he after us, or we do matter, in which case, why is he antagonizing us? Putz.
But really, it’s more like Iraq: we were right about the administration’s policies in terms of their effects (it’s the economy, stupid) and thus, they hate us.
Mandos
Unfortunately, people and human politics themselves are a natural process, and in one sense, the entire purpose of civilization is to defer and socialize consequences. The consumers of oil have not yet seen the consequences of the consumption of oil; hence they are more susceptible to people telling them there aren’t any. After all, one swallow doesn’t make a summer.
anon2525
Unfortunately, people and human politics themselves are a natural process..
Unfortunately, this is the view of the “political pragmatists.” Physical pragmatists can see that this is not true. People and human politics are influenced constantly by words and arguments, while natural processes are not influenced at all by words and arguments. It is a matter of hubris that “political pragmatists” would mistake their realm for the physical realm.
To the “political pragmatists” who believe that people and human politics are a natural process just as the warming of the atmosphere by the greenhouse effect of CO2 is, I invite them to talk to the CO2 in the room around themselves to get it to be more reasonable. After all, CO2, the midterms are coming soon.
Mandos
Sheesh, what a quibble. Words and arguments are natural processes. I’m a dualist some of the time, but not that much.
anon2525
Sheesh, what a quibble. Words and arguments are natural processes. I’m a dualist some of the time, but not that much.
No, that is wrong.
(Since no counter-argument was made in your reply, I won’t bother with making one, either.)
Michael Collins
The real economy – people actually providing useful or amusing goods and services; people innovating to offer new products; technological breakthroughs through research and development. What a great notion.
Addressing energy is both necessary and rational, considering the prospects of the current supply.
Using “the markets” as any type of measure for the development of abundantly available solutions is, with all due respect, folly. The markets are rigged. They bleed every drop out of the status quo. They’re not concerned with social necessity and logic on a grand scale, i.e., the survival of the species as we know it.
It’s time to accept the fact that we need a command economy to accomplish what is necessary and logical for the energy supply. After decades of “let the markets take care of it,” we have to admit that they have. We’re facing ruin. Time for a global project to produce new energy sources that subordinates everything else.
Mandos
There’s no counter-argument to make, because no argument was made in the first place. The distinction between “political” vs. “physical” pragmatism is a false dichotomy that lends itself to a cute but useless form of one-upmanship. No one ever argued that you could have a debate with a tidal wave. What they did argue was that there are limits to what you can do about the tidal wave, and those limits are just as natural as the tidal wave itself.
Michael Levi
Mandos, we already have a command economy for energy. Fossil fuel based energy prices are already highly subsidised at the command of coal and oil companies. The real question is not “free market” or command since there is no such thing as a free market except as an econmists model but rather, who’s in charge.
Mandos
I wasn’t arguing with you, but with anon2525. I basically agree with you.
Lorne Marr
First of all, US oil is highly subsidized by US taxes. It costs more than $1 billion every day to feed the entire fleet of aircraft carriers with their supports to protect the Persian gulf. This money does not come from the oil companies; it comes from the average Joe who doesn’t even have to own a car. The oil companies only buy the crude and refine it, then sell it.
Maybe we should start somewhere there first, and then we can talk about energy dependency.
anon2525
First of all, US oil is highly subsidized by US taxes.
Second of all, it is subsidized by health care costs, where the price of fossil fuels does not include the cost of, for example, the treatment of children in emergency rooms for breathing disorders on high ozone days, or the treatment of coal miners illnesses. Third of all, it is subsidized by the environment which is damaged by the toxins added to the air, soil, and water, but the cleanup of which is not included in the price of fossil fuels.
What were we talking about? Oh, yes, Ian Welsh was noting that the Federal Reserve was going to use the proceeds from its maturing MBSs to purchase short&long term treasury bills. Apparently, this will be an approximately $18 billion transaction. This appears to be a principal reason that the cost of fixed-rate 30-year mortgages are at a new low. That, in turn, appears to be the Fed. Res. desired effect because it, in theory, helps supports the price of houses.
But is the theory flawed in that 1) people don’t want to buy houses because they are overpriced (that is, will on average decline in price for the foreseeable future) and 2) banks don’t want to loan to house buyers (only FHA-insured mortgages are being approved)? Meanwhile, foreclosures continue at around 10,000 per day or over 300,000 per month.
What the Federal Reserve is fighting: The collapse of the $8,000,000,000,000 housing bubble
anon2525
First of all, US oil is highly subsidized by US taxes.
And fourth of all, the burning of fossil fuels is subsidized by the heating of the atmosphere and the heating and acidification of the oceans because removing the CO2 from these “sinks” is not included in the price of fossil fuels.
Mandos
*BOOP*