I awoke this morning with a pounding headache... And resolved it's time to start blogging again.
Here we are, in the 20-something odd month of labor market bleeding, and still the Fed's mighty printing presses are largely sitting idle. And despite the fact that textbook theory says you can print your way out of a liquidity trap, and that, in the situation we are in, the Fed should be rapidly expanding its balance sheet, the Fed has moved slowly and cautiously, consistently erring on the side of doing too little. Yes, the Fed's Balance sheet is now the biggest since last December -- but, wait, why did the Fed's Balance sheet ever shrink exactly? Why didn't the Fed continuously ramp up the balance sheet until we had sustained employment increases? (Or at least until we stopped the bleeding?) That's b/c Ben Bernanke patted himself on the back last February, and started shrinking the Fed's assets. This set off another sell-off on Wall Street, causing Bernanke to reverse course. Things got a touch better, so Bernanke, having not learned any lessons from Feb-March, took his foot off the pedal again, triggering more bad news on Wall Street and in the labor market in June. Since then, he's slowly increased the Fed's Balance Sheet, but here we are, 21 months into the recession, and the economy coughed up 200,000 jobs last month and the Fed has, on net, tightened in the past year. This is really incredible.
A thought: The Dow has continued to track what's going on with the Fed's balance sheet. When the WSJ first wrote an article back in May/June pointing this out, I thought it was a fluke/anomaly, and, after all, correlation isn't causality. But the fluke has continued... It still sounds nuts to me, and I'd like to think it *must* be wrong that when the Fed buys assets, the stock market rises generally, but the correlation seems too good to just dismiss this... On the other hand, the Fed now has $847 billion in MBS (up $80 billion in one week!), so I guess it's not so crazy to think this much buying would effect asset prices generally...
Another random thought: What do our nation's economists do? It's been clear for at least six months now that the Fed has been foolishly bullish on the economy, and foolishly cautious in pumping money into the economy. How many voices within the profession are pointing this out? Very few. (Tim Duy and Scott Sumner deserve credit...) Part of this is that some economists do not think it is helpful to get the Congress riled up over monetary policy (perhaps this is Krugman & DeLong's view), but I think the Fed needs to feel some heat from the profession. I very much doubt it is hearing nearly enough, if any -- even behind the scenes -- and certainly not the type of pointed criticism it needs. Bernanke needs, in short, a good smack across the face to be jolted out of his inaction. It could take a generation for unemployment to get back down to 4% (where it was in 2007), all because Ben Bernanke has been too cautious, worried about some nonexistent hyperinflation around the corner. A generation of higher joblessness is a stiff price for society to pay for one man's shortcomings.
In any case, all indications are that this is a serially incompetent Fed. Despite the good the Fed did last week, we can expect Bernanke to take his foot off of the pedal again next week (or next month), needlessly prolonging a recession which should have ended half a year ago.
Cheers for Chris Dodd : "It's not necessarily a foregone conclusion that Ben Bernanke will be confirmed."
In the immortal words of JMK, I say cut this "blind and deaf Don Quijote" loose. Let him join the millions unemployed whose fate he sealed...