The Fed’s tapering should not be viewed as a reduction in their accommodative monetary policy; rather the Fed is anxious to return to a more normal posture in the financial markets and to regain flexibility of action to respond to future market panics. Historically (pre QE) an accommodative Fed position in the market would be reflected in a steep positive yield curve. A positive yield curve is made up of lower short term interest rates and higher long term rates. In an effort to rebuild the demand of a devastated housing market; the Fed, through QE, has forced the curve flatter during a period of monetary accommodation resulting in historically low mortgage rates. Recent data does argue that the Fed’s stimulus targeting housing has worked in spite of continued credit tightening by banks unwilling to lend. The current yield curve explains to a large extent bank’s hesitation to lend. Banks generally borrow short and lend long. A relatively flat yield curve does not create incentives for banks to lend because spreads are too narrow. Indeed the traditional response to a restrictive money policy is a flat yield curve as the Fed seeks to cool the economy by reducing credit. So, during this recent emergency move described as quantitative easing (QE), the Fed has been working at cross purposes by targeting retail demand for mortgage while reducing incentives for banks to lend. Read More
COMPLACENCY OR JUST FUNDAMENTALS??
On these walls are the names of the fallen soldiers of Operation Iraqi Freedom. The walls remain on what used to be FOB Warrior in Kirkuk, Iraq. Painted by their colleagues these walls would form a great foundation for a memorial in Washington, D.C. for all the fallen during this War on Terror. Remember them and all who have fallen or been wounded defending freedom and the United States this Memorial Day.
I wrote the following Op-Ed piece in the fall of 2011 while the US was negotiating with the Maliki Government of Iraq regarding the future status of any remaining US troops in Iraq after the previously agreed upon December 31, 2011 deadline for all troops to be out of Iraq. I reprint here because of the deteriorating situation in Iraq and the recent response by the Maliki government to a protest in Hawija in the Kirkuk Province. The response turned violent and 33 people were killed. Afterward the local tribal leaders’ comments were to the effect that peaceful demonstrations are over and it is time to pick up arms. That particular clash was Shia on Sunni. However, having taken place in Kirkuk is significant.
I lived in Kirkuk for three years as the senior economic development advisor with the Kirkuk Provincial Reconstruction Team (PRT) and to the Government of Iraq. Over the three year period my team and I engaged in over 600 missions outside the wire to meet with provincial political leaders, Baghdad ministerial leaders, the Governor, and local farmers and business leaders. In Iraq, PRTs were diplomatic outposts of the U.S. Embassy that partnered with Brigade Combat Teams, other U.S. Agency presence in Iraq, and the local provincial governments to foster political progress and build capacity critical for a stable and democratic Iraq. In the disputed province of Kirkuk we were welcomed and the local ethnic groups recognized the positive contributions and the stabilizing influence of the PRT and the U.S. Army.
The crisis in Europe and the Euro is not a surprise to students of economic history. Never in history has there been a sustainable single currency that crossed sovereign boarders. The Euro was intended as a big first step forward on the road to European economic and political union. The reality is that a unified currency cannot survive without political union. The vulnerability of the Euro as a single currency is the same as any fixed rate currency regime or a gold standard for that matter. If sovereign countries, as the term implies, have independent fiscal policies, labor policies, and overall economic policies then those more profligate countries will pressure a currency that they have no control over. This has happened throughout the monetary history. Indeed, it is why there are no fixed rate currencies regimes today, nor a gold standard. For all the insistence by gold bugs that a gold standard will prevent these sorts of crisis’s that occur from fiat money printing, it is precisely the pressures that printing money relieves that make fixed rate regimes unsustainable. Governments have an uncontrollable appetite for money and the theoretical discipline of fixed rate regimes is no match for politics.
The White House insists that the vast majority of economists support the President’s economic policies. John Taylor, Economics professor at Stamford and former Undersecretary of Treasury for International Affairs doesn’t. His must see interview found can be found at WSJ.com. The comparison to the recovery out of the late 1970’s early 1980’s recession is dramatic. The longest period of economic expansion since World War II was initiated and fueled by economic policies exactly the opposite of President Obama’s. To get the economy out of a persistent stagflation, President Reagan reformed the tax code and reduced regulations while Federal Reserve Chairman Paul Volker tightened monetary policy to beat down historically high inflation. Today the economic recovery is constrained by stifling regulations and taxes increases while the Federal Reserve battles the restrictive fiscal policy with its only weapon loose monetary policy. Arguably the Fed’s policies are the only instrument, as imperfect as it is, that has kept the economy from returning to recession in face of a fiscal policy overwhelmed by the politics of class warfare and the insatiable needs of growing government. To borrow from candidate Ross Perot that “great sucking sound” isn’t coming from south of the border any more, it’s coming from Washington, D.C.