Why didn't Helicopter Ben use his helicopter?

[KrazyHorse]

With core CPI increases hovering in the 0-1% annualized range, unemployment at 10% and output growth moderate at best, it's becoming apparent that the Fed has been pussyfooting about for the last 2 years.

"The Ben Bernank" is supposed to be this incredible dove during recessions; his entire pre-chairman research record shows that his thinking on Fed policy is all about unconventional monetary policy during tough times.

He helped act on the part of his thesis that said letting the banks fail due to a massive liquidity crunch is a large part of what caused the Great Depression's severity. And he has made SOME steps toward carrying out the other part of his thesis in the guise of the quantitative easing. Why has he been playing a game of "just the tip, just for a second, just to see how it feels"? He's got 25+ years of Fed credibility behind him. People's inflation expectations aren't going to become unanchored due to emergency measures in a relatively severe recession. Is he just a giant vagina who's scared of doing what he thinks is right?

[DriXnaK]

So do you think it's a good idea to be doing what he's doing? Also, the rising prices of commodities doesn't bother you at all?

[giblets]

Don't the banks have like a trillion dollars in excess reserves? Wouldn't that make it kind of hard for the fed to get banks to lend more?

[KrazyHorse]

So do you think it's a good idea to be doing what he's doing? Also, the rising prices of commodities doesn't bother you at all?

Largely external supply shocks like commodities price increases are best taken as inflation. It's why the Fed pays more attention to core than headline CPI

[KrazyHorse]

Don't the banks have like a trillion dollars in excess reserves? Wouldn't that make it kind of hard for the fed to get banks to lend more?

I don't understand the claim being made here. Is it some kind of liquidity trap thingamajig? 10yr treasuries and cash aren't perfect substitutes. If they were, yields would be at 0 rather than 2.5%

[DanS]

Whatdya want, the end of the world has been averted. Bernanke is already dropping money from the helicopters despite that fact. The money that he's dropping may not be much, but he's pumping furiously otherwise. This is going to be tough to mop up afterwards.

[Aeson]

Helicopter props create a lot of turbulence... it would be difficult to predict just where the money will disperse. It could even end up in the hands of terrorists, or worse yet, getting stuck in people's gutters and going unnoticed for years. One has to question the sanity of a man who would dump money out of a helicopter. (Unless of course it's in the form of loose change, then it's ok. Dumping billions in quarters would no doubt increase demand for healthcare, windshield repair, and other industries... and also probably decreased the number of unemployed if concentrated enough in high unemployment areas when dumped.)

[Egbert]

Don't the banks have like a trillion dollars in excess reserves? Wouldn't that make it kind of hard for the fed to get banks to lend more?

It is hard for the Fed to get banks to lend more money. Monetary policy is a blunt instrument. The Fed has cut its' rates and expanded the money supply without so much effect on lending. Households, corporations and government already have a considerable debts and the banks have quite a lot of problematic debt on their books. Many people and organisations are up to their perceived "debt capacity" with the consequence there are fewer borrowers regarded as a "good credit risk". The banks are feeling cautious about lending due to economic uncertainty (and perhaps regret about some of the lunacy we have seen in respect of junk bonds, NINJA loans and so forth). Households and corporations are now more prone to paying down their high debts in view of the economic uncertainties. The consequence of all this is that a big cut in interest rates leads to a rather smaller than usual increase in lending.

Pumping up the money supply increases uncertainty about the merits of holding US dollars and risks a flight of money out of the USA. There are already concerns that "the Americans are printing money galore, what's that going to do to the value of our US denominated investments, maybe we better flog off those investments and go elsewhere.

This is not the first time such a thing has happened. If I recall correctly a similar thing happened in Japan about 20 shares ago following the collapse of real estate and share price bubbles, which was symptomatic of, and a conributor to, a broader malaise in the Japanese economy at the time (there was a touch of the vicious circle about it). The Japanese central bank cut interest rates right down (to zero for a while IIRC) in an attempt to boost lending and economic activity. This was to no avail as the Japanese economy remained in the doldrums.

IIRC The banks also became somewhat risk averse as a result of the "sovereign debt crisis" about 30 years ago. The banks had the bright idea that sovereign debt was pretty well risk free and all but shoved loans onto countries until they woke up one fine morning to discover that some countries were unable to service their loans. (I still have no idea why Walter Wriston was held in such esteem).

Most of the calls for pump priming appear to be coming from Wall Street. If you tip a big pile of money into the economy it has to go somewhere. When money is invested somebody handles the transactions for a fee, ie Wall Street makes money. I hope Benny ignores Wall Street. (Alan Greenspan seemed to be Wall Streets' tea boy, expanding and contracting monetary policy with both eyes firmly on the "market". Umh, what about Main street, the other roughly 93% of the economy).

End of rant.

[KrazyHorse]

Whatdya want, the end of the world has been averted. Bernanke is already dropping money from the helicopters despite that fact. The money that he's dropping may not be much, but he's pumping furiously otherwise. This is going to be tough to mop up afterwards.

Really? Because core inflation is still nil. There will be no problem mopping this up...

[DanS]

Core inflation is still nil, I admit, but inflation and inflation expectations can move very quickly. These are blunt instruments. Not as blunt as fiscal stimulus, but still pretty blunt.

What's the problem with letting the current measures play themselves out? I just picked up a mortgage at 3.5% p.a. fixed. This is incredibly easy money (you and your wife should buy something in the city when your bonus arrives this year, dude).

[KrazyHorse]

No, I shouldn't. Buying in NYC is idiotic. Renting is much cheaper. NYC has the highest price to rent ratio in the US

[DanS]

Never knew that. Do you have that data series?

[KrazyHorse]

On phone at work. Inconvenient to research now.

[MRT144]

On phone at work. Inconvenient to research now.

On the phone.

[Hauldren Collider]

Alan Greenspan seemed to be Wall Streets' tea boy, expanding and contracting monetary policy with both eyes firmly on the "market". Umh, what about Main street, the other roughly 93% of the economy.

Wall Street markets improving = businesses have more capital = businesses expand = more jobs = more employment = economic recovery. This should be obvious.