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kasriel [and friedman and hayek] advocate qe

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  • kasriel [and friedman and hayek] advocate qe

    this is a very quick read - graphs and big print. kasriel dismisses a variety of supposed causes of the slump in economic activity, and points to credit creation. he then invokes the ghosts of both milton friedman and friedrich hayek in advocating qe, and proposes a rule to guide its implementation.

    http://graphics8.nytimes.com/package...ian_090711.pdf

  • #2
    Re: kasriel [and friedman and hayek] advocate qe

    Originally posted by jk View Post
    this is a very quick read - graphs and big print. kasriel dismisses a variety of supposed causes of the slump in economic activity, and points to credit creation. he then invokes the ghosts of both milton friedman and friedrich hayek in advocating qe, and proposes a rule to guide its implementation.

    http://graphics8.nytimes.com/package...ian_090711.pdf
    Thanks for posting this. I was surprised to learn that even Hayek supported the use of Quantitative Easing under certain circumstances. It certainly isn't the sort of thing he's known for.

    Comment


    • #3
      Re: kasriel [and friedman and hayek] advocate qe

      I'd agree with his observations regarding the factors limiting bank credit during 2009 and 2010. Banks reduced lending to conserve capital and benefited from the ZIRP-driven decline in deposit funding and borrowing costs.

      In 2011, the nature of the problem facing banks has changed somewhat.

      Many of the larger banks (B of A being a notable exception) have boosted capital levels to the point where, at least on paper, they satisfy the higher levels required by new regulations. Banks are now highly motivated to resume lending, as ZIRP is beginning to meaningfully drag down their asset yields (old, high-yielding assets are paying down and being replaced by lower-yielding assets) and profits, and of course it's difficult to explain to investors why they keep shrinking.

      Credit creation in some sectors has resumed, with credit card lending stabilizing and lending to middle-market companies beginning to grow. However, overall loan growth opportunities outside of those areas may be quite limited.

      - Large companies are increasingly self-funding; after bank lending and the commercial paper market seized up in '08, corporate treasurers don't want to face that risk again, and funding costs are at record lows: this is probably the biggest reason why companies are hoarding cash

      - Collateral values are obviously still way off their peaks in residential and commercial real estate; expected future price declines only reduce banks' willingness / ability to lend. If banks were only willing to crank out some more 125 LTV option ARMs to support real estate speculation, and would just start ignoring borrower income to focus on future collateral price appreciation, maybe we could get a new speculative bubble started.

      If banks can't find enough credit-worthy borrowers or are unwilling to loosen lending standards (or are prohibited by regulators), the credit contraction will continue.

      I suspect that, as with student lending, the government or Fed will have to bypass the banking sector and lend directly to reverse the credit contraction. They're the only potential lenders that are (largely) able to lend without worrying about small issues like credit risk.

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      • #4
        Re: kasriel [and friedman and hayek] advocate qe

        Normally Kasriel has something worthy of listening to, but this pitch is pure banksterism.

        No mention whatsoever is made of the large amounts of negative equity mortgages and of shadow inventory in banks as being a factor in both banks' unwillingness/inability to lend and buyers' unwillingness/inability to borrow.

        No mention is made of the still ongoing impact of liar loan MBS's.

        Just the same old tired mantra of "banks uber alles"

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        • #5
          Re: kasriel [and friedman and hayek] advocate qe

          i disagree. he says the banks are not functioning to create credit. that's why he's supporting qe.

          Comment


          • #6
            Re: kasriel [and friedman and hayek] advocate qe

            Originally posted by jk View Post
            i disagree. he says the banks are not functioning to create credit. that's why he's supporting qe.
            I don't understand Kasriel's hypothesis that quantitative easing will create more credit. Doesn't the credit still have to be transmitted through the depository institutions to the consumer? The problem is that even with the Federal Reserve's easy money policy, the banks are not going to lend out the money because most people who are looking to borrow money are poor credit risks. This reticence to lend is further exacerbated by inflated asset prices caused by quantitative easing. With inflated asset prices, there is no margin of safety for the bank if they make a bad loan.

            What it looks like to me is that what the banking system really wants is the return of liar's loans coupled with a government guarantee for loss prevention. That's the only way credit creation is going to happen in the near term. Debt write-offs would increase credit availability, too, since borrowers would be able to service new debt but that would require banks take their medicine and eat their losses.

            Bottom line is quantitative easing doesn't seem to be creating new credit in any useful way except for speculation by those who don't need to borrow money anyway. If the Federal Reserve is so desperate to get credit flowing again (it's currently pushing on a string with the banks), perhaps it should allow everyone to borrow directly from the Federal Reserve.

            Comment


            • #7
              Re: kasriel [and friedman and hayek] advocate qe

              Originally posted by Milton Kuo View Post
              I don't understand Kasriel's hypothesis that quantitative easing will create more credit. Doesn't the credit still have to be transmitted through the depository institutions to the consumer? The problem is that even with the Federal Reserve's easy money policy, the banks are not going to lend out the money because most people who are looking to borrow money are poor credit risks. This reticence to lend is further exacerbated by inflated asset prices caused by quantitative easing. With inflated asset prices, there is no margin of safety for the bank if they make a bad loan.

              What it looks like to me is that what the banking system really wants is the return of liar's loans coupled with a government guarantee for loss prevention. That's the only way credit creation is going to happen in the near term. Debt write-offs would increase credit availability, too, since borrowers would be able to service new debt but that would require banks take their medicine and eat their losses.

              Bottom line is quantitative easing doesn't seem to be creating new credit in any useful way except for speculation by those who don't need to borrow money anyway. If the Federal Reserve is so desperate to get credit flowing again (it's currently pushing on a string with the banks), perhaps it should allow everyone to borrow directly from the Federal Reserve.
              it doesn't create private credit. it creates public credit. it's still credit.

              Comment


              • #8
                Re: kasriel [and friedman and hayek] advocate qe

                Originally posted by jk View Post
                it doesn't create private credit. it creates public credit. it's still credit.
                So is it correct to say that quantitative easing is some sort of "priming the pump" operation where we expect the government to borrow money and spend it on various stimulus programs like infrastructure or investing in critical industries?

                QE still seems like a broken concept because, unfortunately, I don't see the government doing much to put that borrowed money to work and get unemployed people into jobs.

                Comment


                • #9
                  Re: kasriel [and friedman and hayek] advocate qe

                  Originally posted by Milton Kuo View Post
                  So is it correct to say that quantitative easing is some sort of "priming the pump" operation where we expect the government to borrow money and spend it on various stimulus programs like infrastructure or investing in critical industries?
                  .
                  the gov't doesn't even have to spend the borrowed money. they could cut taxes to an equal extent and just cover existing expenditures with the borrowings.

                  Comment


                  • #10
                    Re: kasriel [and friedman and hayek] advocate qe

                    Originally posted by jk
                    i disagree. he says the banks are not functioning to create credit. that's why he's supporting qe.
                    I agree that is what he is saying, but my point is simply that the reason why banks aren't functioning to create credit is due to factors which QE isn't going to solve.

                    Put another way: if the ratio of private credit creation vs. government/Federal reserve credit creation should be around 12:1 as one of his graphs implies, and the present rate of private credit creation is lagging despite several QE programs, then it doesn't seem to make any sense to push up more QE if the private credit creation is just going to keep shrinking.

                    And the reasons for the shrinkage include what I noted above.

                    Comment


                    • #11
                      Re: kasriel [and friedman and hayek] advocate qe

                      The biggest flaw in Kasriel's example of how more QE might work is where he notes that "at the same time, a business issues new bonds to finance the purchase of new computers." For small businesses, that can't happen, and for large businesses, the option is already there, but they're not using it.

                      Large corporations (esp. the top multinationals) are very liquid and much less reliant on the banking system than they once were. Today, they can access the bond market at record low yields. There's nothing stopping them from making capital investments if they think that they can earn a certain risk-adjusted rate of return. The problem is that the risk of a worsening depression far outweighs the benefit of a further ~25-50 bps reduction in financing costs that QE might provide, so they don't invest or borrow. QE would have only a tiny marginal benefit here.

                      Small businesses, especially startups, have no direct access to the bond market and do rely on the banking system. Having been through the experience of the last few years, banks have obviously tightened their lending standards. Realistically, many of the business plans presented to banks to justify new loans might be viable in a "normal" environment but become very high-risk in a depression. Banks used to work around this by asking businesses to collateralize their loans (with their office building or personal property), but the values of those assets have dropped so far that that's no longer viable either.

                      The limited bank lending has little to do with any bad loans that are sitting on their books - those loans are there regardless of what banks do today. Banks very much want to create new loans (otherwise they'll shrink away to nothing) but not at the cost of creating even more bad loans. Even if all old bad loans were written off, that doesn't change the underwriting decision on a new loan.

                      To solve the problem through QE, you'll need to disintermediate the banks. You need a lender who is willing / able to lend without regard to credit losses.

                      Comment


                      • #12
                        Re: kasriel [and friedman and hayek] advocate qe

                        Originally posted by mmr
                        To solve the problem through QE, you'll need to disintermediate the banks. You need a lender who is willing / able to lend without regard to credit losses.
                        I think we've got one: the Federal Reserve

                        Only they don't lend, they're buying bad loans.

                        Not quite the same thing.

                        Comment


                        • #13
                          El-Erian: next Big One coming right up Re: kasriel [and friedman and hayek] advocate qe

                          this have any bearing on the above?

                          El-Erian: World on Eve of Next Financial Crisis

                          The world is on the eve of the next financial crisis, with sovereign debt its epicenter, said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., which runs the biggest bond fund.
                          The European Central Bank hasn’t put in place a “circuit breaker” to contain the region’s debt crisis, El-Erian, who is also Pimco’s co-chief investment officer, said at an event in Washington today.
                          Finance ministers and central bankers from the Group of 20 are meeting in Washington this weekend as markets tumble on concern the world economy is slowing and Europe’s sovereign debt crisis threatens to spread beyond Greece. The Stoxx Europe 600 Index sank 4.6 percent to 214.89 at the 4:30 p.m. close in London, the lowest since July 2009.
                          “There has been a significant increase in the financial requirements of international intervention,” El-Erian said. “You need a lot more firepower in order to be a circuit breaker. Look at how much the ECB has put in and ask yourself the question: has it created a circuit breaker? The answer is no, even though the amounts involved have been massive.”
                          French Finance Minister Francois Baroin said the G-20 nations will coordinate a response to the European sovereign debt crisis. Baroin, speaking to reporters today in Washington, said European nations must approve a July 21 accord on further financial aid to Greece.
                          Greek Budget Cuts

                          The Greek government said today it will accelerate budget cuts to keep emergency loans flowing, extending austerity measures that have deepened a recession and failed to ease doubts that it can avoid default. The latest round of deficit fighting was demanded by international lenders to ensure Greece reaches targets in a 110 billion-euro ($151 billion) bailout and receive a payment due next month.
                          World Bank President Robert Zoellick said the global economy is “in a danger zone,” and his counterpart at the International Monetary Fund, Christine Lagarde, said “downside risks” are high.
                          “We’re in it together and we will be able to solve it together,” Lagarde, a former French finance minister, said in an interview on Bloomberg Television. U.S. Treasury Secretary Timothy F. Geithner said Europe will act “with more force” to combat its debt crisis.
                          In the U.S., stocks tumbled on concern central banks are running out of tools to prevent another recession and after the Federal Reserve said yesterday it saw “significant downside risks” to the economy. The Standard & Poor’s 500 Index fell 2.9 percent to 1,133.09 at 12:51 p.m. on New York.

                          Comment


                          • #14
                            Re: kasriel [and friedman and hayek] advocate qe

                            I was thinking of something a little more direct. They used to lend directly to businesses in the last real crisis.

                            Lender of More than Last Resort

                            The meeting of bank lenders back in July 1934 seemed routine enough, and the requests for loans were in keeping with the times. There was an application for $100,000 from a St. Paul lumber company, another for $40,000 from a Ladysmith, Wis., manufacturer and one for $3,000 from an Ambrose, N.D., mercantile company, all of which met with the approval of the lending committee and which were remanded for "future investigation that they might give future consideration" to the loans....

                            Business as usual, except that those lending officers were members of the newly formed Industrial Advisory Committee of the Federal Reserve Bank of Minneapolis. Based on a review of Minneapolis Fed records, those loan requests were likely the first that the bank considered under a rather extraordinary piece of legislation passed the previous month. On June 19, 1934, President Franklin Roosevelt signed a bill into law that added Section 13(b) to the Federal Reserve Act, which authorized the Federal Reserve to "make credit available for the purpose of supplying working capital to established industrial and commercial businesses,"...
                            If the political environment ever makes a real move to the left, or things become desperate enough, they might try this again.

                            Then there's always the Federal direct student loan programs, aka hope-based lending.

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