2) How can we manage the global economy so it does not hinder on the local economy of a small country?  I’m calling out Greece here.  Just stepping back and thinking – we do not have a robust global & national economy if the fate of Greece greatly affects financial markets (which in turn affects banks, who will not lend to businesses because of the weary financial markets, and then affects the unemployed, where businesses have no access to money to grow and employ).

Just some thoughts

I actually wondered about this at my previous job: the Fed is increasing the supply of money, as seen in the increase in money aggregates.  But the purpose of this quantitative easing is to jump start the velocity of money – to get money exchanged more frequently through different hands (aka: people need not to save it, but to spend it).  These two graphs have confirmed my hunch, that velocity isn’t really moving anywhere.  But what made me curious is what happened in/around 1995?  The same sort of thing happened where the money supply was increased but the velocity didn’t take into effect.

M1 Money Stock

Money Velocity

It also got me wondering is that this is a frequently and widely known tool that the Fed uses to jump start the economy – increasing money aggregates/quantitative easing.  It’s also seen that it doesn’t have much effect on the velocity of money.  So, what can they do to actually increase the velocity of money as intended?  I wonder if it’s how the Fed presents itself when making and enacting these decisions.  Many people dislike the Fed with its ambiguity, perceived lack of hold on the economy, the tools that influence the public regarding the Fed (cough: Ron Paul). 

One thing that Dr. Robert Reich keeps complaining about is the two economies: one booming and the other still suffering.  The booming one, naturally, is the financial markets, investors, CEOs, Wall Streeters, etc.  The still suffering is the folks on Main Street.  It makes me wonder if those on wall street understand what the Fed is doing since the decisions, reactions and thought process is familiar to the folks that have a firm pulse on the market has some effect to its success, while the main street folks are lost in how quantitative easing really helps them.  What is seen for main streeters is the high unemployment rates, the losses in their 401ks, the nose dive of their home’s worth.  How can they even begin to understand the goals of the Federal Reserve when quantitative easing means nothing tangible to them? 

I’m not sure if my thought process or argument is coming across understandable.  I can’t be bothered at the moment, I’m sick.

A year or so ago I came across Inflation Targeting by Bernanke et al.  What I found interesting was the look at the overall market/public response to the German Bundesbank’s press releases after policy meetings.  If the Bank was not on target with inflation, Bernanke et al found that people respond better if the Bank had given a pinpointed estimate and was subsequently off target, rather than an inflationary range target.  The belief is if the Bank can’t hit its intended range, then it does not know what it’s doing.  But if it does not hit a specific number, then people are more forgiving.

It’s as if the Bank was playing darts with a large dart board versus a dime.  What, you can’t hit that target?  What a lousy arm.

The interesting thing is, the Bank could give an inflation target range of 2 – 3%, or a pinpoint 2.5%, and people would still be more forgiving of missing the pinpoint if numbers turned out to be 4%, even though the middle point of the range is equal to the pinpoint.

Hop across the pond back to the US, and people/markets have lost faith in the Federal Reserve as seen by the ongoing debates in DC and Wall Street.  How can we restore trust in our powerful reserve system?  Perhaps it’s similar to the Bundesbank’s understanding of how information is presented to the public.

I came across an interesting article yesterday from AdAge that documented a conversation with Dan Ariely, author of the popular behavioral economics book Predictably Irrational.  I’d like to see some combination of behavioral economics & marketing introduced to the FRB’s public releases.  One of Dr. Ariely’s comments regarding the loss of trust for a company & revenge:

Revenge is a useful thing because revenge allows for trust. If your computer crashes, you might get upset but you wouldn’t feel the same need for revenge as when a human being betrays your trust. The anger that can be caused by bad customer service is really kind of incredible. That’s the first thing that companies just need to understand. Things can quickly deteriorate to a level to which there’s no return. You can really calm people very easily if you do it at the right moment.

Replace “customer service” to “economic leadership” and “companies” with “the federal reserve” and I think there might be something there.

Bare with me, a series of questions: If the public/markets react poorly to the Fed’s leadership in trying to get us out of a recession, how is that going to be taken out on the economy itself?  If people distrust the Fed’s efforts, people must have a poor outlook, which must be seen still in restricting spending, use of credit, banks’ not lending, etc.  How does people’s mistrust affect the economy?  Does it interrupt monetary policy’s effectiveness?  Is there anything recursive going on to affect the progression of monetary policy?  Can we instill trust like that from the people of Germany (might I remind you the strength of the German’s economy…)?  How will faith affect the progression & effectiveness of monetary policy?

Are these questions viable…

But in an article on the WSJ over the weekend, another tool was discovered, and I should have thought of – long term rate manipulation.  hmm, go figure.  Well since treasury now owns freddie & fannie, that seems logical to be able to do.  Purchase long term freddie/fannie bonds to manipulate long term rates.

Let’s think about that – yes that would normalize the yield curve a bit.  Yes that would increase liquidity on the market.  But would it really help?  In pushing the long term rates down – the fed’s goal ultimately would be to lower mortgage rates for the consumer.  Supply-side economics to stimulate demand.  I can see how that would work, but would it really work?  

Tell me, who wants to lend right now?  The best borrowers are still continuing to be lined up next to low grade borrowers.  The banks are hoarding cash due to increase loan losses.  More liquidity would just be more cash to hoard.  A good point was brought up to me – if a bank can buy high grade commercial paper yielding 7%+, why lend at 6%?  Residential and commercial loans have become an unwanted asset.  The banking model is developing – no longer is it borrow short to lend long.  It’s borrow short to lend even shorter.  It’s asking the question ‘how much can we ring out for our NIM’ rather than ‘how can we fund this ninja loan.’

Hmm perhaps the government should buy more commercial paper to loosen up that market.  Perhaps we should just let capitalism hobble along without the government’s crutches.  Let live and let go.

Please – someone – realize that this is a big deal.

Maybe it’s just because I work at a bank.  Yay for us on increase interest, boo for the eventual increase in fed funds effective.