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Taylor on the Bernanke Federal Reserve's quandary over its exit strategy from a loose monetary policy. He points to the consensus among leading economists, Rajan, Meltzer, Feldstein, who share his view that the costs of a loose monetary policy outweigh its benefits, that the Fed's policies are not working, and the need for a more rules based monetary policy.

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Janet Yellen, Fed chairwoman, says the financial system is safer now after the financial regulation, stress testing, living wills and other changes that the Federal Reserve has implemented. She says there is no need for a reduction in these key regulatory rules. One of the changes is that banks now use a safer mix of financing- equity financing has doubled for capital, and wholesale borrowing is cut in half, since the 2008 financial crisis that took the U.S. and with it the global financial system to the brink of disaster. The appointment of Randall Quarles to the Fed by the Trump administration was intended to  reduce regulation, and this is Yellen's response to such proposed ideas. 

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U.S. government policies of "financial repression" to lighten government debt servicing burdens that could have adverse effects on bondholder returns.

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The US economy is growing at a much faster pace than Europe or China in the last quarter of 2021- at 7% annualized growth in the fourth quarter up from 2% in the third quarter, according to Federal Reserve Bank of Atlanta. This compares to 2% in eurozone and 4% in China. Major US ports such as Los Angeles are processing 20% more container volume in 2021 than in 2019, while Rotterdam and Hamburg are almost flat compared to 2019 level. Consumption of durable goods has jumped 45% above 2018 levels in the US, only 2% in eurozone, according to ECB data. The factory gate prices in China are far outpacing the consumer prices in China, suggesting weak domestic demand and strong foreign demand. Lars Jensen, head of network at container ship company A.P. Moller-Maersk says the global supply bottlenecks were started by this surge in US demand with more ships headed for the US taking ships away from other places. The US economy will grow at 6% in 2021 and 4% in 2022, with wages growing 4% a year above the pre-pandemic trend rate, compared with 1% in eurozone, according to Bank for International Settlements. This is pushing inflation up in other countries by pushing up the value of the dollar. In Mexico hitting 7.4% and the central bank raising interest rates 0.5% point to 5.5%. In Russia inflation up to 8.4% and central bank raising interest rates by 1percentage point to 8.5%. The equipment investment in the US is up by 13% this year according to JP Morgan Chase, only 3.6% in eurozone, 0.1% in Japan. All this is creating a large gap between the US and Europe, US and China in economic growth and demand growth, and in income growth. ...

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Dennis Berman takes a very instructive and reflective look at what happened in history, the thirties when something like what we are seeing now happened, a huge global downturn. One thing that is being repeated is the tendency to think that things will recover maybe in 2009 or 2010. But oftentimes this is not the way it turns out. President Hoover said to the American people in May 1930, " I am convinced that we have now passed the worst and with continued unity of effort we shall rapidly recover." Hoover is now seen negatively but a visit to the museum section of the Hoover Institution at Stanford University shows that he was a geological engineer, well travelled to other countries, was President of Stanford when it was a small school, and was active in relief efforts for Russia in the years of civil war after the first world war. Was he less compassionate than FDR, was he less educated, and less aware of conditions in other countries than FDR, and less determined than FDR? Could it be that he did not realize the depth of the downturn that lay ahead and for this reason failed to take more aggressive action? WIth FDR, less well known as Berman points out, is the period of 1936 and 1937 covered in the book "The Forgotten Man", a popular history of the Depression by Amity Shlaes. The Federal Reserve used New Deal laws to tighten reserve requirements on the nation's banks. The goal was to make the banks stronger, but the unanticipated result was that the banks tightened still further. This aggravated things in the economy when it was still stuck in difficulties. The Dow Jones Average fell by more than a third between August 1937 and January 1938. Unemployment jumped. Historians call it the 'depression within the Depression. Just a year before this period, FDR predicted in 1935, "Never since my inauguration in March 1933, have I felt so unmistakably the atmosphere of recovery." Berman reminds us that the main force in the economy at this time however well intentioned is the government. And the government is at the whims of politicians, and the error proneness of human beings in positions of responsibility, with so many decisions taken on an ad hoc basis, responding to emergencies and dire situations as they arise, with not enough time for careful thought, and often with little sleep. The AIG intervention has already taken $177 billion in government money in a few months, and everything is being done on a crash basis with little preparation mostly in response to surprises popping up in financial markets. As Frank Rich points out the danger to the President's plans and vision is not from the work outlined for education, energy, health care, or Republicans, as much as it is from this uncertain element about available capital to make the wheels of the economy move again to sustain employment and incomes....

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Economist Lawrence Lindsey says the Fed has boxed itself and has little choice but to keep interest rates low. Borrowing at the more normal interest rates of 5.7%- which is what it was over the last three decades- and not at the current 2.5%, would mean an increase in borrowing costs for the U.S. government of $800 billion in 2021, says Lindsay. Lindsay bases this on the U.S. debt growing from $14 trillion in 2011 to $25 trillion by 2021, and interest rates going back to normal levels by 2021. Just to put this in perspective Lindsay says it would require all the cuts Republicans and Rep. Ryan are asking for just to pay for the added interest, not even about reducing the size of the U.S. debt. This would be a disaster for the U.S. Treasury, so we're stuck with really low rates. The term used by economists is "financial repression." Savers and retirees will have to put up with low returns. Lowering unemployment is only one aspect of U.S. Fed policy, the other aspect is in the constraints Bernake faces....

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Macroprudential policies of central banks in S. Korea, Indonesia, China, Canada, and other countries, as concerns grow about a housing and credit bubble.

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The risks of the Fed's reinflation policy in 2010-2011. It risks increasing "bad" inflation, the kind that fall heaviest on low income households. Commodities are on fire, and the increase in the price of oil and food, would only leave consumers drowning in the new inflation, says Kelly Evans.

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Federal Reserve chairman Bernanke's move in January 2012 to announce detailed projections for interest rates for each of the 17 Fed Governors participating in policy meetings, is an effort to show that he operates by consensus. Names of the Fed Governors are not stated.This is a change from the Greenspan years at the Fed. Hilsenrath points to the research done by Alan Blinder of Princeton University, former Fed vice chairman, which shows group consensus based action works bettter. Another reason for this is the Fed's damaged credibility after the Greenspan years and the financial crisis of 2008, when the Fed operated under one dominant figure. An additional step taken by Bernanke is to move from the ad hoc type of policy decisions of the past decade to a longer term plan for unemployment and inflation goals. The Fed has set a 2% goal for inflation with some flexibility to reduce unemployment if it is too high. This gives businesses more information to plan ahead and improves Fed credibility....

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David Reilly warns that though the U.S. Federal Reserve's stress tests of U.S. banks showed they passed- including approval for dividends and share buyback- except for Ally Financial and Citigroup, this can be deceptive. True, the Fed used 13% unemployment and sharp drop in stock market prices as conditions. The problem is with capital ratios. The Fed used a leverage ratio of 3%. It should not be forgotten that the financial crisis of 2008 was caused by excessive leverage and risk. Tested on this measure the banks fail to achieve safe levels of leverage and risk. Under the Fed's highest stress scenario Citigroup ratio was at 2.9%, Morgan Stanley's at 3.4%, Goldman Sachs and J.P. Morgan at 3.8%- what ths means is that the leverage for these banks was at 26-29 times capital. Reilly raises the question- how is this so different than the leverage used by these banks before the crisis. The stress tests in the U.S. by the U.S. Federal Reserve are lauded for being better than the European Banking Authority's stress tests, but is this a standard by which to judge them? Before the collapse of Lehman in 2008, experts including Anil Kashyap at the University of Chicago, pointed out that for every $1 of bank losses in a deleveraging cycle bank lending goes down at banks by $10, and for investment banks at $20-$30 depending on leveraging- in David Henry and Matthew Goldstein, Business Week, July 16, 2008, How Bad Will It Get on Wall Street? Lehman's leverage ratio was between 24-31 times capital before the crisis. Worse, by saying banks are now safe compared to the situation before the crisis, is the Fed giving the green light to banks for some of the same leveraging behaviour that ocurred before the crisis?...

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Jon Hilsenrath of WSJ provides an illuminating account of how Daniel Tarullo as head of the Large Institution Supervision Coordination Committee has changed the way bank supervision and rules are set for U.S. banks since the days of the 2008 financial crisis. Tarullo started the effort under Ben Bernanke and continues this in 2014-2015 under Fed chairwoman Janet Yellen. The New York Fed is seen as ineffective in bank supervision and the supervisory role is now entirely performed under the leadership of Tarullo, assisted by Kenneth Gibson and Timothy Clark. The trio are some of the great unsung heroes of the effort to put the U.S. financial system and the economy on a safer footing.

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Alan Blinder points out that the political partisanship that has emerged in 2010 has not served America well, as it has deprived the government of the fiscal policy tools, which would be more effective than the Fed's only mildly effective tool of buying $100 billion a month of medium and long term Treasury debt. The country he says is tied up in partisan knots that prevents the use of the fiscal policy tools, and leaves the Fed with the choice of doing something only nudging the rates on government and private securites a bit (by 30 basis points for Treasury debt and 15 basis points for private securities as an example, not enough for more than a mild impact on corporate spending). The fiscal policy tools are he says of a wide variety and pack a lot more power, and he cites three as examples: offering significant lasting tax breaks for job creation, large enough to produce results (larger and long term than the HIRE program), government hiring directly onto public payrolls and government paying local and state governments for hiring at the local levels, the government offering to compensate states for a cut in the sales tax for a year to stimulate consumer spending. Would'nt this raise the deficit though? Blinder points out that the deficit problem lies in the future. Right now there is so much slack in the economy, that public spending will not crowd out private spending. And with Treasury rates at an all time low, Treasury can finance the larger deficit in the short term. A depreciation of the dollar or inflation, he says, is not a worry, because now there is worry about deflation, and the USA needs a lower dollar to push exports up and rebalance its economy. This does not slight the deficit issue and the culture of poor budgeting among both parties, as Reagan Budget Director David Stockman pointed out in an op-ed piece, but accomodates the real dangers and opportunities of difficult policy choices. This is why he laments the advertising campaign and public relations campaign against the 2009 stimulus bill, and the expected paralysis of fiscal policy from the extremely partisan 2010 midterm elections, and public opinion consumed by fear of deficits. Leaving the Fed with the unenviable choice of using only mildly effective tools. Other experts and columnists mention the risks associated with the Fed's large scale purchase of securities, if this leads to another asset bubble and subsequent collapse, and another bailout needed for financial institutions. Peter Eavis in one column in the WSJ points to the lack of effectiveness of the first round of quantitative easing of $1.7 trillion. And Kelly Evans, in the WSJ, points to the risks of "bad" inflation, if another round of quantitative easing by the Fed leads to increases in the price of commodities such as oil and food (such inflation falling heaviest on lower income households).The US Financial Regulatory Reform bill has received low grades, and recent standards for reserve capital in worldwide banking reforms are stretched out over a long period, leaving fragility in the economic system, if something were to go wrong....

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The U.S. Labor Department report shows 156,000 jobs added in September 2016. The unemployment rate increased by a tenth of a percentage point to 5.0%, because of the increase in the total pool of workers, The labor force increased by 3 million workers over the first 9 months of 2016. The labor force participation rate was up by half a percentage point to 62.9% for the year 2016, as it drew more workers who were earlier discouraged to look for work. Wages grew by 2.6% over the year.

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David Blanchford of Dartmouth College and Adam Posen of the Peterson Institute of International Economics argue in a recent paper that the true indicator of unemployment in this economy -with a low participation rate and millions dropping out of the labor market unable to find work- is the wage growth. This is particularly true with the U.S. Labor Department report of 288,000 new jobs in 2014 and a 6.3% unemployment rate, yet wages flat for March and April 2014, and no improvement in the participation rate. Blanchford says one should look at the wage growth and consider the rest to be noise. The Yellen Fed is looking closely at the participation rate.

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U.S. Fed chairman Bernanke tells a IMF conference on financial crises in Nov 2013 that the unemployment rate of 7.3% does not reflect the problems in the labor market, which require strong action to improve job creation. He says the level of student debt is a serious issue that also needs to be taken into account.

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Prof. Calomiris of Columbia University, says the U.S. Federal Reserve should increase the cash reserve requirement for U.S. banks to prevent a surge in inflation. He points out that excesss reserves at banks stand at about $1.5 trillion. He suggests the Fed should take early action to prevent a jump in lending and credit creation- a pattern seen in the past after several years of dampened credit and lending.