In an earlier post I put some up some graphs for comparison of indirect indicators of the stance of monetary policy. One of them was David Beckworth’s graph of the Fed’s share of Treasury securities. The other was a graph that I juxtaposed the period in which the decline in the Fed’s share of Treasury holdings declined over one showing CPI headline and core measures. Here they are again:
But now Marcus has put up a better one that compares M3 with NGDP.
Across the three of these, we can see that as the Fed was slashing rates in late 2007 and early 2008, M3 and the Fed’s share of Treasuries declined rapidly through the end of 2009, well after the ZLB was breached in late 2008.
Accommodative monetary policy my rear! Never, at any time, during the Great Recession has policy been accommodative. You can clearly see that as banks were going under, and as Fannie, Freddie and Lehman were going bust, and the demand for money was skyrocketing the Fed was destroying base. Even as Fed officials repeatedly claimed it was assuming an accommodative stance, slashing the FF rate, it was destroying base by the truckload.
In Friedman’s Monetary History, he talks about that during the Great Depression, banks destroyed money as they went down which resulted in dramatic shrinkage of the base over a relatively short period of time. Over the same time period, interest rates had fallen to the ZLB. And so this scenario appears to be similar in overall effect on the base, except this time it was the Fed doing it, compounding tendency toward frozen credit. And from a common sense perspective – if credit is frozen because banks are doubting the creditworthiness of nearly everyone, other banks included, how much effect can slashing the FF rate really have?
And the game of Rope-a-Dope didn’t end there. After BS’ing everyone about the stance of monetary policy, the next trick came as excuses for not remediating the costly mistake that included inflation fear mongering, dismissing the power of monetary policy to remedy unemployment with a HUGE output gap, all while blaming the victims of their deflationary policy errors that foisted massive downward price adjustments in all markets including the employment market, leaving millions of workers displaced and many more bankrupt on paper. There were other excuses too, but those are the main ones used to obfuscate and dodge responsibility for what they had done.
Back in 2007-9, these charlatans obviously had very little care regarding the potential for market disruption from OMOs required for such dramatic tightening. How about 50+% off the DJIA and even more off the S&P 500? How about taking down auto makers, insurance companies, and one of the largest, globally connected investment banking firms in the country?
Yet now that the Bernanke Fed has decided make a start toward an effort to put back what it took out with QE, we see all sorts of angst, handwringing, and taper chatter over bubbles, market disruptions, inflation boogiemen, little green men from Mars, etc… anything but concern about what seems to be a very inconvenient primary policy target for inflation and what has to be done to get back on track.
They think we are stupid and will never know what really hit us. Prove them wrong.
Money matters. MV=PY