The Clueless Federal Reserve in 2008

A meeting of the Federal Open Market Committee of the Federal Reserve on 29 - 30 January 2008 two months after the Great Socialist Recession began in early December 2007 was pretty sure that

• The USA would avoid recession.
• Export growth in 2008 and 2009 would be at a rate of 7.25% both years.
• Reductions in the Federal Reserve interest rates would return full employment by 2010.

This group that included Bernanke, Geithner, Yellen, and many other top Federal Reserve leaders was perfectly clueless.  As we all know, the USA not only did not avoid recession, that recession was two months old at that time and would continue even by the government's self-aggrandizing determination through June 2009.

US exports decreased sharply in 2008 and at the end of 2009 they were still below 2007 levels.  Finally, despite drastic cuts to essentially zero in the Federal Reserve interest rate, we have not come close to a recovery to full employment as of January 2014, let alone by 2010.

Federal regulatory agencies and commissions rarely do know what they are doing.  This clueless state is the general state of the Government bureaucracy and of the independent organizations it sets up.

Federal Reserve Joins Vendetta Politics of Obama Regime

Steve Forbes discusses the Federal Reserve action on its latest stress tests of the nation's 18 largest banks in his Fact & Comment in the 6 May issue of Forbes.  Of the 18 biggest banks, the Federal Reserve claimed four had serious problems which it said must be cleared up.  Ally Financial is the present name for GM's bankrupt and reorganized financial services arm.  It is in real trouble.  But Steve Forbes claims that JPMorgan Chase, Goldman Sachs, and BB&T were named as having problems purely for small-minded political reasons.

JPMorgan's Jamie Dimon has expressed displeasure with the Obama administration, but it is a well-run company with a good balance sheet.  Goldman Sachs was too close to Romney and Lloyd Blankfein also made it clear he is not happy with Obama.  So, the Federal Reserve concocted reasons to fault these two institutions.

Most troubling was the claim that the best run major bank in the entire nation had serious problems because it uses its own economic models and judges its own loan portfolio differently than the Federal Reserve wants it to.  Independent thinking is discouraged, even when a company's track record justifies it to any rational observer.  In fact, if all banks work on one model, the risks of a systemic banking failure go up.  This is especially true when the dictated model is designed by bureaucrats for their purposes, not those of the private sector.  It is even more true when the appointments to the Federal Reserve are poisoned by Obama appointees.

Steve Forbes notes that the Basel Accords required banks to have heavy reserves for loans to even the best commercial companies, but none for loans to Greece or Iceland or Ireland.  Those government accords also enshrined mortgages for special low reserve treatment.  Look where these imposed government models led the world financial institutions in 2008 and 2009.

BB&T bank CEO John Allison IV, now retired and heading the Cato Institute, opposed the TARP program and was most forcefully forced to take that money in 2008-2009.  His bank was so well run it had no need for the money.  The Federal Reserve wanted to hide the worst banks by making sound banks take the money and it was hiding potential losses on its loans by making a forced profit in interest from sound banks that did not want the money in the first place.  Allison further earned the enmity of the Federal Reserve and the Obama Regime by writing The Financial Crisis and the Free Market Cure - Why Pure Capitalism is the World Economy's Only Hope, published in 2013 by McGraw Hill.

Government thugs cannot stand the heat of criticism, especially when it is well-stated.  In the Obama Chicago style, they strike back brutally with the misuse of government power.  You do as they say, or they will breaka you knee caps.

Left Says GDP Contraction of 4th Quarter of 2012 Due to Government Austerity

We are being told that the reduction of the GDP by 0.14% in the Fourth Quarter of 2012 was due to a decrease in spending by the federal government.  What on earth are they talking about?

Here is current federal government spending by quarter at the annual rate with seasonal adjustment going back to the 4th Quarter of 2010 according to the St. Louis Federal Reserve Board:

2012 4th Quarter: $3,765.2 billion
2012 3rd Quarter: $3,760.6 billion
2012 2nd Quarter: $3,774.8 billion
2012 1st Quarter: $3,723.6 billion
2011 4th Quarter: $3,716.8 billion
2011 3rd Quarter: $3,743.3 billion
2011 2nd Quarter: $3,830.6 billion
2011 1st Quarter: $3,737.1 billion
2010 4th Quarter: $3,756.3 billion

Federal spending went up very slightly from the 3rd to the 4th Quarters of 2012, not down as we have generally and widely been misinformed.  What is more, going all the way back to the 4th Quarter of 2010, the rate of government spending has been relatively flat.

When government spending rates change, there are direct changes in the GDP because that figure includes all government spending.  But no change in government spending, or a very small increase as shown here, should have no effect on the quarter by quarter GDP, except that of an accumulating wearing down of the private sector growth by discouraging investment due to excessive extraction of wealth and income from the private sector.  That and the increasing effect of laws and regulations harmful to business and investment is surely what really caused the 4th Quarter contraction in 2012.

One really has to wonder at the remarkable dishonesty of the story we are being told by the left and the media outlets they control.

It makes more sense to monitor the Disposable Personal Income (DPI) as a measure of the economy's health, since that does not include the money spent and largely wasted by government.  According to the Bureau of Economic Analysis, the DPI for the last quarter of 2012 increased by 1.3%.

The Fed Projects 3% Growth in 2015, But Be Wary

Bill Wilson of Americans for Limited Government has written an interesting review of the predictions for GDP growth by the Federal Reserve through this never-ending Great Socialist Recession.  He notes that the Federal Reserve is now predicting 3% GDP growth in 2015.  Let me summarize the story of the Federal Reserve predictions for real GDP growth and the actual real GDP growth with the numbers he gives and those I have added:

2008:
January 2008:  Prediction of 1.3 to 2.0%
October 2008: Prediction of 0.0 to 0.3%

Actual 2008: -0.3%


2009:
January 2008:  Prediction of 2.1 to 2.7%
October 2008: Prediction of -0.2 to 1.1%
January 2009:  Prediction of -1.3 to -0.5%

Actual 2009:  -3.1%


2010:
January 2009:  Prediction of 2.5 to 3.3%
January 2010:  Prediction of 2.8 to 3.5%

Actual 2010: 2.4% 


2011:
January 2009:  Prediction of 3.8 to 5.0%
January 2010:  Prediction of 3.4 to 4.5%
January 2011:  Prediction of 3.4 to 3.9%
June 2011:  Prediction of 2.7 to 2.9%

 Actual 2011:  1.8%


2012:
January 2010:  Prediction of 3.5 to 4.5% 
January 2011:  Prediction of 3.5 to 4.4%
January 2012:  Prediction of 2.2 to 2.7%

Actual 2012 So Far:  1.76% 
 

2013:
January 2011:  Prediction of 3.7 to 4.6%
January 2012:  Prediction of 2.8 to 3.2%
September 2012:  Prediction of 2.5 to 3.0%

2014:
January 2012:  Prediction of 3.3 to 4.0%

September 2012:  Prediction of 3.0 to 3.8% 

2015:
September 2012:  Prediction of 3.0 to 3.8%

Clearly, the Federal Reserve does not understand how the economy and businesses work.   It clearly consistently underestimates how much growth control of the economy by the government and the Federal Reserve itself is destroyed by their actions.  The Federal Reserve has been the eternal optimist in its real GDP forecasts for years now.  The closer they get to a year or its completion, the lower their estimates become, but never as low as the actual result.

Glacial Obama Jobs Growth Will Take a Complete Generation to Return to 5% Missing Jobs

The September employment numbers from the Bureau of Labor Statistics indicate a glacial increase in employment.  The Obama jobs recovery over the last two years is at a rate adequate to return the U.S. to a real 5% rate of missing jobs in 18.5 years!  Add this to the four years under his presidency so far with awful unemployment and a complete generation will have passed before we return to a real 5% unemployment rate.  The real unemployment rate now is 12.88% and in September 2010 it was 13.73%.  The real rate of jobs growth under Obama in the last two years is at a rate of 0.425% a year.  Thus, to go from 12.88% missing jobs to 5.00% missing jobs will take (12.88% - 5.00%)/(0.425%/yr.) = 18.54yr.  Add the almost four years of the Obama presidency to this and one has a complete generation mired in a very sorry jobs economy.

Of course, Obama is presently holding back on many of the jobs-killing policies he wants to implement after he is re-elected.  These will likely wipe out the meager jobs growth we are presently seeing.  We also have to remember that the Federal Reserve is pouring $40 billion a month into the economy now, which should be able to purchase a few jobs upon the first pulse of that money surge.

The number of missing jobs and the real unemployment rate are given in the table below using the BLS Household Survey Data without seasonal adjustments:

The classical unemployment rate has fallen considerably, but it is substantially due to people quitting their job search.  The working age and available population increased from August to September by 206,000 people.  The number employed increased by 775,000 according to these Obama administration BLS numbers, though given the state of the economy, I find that number rather difficult to believe.  Unless, there are a lot of small business people out there who decided in September that Obama was not going to be re-elected and they are hiring on that belief!

Looking at the numbers of people unemployed, we see an even bigger decrease of 954,000 people.  If we assume that none of the 206,000 new working age people wanted jobs and 775,000 of the officially recognized unemployed found jobs, then another 179,000 people gave up looking for a job.  Does it not seem very unlikely that if 775,000 found a job in one month, that 179,000 who had just been looking for work would choose that time to stop looking for work?  There is something rather out of kilter in these numbers.  It may be that a lot more people really stopped looking for a job and decided they were by default self-employed.  These days, many of the self-employed are not able to pay themselves a salary.

But even if we use these numbers, there are 21,189,000 missing jobs now.  This is more missing jobs than were missing in September 2010!  Thanks to the population growth, the percentage of missing jobs has come down slightly though as noted above.  Here is the missing jobs chart:

Obviously the missing jobs chart does not show any major breakout in the rate of jobs creation once again in the last two and half years.

But, there may have been some jobs growth due to the decrease in savings rate and the increase in spending of Americans over the last two months.  A good part of that spending increase went to pay for higher gasoline prices, however.  The Economic Confidence Index improved in August, though many more Americans are still pessimistic about the economy than are optimistic.  The Institute for Supply Management Manufacturing Index rose to 51.5 in September from 49.6 in August, indicating expansion for the first month since May.  This expansion is based on the American economy alone, since world trade is decreasing.  Europe is importing less and while China is claiming to have a GDP growth rate of 7.5%, its real growth rate is about zero.  The service sector has been expanding all year, though it did the same in 2011.  In September, it was at 55.1 up from 53.7 in August.  Some of this service sector expansion is likely to have been generated by that $40 billion pumped into the economy in September by the Federal Reserve.  Mortgage rates have continued to fall as well and are now averaging 3.36% for a 30-year mortgage.  While mortgages are still hard to get, home sales have increased slightly.

I cannot see any reason whatsoever to give Obama any credit for the slight improvement implied by the latest jobs report, however.  We should long ago have had much better jobs growth.  Obama has worked overtime to cut down the U.S. economy with his wrongheaded economic policies.  The 1.3% GDP growth claimed in the second quarter is surely a zero or negative growth rate in terms of real real per capita GDP.  The cost of living index being used by the government understates our real cost of living so that the real GDP growth is overstated.  The adjustment for per capita GDP means that a 1% growth in GDP is just that due to the population growing at a 1% rate a year.  GDP has to grow faster than 1% so that our average standard of living will not fall.

The slightly higher 1.6% growth rate of GDP for the first half of the year is likely about a zero real real per capita growth rate.  This is a highly stagnant economy.  When Obama tries to brag about it and claim he is responsible for it, he is just showing his ignorance of the economy.  We do not have to share that ignorance.  If enough people do and he is re-elected, we will not see any significant improvement in the economy over the next four years.  His plan to increase taxes by another $1 trillion and to implement ObamaUncaringTax will be a great kick to the head for the economy.  Who knows how much more damage he will do as the rules for Dodd-Frank financial industry regulations are fixed or left unfixed so that no one can safely undertake any significant financial activity.  He is also about to march his EPA brown shirts out to strangle all coal-fired power plants and he will take more actions to generally impede the use of fossil fuels.  Of course, he will also continue the mal-investment of our tax money in impractical green energy schemes doomed to failure and run by his parasitic campaign donors.

Everything in the Democrat Economic Central Planning Arsenal is a Dud

The government told us the GDP growth rate in the first quarter was 1.8%, which is not a healthy growth rate at any time and is especially weak if an economy is recovering from a recession.  In May, the government increased that reported first quarter growth rate to 1.9%.  This was still not good, but it seemed to leave the door open to optimism that while recovery was slower than in other recessions, it would occur.  Then, the bottom fell out.  The first quarter GDP growth was revised downward to 0.4% and the second quarter GDP growth was said to be an anemic 1.3%, which has just been revised down to 1.0%.

Jobs growth is not keeping up with the growth in population.  The annual Consumer Price Index (CPI) stands at 3.6% and is running much higher in the last half year.  The average American worker workweek decreased by 0.1 hours and earnings fell by $0.03, which is no way to keep up with the inflation.  Labor productivity has very unusually been falling lately as well.  These factors bode ill for further hiring.

The rest of the world economy is not in good shape either, so there is no chance that exports will do much to change the bleak picture of the American economy.  The Purchasing Managers' Index (PMI), a measure of business purchasing activity, fell to a two-year low in August to 49.0.  Numbers below 50.0 mean contraction of business activity is going on.  Among the European countries with reduced activity are Great Britain, France, Spain, Italy, Ireland, and Greece.  The positive PMI's of Germany, Sweden, and Switzerland dropped.  The PMI of Japan is at a 3-month low and Taiwan's PMI is very negative at 45.2, its lowest value since January 2009.  Canada's GDP contracted, largely due to a 2.1% drop in exports.  The leading retailer in Australia expects falling sales.  China has a PMI on the edge of contraction and its exports to the U.S. have fallen.  The world economy is staggering.

In the U.S., the favorite Democrat central planning tools of stimulus spending and quantitative easing, or creating money from thin air, have not worked.  What a surprise!  Despite the GDP growth of the first half of the year being only 0.7%, the White House is telling us that GDP growth for the year will be 1.7%.  Wow, what a howler that is!  This means they are predicting growth in the second half of this year at an annual rate of 2.7%.  I suppose they think that growth will occur because businessmen and consumers are trusting that Obama's speech on his economic recovery plans this week will solve all of our problems!  For that to be so, all Americans would have to regress to the point that they believed that he could stop the oceans from rising and cure all of the diseases of the world, as many did when they first voted for him.  I think many even of those favorable voters have learned something since!  Even if that were the case, that growth which has not been evident through August, would have to occur entirely in the last 4 months of the year.

Let us examine a few issues with the stimulus approach loved by socialists.  The CBO, not really a very reliable source, recently released a report saying that the $787 billion American Reinvestment and Recovery Act has really cost us a $825 billion increase in debt.  They claim that they cannot figure out how many jobs were created by it, but it was somewhere between 1.4 million and an unbelievably generous 4 million.  I do not think they seriously try to estimate the number of jobs lost due to the bill.  So let us divide $825 billion by 1.4 million jobs and we find each job cost $589,300.  While some investment is needed to create meaningful jobs, that is enough money to pay someone the median income of $46,300 for 12.7 years!  I could readily provide several scientists with jobs with that amount of money, but the federal government is always incompetent and inefficient!  While I do not believe there is even a 1% chance that the stimulus bill created 4 million jobs, even if it did, each job would have cost $206,250 which would have allowed me to provide at least 1.5 long-term new jobs in my laboratory instead of a mythical job.

The CBO report claims that printing up $0.825 trillion in a $15 trillion economy added between 0.8% and 2.5% to the GDP in real, inflation-adjusted growth.  Printing this amount of money diluted the value of all money by at least 5.5% since 0.825/15 = 0.055.  One could argue that the dilution of money value is proportional to the smaller value of money in circulation, making the dilution much greater than this.  The act of printing that money did nothing to add to productivity so its effects upon production are transitory.  Worse yet, that monetary dilution devalued all property, including the already depressed housing market, and all commodities, such as oil, cotton, corn, wood, and metals.  Despite these huge negative effects, the CBO tells us that the expenditure increased the GDP by something in the range from 0.8% to a totally unbelievable 2.5%.  Well, this is another instance of the very bad track record of the CBO showing its lack of understanding of economics or its adherence to rules which do not correspond to reality.

The CBO then goes on to say that direct government purchases of goods and services have a multiplier effect of 1.0 to 2.5 for every dollar spent!  Well that is very interesting.  If that were so then the stimulus bill expenditure of $825 billion would have increased the GDP by between 5.5% and 13.75%!  Clearly, direct expenditures by government have no advantageous multiplier effect.  In fact, we can calculate the effect from their own numbers for the GDP growth they claim for the stimulus bill.  0.8/5.5 = 0.145 for the lower bound multiplier and the upper bound multiplier would be 2.5/5.5 = 0.45.  These calculated multipliers ranging from 0.14 to a clearly too high 0.45 are way below 1.0, which is more like what one expects from an incompetent and inefficient government with no real interest in human productivity.

Alan Reynolds, an unusually insightful economist, has written an excellent article entitled The Fed vs. the Recovery, which first appeared in the Wall Street Journal on 26 August 2011.  It is on the CATO Institute website here.  He says:

In demand-side theorizing, monetary stimulus means the Fed buys more bonds. The Treasury has certainly been selling a lot of bonds, and the Fed has been buying (monetizing) a huge share of those bonds. That helped push the broad M2 money supply up at a 6.8% rate over the past six months. Yet the only thing we have to show for all that stimulus over the past year has been rapid inflation of producer prices and a simultaneous slowdown in the growth of the private economy. Consumer price inflation also accelerated to 5.2% in the first quarter and 4.1% in the second, from just 1.4% in the third quarter of 2010.

He notes that industrial supplies and materials account for 34.5% of our imported goods so far this year and capital equipment and parts add another 23% of imports.  Because of the second quantitative easing (QE2) which began in November 2010 and ended in June of 2011, the value of the dollar fell about 15% relative to the Euro.  The Economist's commodity-price index went up 50.9% in a year in dollars, but 22.8% in Euros.  Our import prices rose by a 15.1% annual rate and our export prices rose by an annual 11.4% over the last three quarters under QE2.  These effects reduced the growth of real GDP.

Alan Reynolds notes that

The net effect was to reduce the profitability of manufacturing and distributing products in the United States, and therefore to shift such activities (and jobs) to other countries which were less handicapped by the dollar's weakness.

Fortunately for the S&P 500 companies, 46% for their sales came from other countries!  As a result, their operating earnings per share rose from $20.40 a year earlier to $24.86 by June 2011.  Thanks to our government's policy of printing money, this did most Americans little good.

One of the commodities whose price was driven up by QE2 with important and devastating consequences was that of oil.  As I have pointed out many times (thanks to reading Alan Reynolds), every postwar recession except that of 1960 has been triggered by a sudden increase in the price of oil. From August 2007 to July 2008 we had such an oil price spike as the value of the dollar fell and oil prices doubled.  We had another large oil price increase due to the dollar losing value from late August 2010 when Bernanke announced QE2 until the end of April 2011.  The price of oil increased from $72.91 to $112.30, an increase of 54%.  Just the price of oil increasing suddenly has a very negative impact on our economy.  This is aggravated by our refusal to allow reasonable increases in domestic production, which makes us more vulnerable to fluctuations in the value of the dollar relative to other currencies.

Both the Stimulus and the Quantitative Easing efforts have depressed the growth of the GDP and resulted in giving companies every incentive to hire aboard and every disincentive for hiring at home.  Meanwhile, the regulatory, tax, anti-business, promotion of labor cost increases, and anti-energy policies and rhetoric of the Obama cabal has been added to the wrongheaded policies of the Federal Reserve to put us into a never-ending recession.

Continued High Unemployment -- A Manufactured Crisis to be Exploited

The on-going recession began in mid-2008 due to a housing bubble and financial instability brought on by the federal government's and Federal Reserve's easy money policies, which had been pricked by the needle of the 2007 sharp increase in energy prices.  Throughout the recession, which according to government numbers is falsely said to have ended in mid-2009, the government has continued to pursue the easy money policies that caused the recession.  What is more, it has selectively decided that some individuals and companies will not pay the price for bad decisions they may have made, albeit with much encouragement from the government.  This has heaped all of the costs of the recession on those who bore no or little responsibility for the recession or on a few responsible actors the government does not like for one reason or another.

To be more precise, the economy was rebounding from the recession in the latter part of 2009 and in early 2010.  But then ObamaCare and the Dodd-Frank financial "reform" bills were passed and the Democrats clearly wanted massive tax increases.  These actions and many strange and arbitrary regulations created an avalanche of business uncertainty to add to the lingering uncertainty of the earlier bailouts and company asset thefts by the government. The second dip of the recession started in the latter half of 2010.  Then, once again, perhaps due to the extension of many of the Bush tax cuts, the economy showed some signs of recovery in the first quarter of this year.  But, continuing government ineptitude mixed with deliberate destruction of the private sector, caused the second quarter of this year to slip back into recession mode again.  This fact was hidden by the unrealistic measures of price inflation, which ignored large fuel and food price increases and over-emphasized some improvements in technology values.  Apparent increases in GDP were likely just artifacts of the understated inflationary effect on goods and services of the huge stimulus spending and the two Quantitative Easings.

Each month, I calculate the real unemployment rate and the number of missing jobs in comparison to January 2000 when most anyone who wanted a good job could find one.  In the belief that were good jobs available, as large a fraction of the population would be wanting to work today, one can calculate the needed jobs and the missing jobs.  The latest numbers based on the Bureau of Labor Statistics unemployment report for May 2011 follow:

There actually was a nanoscale improvement in the number of missing jobs relative to April 2011.  The bad news is that the improvement in jobs creation ought to be much, much better at this time after the mid-2008 start of the recession if we were really seeing any improvement of the economy.  There were 693,000 more missing jobs in May 2011 than there were in May 2010!  A new crop of high school and college graduates is emerging and there are no jobs for them.  This is now a three-year old recession!  Recessions of the private sector never last this long.  Only government can make such an extended recession.  This is truly the Great Socialist Recession.

We are mired in the doldrums and there is no wind in sight.  The business community expects the Obama administration and the Democrats to continue making systematically awful choices with respect to the business of business and job creation.  It is true that Congress is doing less harm since the Republicans gained control of the House, but that has only invigorated the administration's determination to cause as much harm as possible through executive branch agencies.  Some of this is incompetence in business and economic matters, but some is very likely an effort to simply make many Americans dependent upon big government.  The plan is to make many individuals so destitute that they will think government is their only salvation.  It is to put many companies so at risk in the hands of regulators that they will bow and scrape before government to save their heads from the chopping block. 

What is better than a crisis of no growth, inflation, and joblessness for government to aggrandize its power?  This is well-understood by those many Democrat Socialists who hunger always to expand the scope and power of government, while making the private sector tremble in fear.  They well remember how the Great Depression grew government and gave the Democrats the initiative in politics for decades.  Some of the most influential Democrats are hoping the present crisis will give them the same power, if only they can make this recession into a long-lasting depression or at least something close to one.  These supreme power-lusting Democrat Socialist leaders are a minority of the party, but they are in control of the party policy.  The Great Socialist Recession is very unlikely to end until Obama is no longer occupying the White House and the Democrats no longer control the Senate.

Walter Williams on Congressional Problem Creation

Prof. Walter E. Williams has written a short commentary on a number of problems caused by Congress and the Presidents. These problems then become the justification for Congress taking still more control of industries and the economy, which will cause still more problems. These will newer problems will be used to justify still more Congressional controls and, happily for Congress, lead to still more problems, which will .......

He discusses the effects of The Community Reinvestment Act of 1977, monetary expansion by the Federal Reserve Bank, Congressional limitations on oil and gas exploration, refineries, and nuclear power, and the ethanol fuel mandates and food prices.