Jon Markman on the speed and veracity of our current Federal lending/bailout:
Yet money isn’t everything, even in the debt markets, and it will likely take a lot more than near-zero interest rates and massive boosts in the monetary base to ward off the painful effects of global deleveraging and a prolonged recession.
The main beef: Few of the government’s weapons in the crisis have been tried on this scale, if at all, so they amount to the most speculative experiment in modern financial history. And no matter what the suits at the podium say, they have no idea — no idea — whether their plans will work….
….In economics circles, this battle has another name and a set of theories. It’s called quantitative easing, or QE, and the only place it has been tried is Japan, starting in 2001. The fact that it has failed there doesn’t discourage U.S. policymakers, because they think they can get it right.
Quick primer: Central banks pursue their mission to stabilize a nation’s money supply and promote economic growth in two ways: changing the price of money via interest-rate cuts or changing the quantity of money by printing or destroying it. Ninety-eight percent of the time they pull the interest-rate lever, which is why we care about the rate-setting meetings of the Federal Open Market Committee. Yet in the rare cases when rates approach zero amid a collapse in inflation, central banks turn to quantitative channels to deliver economic stimulus.
This is the classic playbook from seminal 1930s-era British economist John Maynard Keynes, who proposed that governments should run big deficits to intervene directly into markets and maintain a zero-interest-rate policy, or ZIRP, when under extreme stress.
The idea didn’t work in Japan because a persistent recession had gutted demand for money, and, besides, banks didn’t think it wise to lend to failing companies. Economists call this a liquidity trap: When expected returns are low, investment falls, so economic activity slows. Then cash holdings rise because people expect returns to fall — which, of course, they do. Ergo, it’s a trap.
The Fed has tried to bust the U.S. economy out of this trap first by embarking on a path to cutting rates to zero by early 2009, then by increasing the size of its balance sheet through the printing press, then by changing the composition of its balance sheet by buying agency debt to keep yields down. Since none of this has jump-started the economy, the Fed has gone on to buying bank securities directly, taking over the role of private fund managers in a process economists call intermediation….
….So all the Fed efforts now are basically aimed at revving money velocity back up — and so far the ol’ girl just won’t go, largely because confidence that it makes sense is low. As one fund manager, who declined to be identified, told me in an interview this week: “We keep trying to find a silver bullet instead of just allowing deleveraging to run its course. Now that bullet is getting more and more expensive, and also requires so much gunpowder that it might destroy the gun.”
Shoveling cash at undeserving banks is just what you would expect from bureaucrats who didn’t have to earn that money in the first place — and who will be out of office before the plan blows up. Moreover, authorities who have studied Japan’s lost decade complain that cash-bombing the financial system will delay structural reforms and introduce dangerous market distortions.