Mission Creep; Booms, Busts, Credit Growth, and the Fed; US Police State Becomes Formal

March 24, 2012

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“First they ignore you. Then they laugh at you. Then they fight you. Then you win.” –Mahatma Gandhi

“Success is no kind of failure, but failure is no kind of success at all.” -Bob Dylan

Mission creep: “expansion of a project or mission beyond its original goals, often after initial successes,” but for the government, after failures, such as expanded Fed, SEC, NSA, Homeland Security, etc, etc.

“Never waste a good crisis.”  Former Chief of Staff Rahm Emanuel – #moralhazard

#Research:

‘Changes in dealer repos forecast changes in financial market risk as measured by the CBOE’s Volatility Index $VIX.’ “Liquidity and Leverage” (Adrian and Shin, 2009)

“Credit Booms Gone Bust Monetary Policy, “Leverage Cycles, and Financial Crises, 1870 – 2008” (Schularick and Taylor 2009)

  • “Lagged credit growth is highly significant as a predictor of financial crises, but other variables add very little explanatory power.”
  • “Monetary policy responses to financial crises have been more aggressive post-1945 but [sic] the output costs of crises have remained large.”
  • “Inflation has tended to rise after crises in the post-WW2 era,” breaking the debt-deflation pattern pre-WW2.
  • Conclusion: the busts are just as large post WWII, but we get inflation, an ever expanding debt load, and a banking system backstopped by the taxpayer. Whatever would we do without the Fed?

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#Central Banking:

“The credit channel is an enhancement mechanism, not a truly independent or parallel channel.” – Bernanke (1995).

Bernanke Says Low Interest Rate Didn’t Make Housing bubble (2012) Bloomberg

Schularick, Taylor, myself, and the facts would beg to differ, sir.

Turkish government passes measures to Turks to deposit their Gold in Banks, akin to the 1933 Gold Confiscation Act . “Memo to the Turks. Stay nervous, keep your gold at home.” Douglas French $TUR

Fed’s Lockhart: “A lot of money on the sidelines”. – If there’s a lot of potential inflation on the sidelines, why does he want more stimulus? 

To Schularick and Taylor’s point: inflation persistence – before and after the Federal Reserve – EconMatters

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#US:

“Intelligence community can keep data on Americans with no ties to terrorism for up to 5 years Washington Post   #freedom

#financialrepression: Basel and Dodd Frank causing market distortions; encourages banks to buy treasuries and securities over lending – Citi

Multi trillion dollar interest rate swap market sinking local governments $MUB web of debt blog

Student-Loan Debt Reaches Record $1 Trillion, Report Says  Bloomberg

Historical short term interest rates:

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#World:

$EURUSD is becoming a competitor to the dollar as a global funding currency.- Nomura

Overseas investor holdings of JGBs rose 37.8% y/y as investors sought “safety” from Europe

Italian 10-year yields have fallen 180bp so far this year while Spain’s have risen 39bp, despite two LTROs $EURUSD Irish Times

A trade surplus has helped Japan avoid disaster, however their clients are in trouble:

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source unsure: (leave comment if you need to be cited)

#China:

China Banks Said to Underestimate Local Government Risks Bloomberg

China: a decade of change – interactive timeline Guardian

“China’s economy is largely state-planned, state-owned and state-run.” Reuters

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