The Fed at the Crossroads

The Fed is not supposed to be swayed by elected officials or special interests. But bond holders — a powerful political constituency that includes financial firms, investment funds and wealthy individuals — generally want the Fed to raise rates sooner rather than later, and they have ample opportunity to dominate public discourse. Their aim is to pre-emptively attack inflation, which diminishes the value of their bonds.

But it is not the Fed’s job to protect investors’ bond portfolios.

.. Similarly, wages can rise at a rate well above inflation without pushing up prices. That’s because wage increases do not even begin to pose an inflation threat until they exceed the rate of inflation plus the rate of labor-productivity growth, roughly 3.5 percent currently.


The Depressing Signals the Markets Are Sending About the Global Economy

Add it all up, and the markets aren’t betting on catastrophe per se; if they were, stock prices would be down more. But they are betting that central banks and other policy makers aren’t going to be able to get a handle on global deflationary forces that have been unleashed. That means we could be in for a slow grind in which global growth and inflation both stay below where people across the advanced world would like it to be.

The Astonishing Story of the Federal Reserve on 9-11

The Fed in Chicago is one short block from the Sears Tower and while others around the country may not remember, Chicago was very much in fear of attack. Chicago staff decided not to shift to the back-up because they knew that DC and NY would need them and they felt the time it would take to move was not time the system could afford.

.. During the Ferguson-led  Y2K emergency planning it was determined that key employees should carry two cell phones from two different providers and pre-load them with a master list of phone numbers including their key co-workers, key bank customers, banking regulators, utility service providers and the like. In many cases they had multiple numbers for specific contacts at each organization. It was this kind of planning which proved invaluable at all the Fed Banks across the country. That essential people were able to reach one another was a significant cog in the process. 

.. As a point of reference, in the year preceding 9-11 the discount window averaged $200 million dollars in lending a night. On 9-11 that jerked up to $37 billion, then to $46 billion on the 12th. The thing that made this level of lending acceptable was that the need for the lending was driven not by insolvency but rather by true liquidity and this was the very sort of problem for which the Fed’s “elastic currency” capability was intended.

Krugman on Geithner’s “Stress Test” Memoir

A principal part of Geithner’s argument against nationalization was the belief that a “stress test” of banks would show them to be in fairly decent shape, and that publishing the results of such a test would, in conjunction with promises to shore up banks when necessary, end the crisis. And so it proved. He was right; I was wrong; and the triumph of the stress test gave him the title for his book.

.. Unlike a financial panic, a balance sheet recession can’t be cured simply by restoring confidence: no matter how confident they may be feeling, debtors can’t spend more if their creditors insist they cut back. So offsetting the economic downdraft from a debt overhang requires concrete action, which can in general take two forms: fiscal stimulus and debt relief.