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goofball
Navy Fan
Member since Mar 2015
15368 posts

Wall Street Journal: How the Fed and the Biden Administration Got Inflation Wrong

It's a very long read, but it's worth it to understand the kind of storm we are in right now. This is only part of it - the full article is at the link provided.

quote:

How the Fed and the Biden Administration Got Inflation Wrong

Officials applied an old playbook to a new crisis. ‘We fought the last war.’

Wall Street Journal

In recent weeks, top officials in the Biden administration and Federal Reserve have publicly conceded that they made mistakes in their handling of inflation.

Behind their errors was a misreading of the economy.

Advisers to President Biden and Fed officials worried the Covid-19 pandemic and related restrictions would bring similar consequences to the 2007-09 financial crisis: weak demand, slow growth, long periods of high unemployment and too-low inflation.

So they applied the last playbook to the new crisis. The Fed redeployed low-interest-rate policies that it believed had been effective and generally benign, and promised not to pull back prematurely. Elected officials concluded they had relied too heavily on the Fed previously, and decided to spend more aggressively this time, starting with President Donald Trump and capped off with President Biden’s $1.9 trillion stimulus.

Moreover, many Democrats saw their control of the White House and Congress as a rare opportunity to shift Washington’s priorities away from tax cuts favored by Republicans and toward expansive new social programs.

But the pandemic economy turned out to be fundamentally different.


quote:

The pandemic has caused lasting disruptions to global supplies of a range of goods and services, causing nagging shortages and upward pressure on prices that would likely have occurred even without stimulus. While supply has been slow to rebound, demand for goods and services recovered quickly.

By December 2020, the unemployment rate had fallen to 6.7%. It had taken three years to fall to that level after the 2007-09 recession.

Policy makers didn’t change course. House Democrats in May 2020 had approved a $3 trillion stimulus bill, and continued to back that figure, citing Mr. Powell’s support for targeted aid.

Fed officials and Mr. Biden’s advisers, many of whom had served either under Mr. Obama or, like Ms. Yellen, at the Fed during the financial crisis, remained haunted by the slow recovery of the 2010s and fears that new waves of Covid could derail the nascent upturn. Moreover, inflation had been below the Fed’s goal for more than decade. This also made them confident they had the scope to act further.

“We know from the previous expansion that it can take many years to reverse the damage” of prolonged high unemployment, Mr. Powell said in a February 2021 speech.


quote:

Democrats saw deficit-financed stimulus this time as a vehicle to advance expanded social programs, such as an enriched child tax credit they hoped to make permanent. In progressive circles, some lawmakers embraced the ideas of “modern monetary theory,” which posited that as long as inflation was low, there was no limit to how much Washington could borrow.

Mr. Biden likened his ambitions to those of Lyndon B. Johnson’s Great Society during the 1960s. “This is the first time we’ve been able to, since the Johnson administration and maybe even before that, to begin to change the paradigm,” he said after signing the stimulus into law in March.




quote:

In December 2020, after Mr. Trump had lost the election to Mr. Biden but had not conceded, he argued for $2,000 in additional relief checks to millions of individuals. Democratic candidates in Georgia’s Senate runoff elections picked up the call.

They won, giving control of the Senate to Democrats. Progressive lawmakers pressed for fast action on stimulus.

Days before inauguration, Mr. Biden and his closest advisers agreed on the $1.9 trillion plan, which included $350 billion in aid for state and local governments, $300 a week in extra unemployment benefits through the first week of September, and, fulfilling the Georgia Democrats’ promises, $1,400 relief checks, an addition to $600 passed by Congress in December.

Some economists warned this would lead to inflation, most prominently Harvard University’s Lawrence Summers, a former Treasury secretary. He estimated monthly household income was about $25 billion to $30 billion below what it would be in a normally functioning economy. He estimated the stimulus was near $200 billion a month and would fill that “output gap” many times over. Mr. Furman joined in those criticisms.

Their criticism frustrated White House officials because both were prominent Democrats who had served under Mr. Obama. Ms. Yellen, who was new to Mr. Biden’s team, was in a delicate position. When Mr. Biden completed the $1.9 trillion proposal in January, she wasn’t in the meeting, according to people familiar with the matter.



quote:

Until November 2021, the Fed was adding more stimulus by buying $120 billion of Treasury and mortgage-backed bonds a month. Such purchases are aimed at holding down long-term interest rates. Officials had said they would “taper” those monthly purchases to zero before starting to raise rates.


quote:

Mr. Quarles said in hindsight the Fed should have begun reducing bond purchases last September; it phased them out between November and this past March.

Before the pandemic, Mr. Summers had warned of a chronic shortfall of demand and low inflation, a combination dubbed “secular stagnation.” But after Mr. Biden’s stimulus passed in March 2021, his concerns shifted to excess demand and inflation. The Fed’s job is to take the punch bowl away just as the party gets going, a former chairman once quipped. Mr. Summers compared the Fed’s new framework to waiting “until we see a bunch of drunk people staggering around.”

Mr. Summers was in the minority. Many professional economists, using models similar to those used by Mr. Powell and Ms. Yellen, agreed with them that the inflation surge would be transitory. In July 2021, private forecasters surveyed by The Wall Street Journal projected inflation would recede to 2.4% by the end of 2022. They now project 4.8% at year-end.



Our fiscal and monetary policies are both completely fricked and in many ways haven't been corrected yet.


CocomoLSU
Penn State Fan
Inside your dome.
Member since Feb 2004
144461 posts
 Online 

quote:

How the Fed and the Biden Administration Got Everything Wrong So Far


Joshjrn
LSU Fan
Baton Rouge
Member since Dec 2008
21238 posts
 Online 

End the Fed.


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444
member12
Marquette Fan
Bob's Country Bunker
Member since May 2008
29996 posts

quote:

It's a very long read


Would be a lot shorter if they just listed what the Biden administration has gotten right.


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491
LSUcdro
USA Fan
THE Livingston Parish
Member since Sep 2009
10648 posts



Pootins price hike is killing us























member12
Marquette Fan
Bob's Country Bunker
Member since May 2008
29996 posts

The whole article is a bunch of excuses as to why their lazy monetary policy from the Fed and opportunistic fiscal policy from house Democrats didn't work.

Democrats were finally in control and put another massive stimulus through when it wasn't needed. Mostly to bail out local or state governments, but also to vastly expand unemployment benefits and social programs. Very Stupid, but they wanted to seize the opportunity to push their agenda after Trump left office.

The Fed ignored all of the signs of major inflation and kept on throwing fuel on the fire until at least March 2022 when they should have stopped in September 2021. The Fed has a horrific record of avoiding a hard landing when fighting inflation. In this case they didn't even recognize that they were breaking the economy until at least 6 months later than they should.

Both of the above should have been expected by the average American.


PeteRose
LSU Fan
Hall of Fame
Member since Aug 2014
15008 posts

If the avg American saw inflation coming and the fed/Biden admin didn’t, it doesn’t say much about them.


Free888
Member since Oct 2019
467 posts

It wasn’t just a mistake or misread of the economy. They’re so hellbent on their ideology they could care less what it does to other people as long as they get their way. They’re pure evil.


dewster
LSU Fan
Chicago
Member since Aug 2006
22912 posts

quote:

By December 2020, the unemployment rate had fallen to 6.7%.


This is when the fiscal party should have stopped for a while. But it kicked back off the second Biden took office.

Mr. Biden and his closest advisers agreed on the $1.9 trillion plan, which included $350 billion in aid for state and local governments, $300 a week in extra unemployment benefits through the first week of September, and, fulfilling the Georgia Democrats’ promises, $1,400 relief checks, an addition to $600 passed by Congress in December.



quote:

the Fed should have begun reducing bond purchases last September; it phased them out between November and this past March.


And now if they don't hike rates by 75bp this month and next month, the market will respond HIGHLY negatively. They've been flat footed for a year on this.

We are going to end up seeing rapid rate hikes (as predicted), and likely won't avoid a recession. Hopefully we can capitalize on issues with our economic competitors (Europe) and avoid a deep, prolonged slowdown.

I'm too young to have seen the Carter years, but I imagine this is a taste of what my parents experienced back then.
This post was edited on 6/14 at 8:21 am


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funnystuff
Member since Nov 2012
7607 posts

quote:

Many professional economists, using models similar to those used by Mr. Powell and Ms. Yellen, agreed with them that the inflation surge would be transitory.
This is a major problem in modern economics… an extremely large portion of our economist class are nothing more than blind data junkies. All they know how to do is collect data, plug it into a model someone else built, and trust the result. The critical thinking portion of economics isn’t being taught anymore, so our professional economists don’t know how to do it.

Anyone paying attention could see that a major supply crunch would create inflationary pressures even before the Fed added extra demand. But one guesser in Chicago builds a “model” that replicates the exact same dynamics from the last 20 years, all of these data junkies blindly “trust the science”, and no one even thinks to ask, “is this time different?”


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Eat Your Crow
caught beneath the landslide
Member since May 2017
8270 posts

Dims aren't going to be able to run Biden in 2024 and they know it, so they are starting to have the media write and report bad things about him.



MrJimBeam
New Orleans Saints Fan
Member since Apr 2009
7964 posts

quote:

If the avg American saw inflation coming and the fed/Biden admin didn’t, it doesn’t say much about them.



Yeah it blows my mind how it seems like everyone knew this but them. I just don't see how they could be this blind which makes me believe it was intentional. Are they really this stupid?

ETA: They pushed these programs that cost billions of dollars when we were in a pandemic or coming out of one. As if those programs weren't already bad enough, the timing was even worse.
This post was edited on 6/14 at 8:26 am


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LSUtoBOOT
LSU Fan
Member since Aug 2012
8443 posts

quote:

Democrats saw deficit-financed stimulus this time as a vehicle to advance socialist propaganda and buy more votes.
.


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RogerTheShrubber
LSU Fan
Juneau, AK
Member since Jan 2009
215403 posts

People were warned about this stuff when the pandemic started and they didn't believe it, because they are economic illiterates.

For over two years the folks rooted in reality saw this coming, saw the gubment putting fuel to the fire and were blasted for it.


Free888
Member since Oct 2019
467 posts

quote:

This is a major problem in modern economics… an extremely large portion of our economist class are nothing more than blind data junkies. All they know how to do is collect data, plug it into a model someone else built, and trust the result. The critical thinking portion of economics isn’t being taught anymore, so our professional economists don’t know how to do it.

Anyone paying attention could see that a major supply crunch would create inflationary pressures even before the Fed added extra demand. But one guesser in Chicago builds a “model” that replicates the exact same dynamics from the last 20 years, all of these data junkies blindly “trust the science”, and no one even thinks to ask, “is this time different?”


The same thing happened with credit default swaps in 2007. All of the models assumed the market would continued its upward trend, no one contemplated a downturn. That’s what happens when you have mathematicians with no practical experience running these models.


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dewster
LSU Fan
Chicago
Member since Aug 2006
22912 posts

quote:

This is a major problem in modern economics… an extremely large portion of our economist class are nothing more than blind data junkies. All they know how to do is collect data, plug it into a model someone else built, and trust the result. The critical thinking portion of economics isn’t being taught anymore, so our professional economists don’t know how to do it.


I think they are brilliant people and are capable of critical thinking, but seem to be myopic when it comes to their jobs. They focus deep on what's right in front of them, but don't seem to be connected to the world around them. They could talk for days on theories but couldn't tell you how much a gallon of gas or milk costs. They couldn't tell you about shortage of toilet paper, tampons or baby formula either because that wasn't explicitly called out in the NYT or Bloomberg.

Rapid inflation is certainly something that is felt by the poor and middle class in flyover country before the wealthy. It shouldn't be dismissed as partisan tripe like it was in most media circles.

Literally any poster (even the progressive ones) saw signs of this coming last summer, and certainly into the winter holidays. I think this might be another example of the ruling class being blindsided by a problem they are more than arms length from.

The Fed claimed that the inflation was just transitory and a minor issue until January, but didn't hold off on their bond buying program until March.

Biden claimed that he didn't even know about the formula shortage until 3+ months after his own branch shut down the Abbott Labs plant in Michigan.

Something is wrong when that kind of shite happens. This is why millions of blue collar Americans in flyover country identified more with a billionaire that lived in the penthouse of his own 5th Avenue skyscraper more than a career politician in 2016. The billionaire class is more in tune to reality than our ruling class these days. This is one of the reasons why I think we need move as many federal employees as we can to areas outside of NYC and DC as possible. We need to get them out of that bubble and into the real world, where real world issues are staring at them right in the face.
This post was edited on 6/14 at 8:35 am


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LSUtoBOOT
LSU Fan
Member since Aug 2012
8443 posts

quote:

Fed officials and Mr. Biden’s advisers completely shite their pants and fricked up the whole economy.


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RogerTheShrubber
LSU Fan
Juneau, AK
Member since Jan 2009
215403 posts

quote:

This is a major problem in modern economics… an extremely large portion of our economist class are nothing more than blind data junkies.


Even worse are the Modern Monetary Theory ideologues who have their hold on the Federal govt. The pandemic proved its not going to work at the present time.

The Keynesian belief is that deficit spending in a recession will improve the economy. It doesn't, it stabilizes it temporarily and you still have to pay the piper down the road.
This post was edited on 6/14 at 8:33 am


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Oilfieldbiology
LSU Fan
Member since Nov 2016
30829 posts

quote:

Democrats saw deficit-financed stimulus this time as a vehicle to advance expanded social programs, such as an enriched child tax credit they hoped to make permanent. In progressive circles, some lawmakers embraced the ideas of “modern monetary theory,” which posited that as long as inflation was low, there was no limit to how much Washington could borrow.

Mr. Biden likened his ambitions to those of Lyndon B. Johnson’s Great Society during the 1960s. “This is the first time we’ve been able to, since the Johnson administration and maybe even before that, to begin to change the paradigm,” he said after signing the stimulus into law in March.


This should scare the ever living shite out of any tax paying American.


dewster
LSU Fan
Chicago
Member since Aug 2006
22912 posts

quote:

This should scare the ever living shite out of any tax paying American.


The bigger problem to me was that they continued to push this after they took office, and used the pandemic as an excuse to vastly expand social programs with deficit spending. That alone would be bad for inflation - but they doubled down on what congress did barely 4 months earlier to boost programs that would DISCOURAGE people from going back to work.

That was literally already addressed 4 months ago, but they decided to just dump gallons of fuel to the fire. Almost like a celebration for taking control of congress and the White House.

It was a fricking disaster, and it could have easily been avoided by simply doing nothing. That's something that congress does all the time. They know how to do nothing very well.
This post was edited on 6/14 at 8:40 am


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