E-piphany

So far, the Treasury has not had much trouble moving the mountains of supply it has needed to. Today’s $10bln TIPS auction came right on the screws, actually slightly through the screens at 1pm. This shouldn’t be very surprising; of all the securities that Treasury is issuing, the ones linked to inflation ought to be the most-attractive especially since they aren’t exactly flooding the place with them.

The Wall Street Journal sought to suggest otherwise today, running an article entitled “U.S., In Nod To Creditors, Is Adding TIPS Issues.” According to the article, “by increasing the amount of TIPS outstanding, the U.S. government boosts its credibility as an inflation fighter. ” TIPS issuance is projected to rise by some 40% this year which, as I noted a couple of weeks back (“What Was the TIPSing Point?“) isn’t anything close to the wholesale changes that have been made in the nominal Treasury calendar. When $10bln 10y TIPS can be released into the market with not a ripple, then a government that is trying to raise and roll trillions of dollars per year of debt might reasonably consider whether they can auction a few more. But increasing issuance 40% in these circumstances doesn’t exactly signal “inflation fighter!” to me.

But words, of course, mean less and less every day (which is why I have to spew more and more of them!). According to a Bloomberg story today, President Obama has “vowed to halve” the $1.4trillion deficit of last year. Great!…but almost trivially easy. If you just avoid spending the $1trillion in stimulus money then, even with lower receipts, you ought to make good on that promise pretty easily. It is so not nice to take advantage of people who can’t do math.

Speaking of “not nice,” I think Chairman Bernanke needs to get the phone number of Greenspan’s P.R. director. Not one but two articles this weekend were aimed at Generous Ben. In Barron’s, economic columnist Gene Epstein took the Fed chief to task for citing a study in support of his position that did, in fact, come to rather the opposite conclusion from his own. And, in what would be considered “piling on” if this were not the blood sport of finance, Dr. John B. “Rule” Taylor penned an op-ed piece “The Fed and the Crisis: A Reply to Ben Bernanke” in the Journal. In addition to echoing Epstein’s point about a primary source, Taylor also took issue with Bernanke’s re-writing of the Taylor Rule ex-post to use forecast inflation rather than actual inflation and pointed out that even with blue chip forecasts other than Ben’s own, the Fed arguably kept rates too low for too long and helped contribute to the housing bubble.

I haven’t seen a hit like that since Donovan McNabb’s arm was karate-chopped by DeMarcus Ware, although come to think of it that was pretty recent.

Look, low rates contributed to the housing boom, and Bernanke is wrong to try and steer attention away from that fact. It’s crazy to suggest that low rates didn’t increase the investment value of the home. But personally, in retrospect I don’t think the Fed had a real choice, because as I’ve been arguing recently there was a real chance that the non-housing economy was slipping into deflation and the Fed couldn’t be pricking bubbles in that circumstance (which is one reason why some inflation is a good thing for policymakers). Of course, the Fed also wasn’t arguing for using other policy levers to restrain housing, so as the nation’s economist reserve (the Fed hires more econ Ph.Ds than anyone in the country) they’re not entirely free from guilt. I am just not sure that laying the culpability for the housing bubble entirely at the Fed’s feet is fair since I can’t say that it is immediately obvious that a broad deflation and very high real rates over which they had no control (which is what they would have had if they had tightened then) would have produced a better outcome.

However, I am sure that Congress and others who should have exercised adult supervision are more than happy to blame Ben. How weird it feels to be defending him, even a little.