Bob Eisenbeis's Contributions

Those of you who have seen the movie Speed will remember that Dennis Hopper (the villain) would call Keanu Reeves (the hero) and start the conversation with the phrase “Pop Quiz, Jack.” Given the recent lecture to Chairman Bernanke by Jamie Dimon and the Republican roasting of Governor Tarullo at a hearing last week

In a Wednesday opinion piece in the WSJ, George Melloan, a former columnist and deputy editor of the Journal’s editorial page, penned a piece opining on the policy problem the Federal Reserve has gotten itself into with its QE1 and QE2. His concern is one that we at Cumberland pointed out more than a year ago.

Faced with largely the same set of facts when it comes to their inflation outlook, some of the world’s major central banks have come to markedly different conclusions about the appropriate policy.

No, not “shock” and “awe” as in how the military uses the terms, but rather shock as a characterization of what has hit the US and world economies recently and awe in terms of how resilient both have been. Just think of the variety of shocks that financial markets have had to digest and synthesize.

The G-7 finance ministers acted last week to halt the strengthening of the yen and dampen market volatility in the face of the twin tragedies in Japan. A key question is, why would the yen strengthen?

I don’t normally pen an economic commentary on an article that has appeared elsewhere, but David Enrich’s Wall Street Journal article of February 17, 2011, entitled “Banks Find Loophole on Capital Rule,” raises some important concerns and is worthy of additional observations. The article notes that Barclays changed the legal classification of its main US subsidiary so as to no longer be subject to US bank capital standards.

Note to Readers: What follows is a very technical and somewhat arcane discussion of a new Federal Reserve accounting issue, but one that has potentially significant policy implications when it comes to the Fed’s ability to execute its exit strategy from its current quantitative easing policy.

The Federal Reserve’s Vice-Chair Janet Yellen provided a spirited defense of the Fed’s quantitative easing program at the American Economic Association annual meeting last week. She laid out what clearly seems to be the conventional wisdom inside the Fed as to the effects of its crisis programs, the results of the current additional $600 billion of additional asset purchases, and the hoped-for path of employment flowing from those policies.

A number of readers have commented on my most recent yearend commentary. In it, I argued that regardless of what additional policy moves may be made, next year’s economic performance is largely baked in the cake. Furthermore, because of the lags in policy, we would be well into next year and the start of election season before we can begin to assess the impacts of the passage of the tax bill and the Fed’s QE2. Consequently, public focus will be dominated by continuing uncertainties and by concerns about employment, neither of which can be materially affected by additional policy moves in the short run.

It is year-end and time to look ahead to where the economy is going. The path has already been largely charted for the coming year. Congress has passed an extension of the Bush tax cuts and also extended unemployment benefits. The budget cost of this de facto tax-stimulus package is estimated at $800 billion, not because of increased spending but because of its implications for reduced tax revenues.