Federal Reserve and Monetary Policy: I've read this year's fed speeches and a horrifying thought has just occurred to me

I've read this year's fed speeches and a horrifying thought has just occurred to me.

I've read this year's fed speeches and a horrifying thought has just occurred to me (beside my opinion that there is now a conflict of interest at the Fed). I think the Fed is really worried about the housing sector. The source of this troubling thought is NOT because banks are at risk, but because so much of the housing mortgagees are held in non-banking financial institutions.

See link: Flow of Funds page 58 table F.217 Total Mortgages

Note these are net changes. I do not know which institutions hold the “old” mortgages.

2004 was $1,179.7 billion

Commercial Banking $338.6 billion.
Credit Unions $28.6 billion.
Savings Institutions $187.6 billion.

These 3 have to follow the Fed's rules (Banking Security Act and Basel I and II).

They add to $554.8 billion.
This is 554.8 / 1179.7 * 100% = 47%

The other 53% is held by financial companies that do not have to follow the risk management rules that banks do.

I really think the banks are pressuring the Fed to loosen the rules so that they can lend more mortgages money.

See the following speeches:

Kohn's Speech on Crisis Management: The Known, the Unknown, and the Unknowable,

Ferguson's Speech on Recessions and Recoveries Associated with Asset-Price Movements: What Do We Know?,

Bies's Speech on The Economy and Challenges in Retirement Savings,

Olson's Speech on Loan Quality and How It Reflects the Overall Economy, Gramlich's Speech on The Importance of Raising National Saving,

Greenspan's Speech on Bank regulation, Bies Speech on Bank Secrecy Act and Capital Compliance Issues.

Let's look at 2000 – 2003

2003 was $1,004.3 billion

Commercial Banking $197.5billion.
Credit Unions $23.2 billion.
Savings Institutions $89.5 billion.

They add to $310.2 billion.
This is 310.2 / 1004.3 * 100% = 30.9%

2002 was $822.7 billion

Commercial Banking $197.5 billion.
Credit Unions $18.2 billion.
Savings Institutions $23.1 billion.

They add to $309.8 billion.
This is 309.8 / 822.7 * 100% = 37.7%

2001 was $673.6 billion

Commercial Banking $129.8 billion.
Credit Unions $16.4 billion.
Savings Institutions $35.3 billion.

They add to $181.5 billion.
This is 181.5 / 673.6 * 100% = 26.9%

2000 was $558.4 billion

Commercial Banking $164.6 billion.
Credit Unions $13.8 billion.
Savings Institutions $54.9 billion.

They add to $233.3 billion.
This is 233.3 / 558.4 * 100% = 41.8%

To make matters worst, I think the Fed has lost its ability to forecast future economic trends. The problem is job growth and productivity.

See links: Ferguson's Speech on Interpreting Labor Market Statistics in the Context of Monetary Policy,

Bernanke's Speech on Productivity, Greenspan's Speech on Globalization,

and

Bernanke's Speech on The Global Saving Glut and the U.S. Current Account Deficit.

Economist link a rise/fall in the rate of labor productivity with an decrease/increase in hiring. They are now saying that job creation should pick up because of a decrease in the rate of labor productivity. However, this may not be true. There is an other measure of productivity call Multi-factor productivity.

See BLS's link: Multi-factor productivity.

Go to the following site and select all, add graph and see the results. BLS's Interactive Data

These graphs (they go only to 2002) show that even with increases in multi-factor productivity, there may be a stagnant job market. See series MPU740021 and MPU740022. These two graphs show that productivity for those two components have not changed yet there is stagnant job market and income growth.

No wounder Greenspan can not explain the long maturity bond market.