First, a quick refresher from my “Monetary Policy is Working–A Little” post back in November 2008:

1. 1. The Fed did everything it could to fuel the money supply¹  in late 2008.  In 2 months, it increased the base money supply by 43%

      

   2. The Fed’s efforts dwarfed analogous (but much smaller) efforts after 9/11 to keep the economy from tanking:

      

   3. At the time, everyone understood that, while the Fed could increase the base money supply, it can only effect “narrow money,” and it would take a while for the broader money supply (including credit) to feel the impact.

So, what were the results. ::drum roll::

You will be forgiven for thinking that the results are a whole lot of nothing.  They basically are:  a completely unprecedented, roughly $1.5 trillion increase in the money supply, and zero noticeable impact?! What gives?  Our expectations.  ed note 7/5/2010:  stay tuned for a post explaining why the Fed’s printing money didn’t work.

I’ll close with one more interesting statistic:  thanks to the John Williams at Shadow Government Statistics, we can track an old friend.  For the past three months, M3, the broadest measure of the money supply, and a statistic no longer tracked by the Fed, has been growing increasingly slowly.  Just this month, it stopped growing altogether.   M3 contains all of the money supply measured by M2 but also includes all other CDs (large time deposits, institutional money market mutual fund balances), deposits of eurodollars and repurchase agreements.

What’s going on here?  Unfortunately, it is clear that the Fed’s monetary expansion simply didn’t result in a broader money supply increase. In fact, there was a contraction. One could argue that the money multiplier was therefore negative.

ed note 7/5/2010: stay tuned for a post about why monetary base expansion worked better in China than the US.

1. For an excellent explanation of all these money supply measures, see http://www.shadowstats.com/article/money-supply.

source¹

To listen to Robert Nardelli (Chrysler, formerly CEO of Home Depot), his company has minutes remaining.  I’ve certainly expressed a sense of urgency before in my job when working to close a deal, but it’s impossible to listen to him and not sense something profound.  Three of our great industrial giants are willing to speak publicly about endgame.  Rick Wagoner (GM) seriously discussed a “pre-packed” Chapter 7 bankruptcy (surely a trial balloon alternative if ever I’ve heard one) by quoting marketing studies which show consumers are overwhelmingly unwilling to buy a car from a bankrupt company.  When was the last time you heard the CEO of a major non-financial company speaking about such potential downsides alongside his competitors? Extraordinary times indeed.

But not extraordinary enough.

Towards the tail end, Alan Mullaley (Ford, formerly Boeing) was asked whether his company would exceed the new CAFE fuel economy standards.  His response?  That Ford would barely be able to make them, and would not be able to exceed them.  The others agreed with him.  That one response convinced me that any bailout of US automobile manufacturers should 1) be totally focused on saving jobs (millions of them, potentially), and 2) must be so severely punitive of the companies themselves that they don’t get out of jail free.  These three companies have succeeded in lobbying their way out of innovation legislation (fuel economy, safety, public transport, etc.) for decades.  Consumers have responded by choosing foreign manufacturers preferentially (e.g. Toyota who pushed hybrid technology as a differentiator).  US manufacturers drop to the bottom of the list of consumer choices because of the manufacturers’ complacency, and then a contraction comes along and endangers the bottom of the barrel.  Surprise, GM, Ford, Chrysler, you now inhabit the bottom of the barrel precisely because of your complacency!

A little capitalist Darwinism is in order here.  If these guys had worked on fuel economy and alternative technologies 20 years ago, CAFE standards would be unnecessary now.  For want of those prior investments, it is not the Government’s job to subsidize their lack of business skills.  Do what we need to to save the jobs (lest we further endanger the economy), but otherwise I vote let these companies suffer the fate of others who stick their heads in the sand.

1. Businessweek online, “Auto Execs in the Hot Seat” http://www.businessweek.com/bwdaily/dnflash/content/nov2008/db20081118_113319.htm?chan=rss_topStories_ssi_5

To get a sense for what the Fed has done recently, take a look at the utterly unprecedented jump in the adjusted monetary base²:

Your eyes are not deceiving you:  the Fed has pumped an unbelievable amount of money into the monetary base.  Classic monetary policy at work, right?  Well, it’s certainly an implement out of the classic monetary policy toolbox, but this is an unprecedented action:

Now the critical question:  is it working?  Well, a little.  In comparison to the monetary adjustments made after 9/11 to offset the economic shock, the current adjustments are three to four times bigger, but they’ve had a substantially smaller impact on the broader money supply³:

Compare the two red arrows in the second figure to the orange arrows in the figure immediately above.  The absolute adjustment to the monetary base (red arrows) in 2001 was somewhere between a quarter and a third as big as the utterly unprecedented influx the Fed just let loose, but the results (orange arrows) is barely noticeable.  What’s going on?  The simplest explanation I’ve heard comes from Bob Brinker, who explains that M2 has seen the impact of the past two months’ massive evaporation of wealth, while the absolute currency (monetary) base hasn’t.  To my eyes, we can therefore visualize the “spread” between BASE and M2 on the right-hand side above as that very evaporation itself

Speaking of spreads, it looks like there’s another indicator that the Fed’s policies are working a little.  The TED spread⁴ has improved dramatically:

Recent TED Spread history. ⁵

All of this points towards a similar conclusion to the one I hinted at in my post earlier this week:  monetary policy alone isn’t going to solve this problem.  A solution will require some time and some fiscal policy—both of which will have to wait for the end of the lame-duck period and thus for 2009.

1. the St. Louis Fed reports most of its major money supply “observations” every week, on Fridays
2. the Fed series is called “BASE” and you can find it, and the rest of the measures (“series”) I am referring to in this post on FRED at http://research.stlouisfed.org/.  The BASE data, for example, can be found at http://research.stlouisfed.org/fred2/series/BASE.
3. as measured by a different Fed series, called M2, which is physical currency (M0) plus demand deposits such as checking (M1) plus all manner of time deposits (savings, CDs, etc.).  For an explanation of the various money supply measures, see http://en.wikipedia.org/wiki/Money_supply.
4. difference between LIBOR and the 91-day Treasury Bill, roughly indicating the price of the credit supply
5. source: Bloomberg, http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP%3AIND