Resistance to Fed policy is futile, Professor Krugman.

Over the weekend, we got a preview of Paul Krugman's new book, which has the not-very-subtle title "End this Depression Now!" Yep, that's an exclamation point, perhaps the first ever in the title of a book by a Nobel Prize winner. And yep, Krugman doesn't think we're in a recession. He's calling it a Depression, and yes, I've dutifully capitalized that scary word. 

The excerpt appeared in the New York Times Magazine, the pages of which Krugman has taken to from time to time when he wants to lay out a more involved argument than the column inches he's allotted on the NYT's op-ed page will allow. It also appeared just a few days before the Federal Reserve's Open Market Committee met to decide on the direction of U.S. monetary policy. 

Bernanke effectively hired Krugman, when Bernanke ran the economics department at Princeton. And Krugman clearly thinks that Princeton Bernanke was a much different economics guy than Chairman Ben. And when I say "much different," what I mean is that Krugman has no qualms about going out on a very long limb here. Like far enough to bring out the "Star Trek" comparisons.

I'm not kidding, and I'm not talking about Captain Kirk. We're talking "Next Generation," specifically the most terrifying moment that most Star Trek fans have ever experienced: the forced assimilation of starship Enterprise Captain Jean-Luc Picard into the cybernetic hive-mine species, the Borg. Bottom line is that Krugman is very far from happy with how Locutus of Fed has dealt with the economy, particularly the problem of high unemployment:

The Bernanke Conundrum — the divergence between what Professor Bernanke advocated and what Chairman Bernanke has actually done — can be reconciled in a few possible ways. Maybe Professor Bernanke was wrong, and there’s nothing more a policy maker in this situation can do. Maybe politics are the impediment, and Chairman Bernanke has been forced to hide his inner professor. Or maybe the onetime academic has been assimilated by the Fed Borg and turned into a conventional central banker. Whichever account you prefer, however, the fact is that the Fed isn’t doing the job many economists expected it to do, and a result is mass suffering for American workers.

For his part, Bernanke forcefully denies this. He did so emphatically at his press conference yesterday (see below), when questioned about his academic excoriations of the Bank of Japan and its struggles in the 1990s, as the Japanese economy fell into deflation. Bernanke insists that he criticized the actions of Japan's central bank in the '90s because the country was already experiencing deflation. From his comments yesterday, you'd conclude that he doesn't advocate that the Fed do what he recommended the Bank of Japan do because he doesn't think the U.S. is dealing with deflation (which is basically a collapse of prices, including debt pricing, that can keep an economy down...well, maybe forever, if the spiral gets bad enough). 

That said, Bernanke sounds a lot like a typical conspiracy theorist Fed central banker when he insists that the Fed has invested too much in the "asset" of its low-inflation credibility to do more to speed the decline of unemployment. For decades, Fed critics have maintained that the institution puts the interests of the finance industry above those of labor by keeping inflation low to ensure the future integrity of debt (inflation erodes the future value of debt, favoring the interests of creditors over debtors).

This is more than a spat. It's a battle of economic titans. Krugman has fired an impressive opening shot, using a memorable slice of pop culture in the process. Bernanke has sort of fired back, saying that a higher inflation target than the current 2 percent — say 4 percent — would be "reckless." 

Not exactly "resistance is futile." But that's not something you would ever expect from Gentle Ben, even if he is Locutus of Fed. So who is Krugman in all this? Mister Data with a beard?

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A jobs sign hangs above the entrance to the US Chamber of Commerce building in Washington, DC.

Well, I wasn't even close. Yesterday, I predicted that we'd see another decent if not spectacular jobs report from the Bureau of Labor Statistics. My number was 225,000 jobs added. But the actual number, released by the BLS this morning, is miles lower then that: 120,000.

That's the bad news. The good news, if you can call it that, is that the national unemployment rate fell to 8.2 percent from 8.3 percent. But that's just because more than 120,000 Americans quit looking for work. (Did I say this was the good news part?)

There was some truly good news. The trend of the BLS revising up the previous month's result continues: a gain of 227,000 jobs was originally reported for February, but that number has been adjusted to 240,000.

It's a good thing the markets are closed today for Good Friday, as this "surprise to the downside" — given that most economists who follow the labor market expected another month of 200,000-plus new jobs in March — may very well not have been priced in (basically, already accounted for), given that the major stock indexes shed some gains this week.

So what's the takeaway? Two things could be going on here: The economy could be in a holding pattern, waiting for additional government action — which isn't going to come from the President and Congress, not in an election year. The Federal Reserve, after backing off another round of "quantitative easing," may take another look at that strategy. The bottom line is that there simply isn't enough demand out there, beyond cars and washing machines ("durable" goods that consumers hang on to for several years), to support a level of hiring closer to what the economy needs to get back to pre-crisis levels. For that, we'd need to see more like 400,000 new jobs per month.

But there's a more troubling possibility, which is that GDP growth, after surging to 3 percent in the fourth quarter of 2011, has retreated to barely 2 percent — just enough to keep the economy in positive territory but not enough to accelerate the dismal employment situation. Ominously, we could be in for an ever-so-slightly better performance than in 2011, when GDP averaged less than 2 percent for the entire year and brought on a phenomenon I call "stuckflation" — a low-inflation economy that nevertheless isn't going anywhere.

Of course, March could be a blip, a disappointing BLS report in the midst of an overall improving trend. Come April, we'll pick up the pace and get back to 200,000-plus new jobs per month. That's the optimistic scenario. The pessimistic scenario is that business confidence is extremely fragile and subject to any little wobble, at least in terms of hiring. Because on the positive side, the data have been showing for a while now that the pace of firings and layoffs has slowed.

So despite the fact that the auto industry (arguably the strongest part of the entire economy) and...bars and restaurants are hiring at a nice clip, there are still 12.7 million people unemployed in the U.S. It could take a decade to repair this damage, if we have more months like March. If you plan on going to college and graduating in the next ten years, this isn't something you want to confront.

What does the bad March report mean for California? Well, we're likely to see our state unemployment level unchanged at 10.9 percent. That's among the worst in the nation. And it's worse in Los Angeles County, at about 12 percent. Remember, we got hit hard by the housing and related construction downturn. So we're going to suffer in double-digits for months and maybe years to come. 

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A jobs sign hangs above the entrance to the US Chamber of Commerce building in Washington, DC.

Time to take a crack at handicapping tomorrow's official March jobs report from the Bureau of Labor Statistics (BLS). If you'll recall, February came in at 227,000 and the national unemployment rate remained at 8.3 percent. That was good but not great; the economy really needs to add close to 400,000 jobs each month to reduce the rate to a pre-crisis level. But for the moment, adding 200,000-plus jobs each month shows that the economy is slowly recovering and expanding, even if GDP growth is only running at 2-2.5 percent.

There's a wrinkle to the March numbers — the data is usually released in the first Friday of the month, and this time around Friday is a holiday for the stock market (Good Friday). This basically gives traders a long weekend to digest the news.

Anyway, to the handicapping! The ADP report came out yesterday and said the economy added 209,000 in March. The Bloomberg consensus — a survey of 77 economists — says the number will be 205,000. Business Insider has been crunching various datasets of late and comes up with 193,000, a somewhat alarming figure given that we want to see 200,000 at least to support the idea that GDP is puttering along at around 2-2.5 percent, down from the 3 percent we saw in the fourth quarter of last year, but not the discouraging sub-2-percent pace we witnessed in much of 2011.

It's worth noting that last month, both ADP and Bloomberg were off, to the negative side, by about 10,000 jobs. Business Insider erred well to the positive side, at 285,000 (Overcompensating with the March prediction, perhaps?)

I thought we'd come in above January's 243,000 — which actually wound up being 284,000, after the BLS revised the data — so I was off by 17,000 or so. That's an encouraging trend, by the way — not my being wrong, but the BLS revising higher, with regularity, the previous month's numbers.

Everyone figures that the March number will be lower than the initial, unrevised February number, so I'm going to assume the contrarian stance and restate my belief that first quarter GDP is better that 2-2.5 percent. I'm basing this on one factor: that consumers are buying more new cars and other durable goods than in 2011. We're on track to sell at least a million more new cars in the U.S. in 2012 than we did in 2011. Consumers need to take out loans to buy these cars, which means growth both in manufacturing and financial services, to meet the demand for new autos, which is also a demand for new auto loans. An added benefit is that buying new cars means trading in old cars, which improves the used car business (and generates used-car loans).

The same reasoning applies to washing machines, refrigerators, and other stuff meant to last three years or more. Minus the trade-in factor, of course.

Also, as a sidebar, I think many economists and the Federal Reserve are moving into a conservative mode. The Fed especially doesn't want to see too much GDP growth because it will create pressure to raise interest rates to head off inflation, and that will be a problem for equities markets. Please note that he stock market is already disappointed that Ben Bernanke & Co. won't be doing another round of quantitative easing, or QE3, to urge on the reflation in equities.

My margin of optimistic error seems to be around 15,000 jobs, so I'm going to say we'll come in at about 225,000 for March and see the unemployment rate nationally fall to 8.2 percent.

AP Photo / J. Scott Applewhite

The Federal Reserve Building in Washington, DC.

The Federal Reserve released the minutes from its most recent Open Market Committee meeting today. Bottom line: There will be no additional round of "quantitative easing," or QE3. This means the Fed won't print more money to buy bonds and drive down long-term interest rates. 

At the Huffington Post, Mark Gongloff had the best take:

This affront to humanity sent the stock market tumbling immediately, making it seem almost as if the market's rally to multi-year highs had less to do with actual economic growth than with an addiction to Fed stimulus.

At the worst moment for the market this afternoon, the Dow Jones Industrial Average was down about 130 points, or about one percent, while the S&P 500 stock index was also down about one percent. Both markets were on track for one of their worst days of the year.

Gold, silver and platinum, which have thrived under a free and easy Fed, fell even harder. Gold at last check was down nearly 2 percent to $1650.40 an ounce.

U.S. Treasury bonds fell, too, as the Fed's minutes disappointed market hopes that Bernanke & Co. would soon launch another program to print money and buy bonds. The 10-year Treasury note recently yielded 2.25 percent, which is still ridiculously low, thanks in part to the Fed still keeping its promise to hold short-term interest rates near zero until sometime around the Second Coming.

Gongloff didn't specify the Second Coming of what, or whom. Alan Greenspan?

In fact, even at that 2.25 yield, which is notably higher than a few months back, when the 10-year was yielding less than 2 percent, comes out as negative when you consider than inflation is running around 2-3 percent, above the Fed's stated 2-percent target. Historically, inflation runs over 3 percent, so you can see how compelling the "flight to safety" factor in bond buying really is these days.

The Fed might still do QE3. It would be an obvious option if the recovery grinds to a halt and growth for 2012 comes in significantly lower than 3 percent, thereby pushing unemployment back up. But for the moment, the recovery looks to be on track, although that track is slow. So the Fed is acting as expected.

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Bank of America, a big U.S. bank that's a symbol of "Too Big to Fail."

In a very aggressively argued essay by Harvey Rosenblum in the annual report of the Federal Reserve Bank of Dallas, the difference between Very Very Big Banks and small banks is blamed for the Federal Reserve's general inability to use monetary policy to "fix" the financial crisis:

The machinery of monetary policy hasn’t worked well in the current recovery. The primary reason: TBTF financial institutions. Many of the biggest banks have sputtered, their balance sheets still clogged with toxic assets accumulated in the boom years. 

In contrast, the nation’s smaller banks are in somewhat better shape by some measures. Before the financial crisis, most didn’t make big bets on mortgage-backed securities, derivatives and other highly risky assets whose value imploded. Those that did were closed by the Federal Deposit Insurance Corp. (FDIC), a government agency. 

Coming out of the crisis, the surviving small banks had healthier balance sheets. However, smaller banks comprise only one sixth of the banking system’s capacity and can’t provide the financial clout needed for a strong economic rebound.

The entire essay is worth reading, as a reminder that TBTF could justifiably be relabeled "Even Too Bigger to Fail," because the majority of financial assets in the U.S. are now concentrated in even fewer large banks than before 2008.

But the point that Rosenblum makes about small banks is worth carefully considering. It was all about risk. The small banks didn't make the crazy bets and earn the monster rewards. But their balance sheets aren't in ruins, either. The challenge will be to scale-up their example — without scaling it up too far! This leads to a politically difficult conclusion: Will it eventually be necessary to end TBTF by breaking up the big banks?

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