Saturday, August 22, 2009

The Fed Is Blowing It Again

Reuters reports in Fed official: rates to be kept low past upturn that the Fed is addicted to short-term thinking, serial bubble-blowing and a continuing war on savers:

Financial markets have not fully understood that the U.S. Federal Reserve's pledge to keep interest rates exceptionally low for an extended period means they will stay low beyond when officials normally would raise them, a top Fed official said on Friday.

"I don't think markets have really digested what that means," St Louis Fed President James Bullard said in an interview.

The Fed's strategy is aimed at promoting a future rise in inflation, which should provide an immediate boost in activity in anticipation of a future boom, but that hasn't happened, Bullard said.

The Fed has learned nothing from keeping rates too low for too long after the 2001 recession. The result was a false boom, a recent depression in manufactured goods and housing, and the first deflationary cycle in decades.

Long rates are higher than in the later 1940s, when the Fed also manipulated long-term rates. Despite all the Fed's actions earlier in this decade, ultimately both short- and long-term rates collapsed to all-time lows and multi-cycle lows, respectively.

My take from what the Fed is saying is: buy gold; buy gold; also don't forget oil, silver, copper, etc., et al., ad infinitum.

That it is a good thing to goose consumption by promising that inflation is coming is quite an amazing concept. Has the Fed learned nothing from the U. S. in the 1970s, from the most recent economic cycle, from Zimbabwe, or from Argentina, to name a small number of the many examples where cheapening the currency is a "bad thing"? The Fed should remember that for every indebted borrower there is a lender. It was the lender who earned the money and forewent the enjoyment of that money so that the borrower could use it either for enjoyment (e.g. homes, autos) or productively (business purpose). To deliberately and repeatedly favor the borrower when it was the lender who made the real sacrifice is both economically wrong and immoral.

As the greatest debtor perhaps in world history, the U. S. needs to start consuming less than it produces. That's defined as saving. The U. S. rose to economic leadership of the world that way. It cannot borrow and print money to prosperity anymore. At best, that would lead to more years of Japan-type stagnation or high inflation.

Perhaps the Fed should go back to such simple functions as assisting banks in money transfers, as well as to be a superbly-capitalized institution that can perform the Bagehotian function of providing liquidity to needy but viable banks at penalty rates to forestall runs on the bank.

We need to also consider removing the responsibility for full employment from being a co-equal goal of the Fed and go to a European approach of having it responsible for low or no inflation as its only policy mandate. Full employment is a political/social goal and truly belongs to Congress and the Executive to implement.

Meanwhile, Dr. Bernanke committed Fed malpractice from taking office in 2006 until the fall of 2008, when the patient had a preventable massive economic seizure/heart attack/stroke (take your pick). He is on the record as repeatedly having no idea of how pervasive and dangerous the credit bubble was in this country.

He has now embarked on an unprecdented PR effort to gain re-nomination. His patient was vigorous to respond to massive economic steroids, adrenaline and the like to the tune of $23.7 trillion dollars (per Neil Barofsky, who heads SIGTARP), but that does not change that he has been a disaster going back to the time when he helped persuade an aging Alan Greenspan at the Fed and the first MBA president to each sign on to the easy money, double-bubble policy that multiple observers correctly predicted would lead to the recent collapse.

It is hoped here that President Obama return to the tradition that a banker by training, not an economist, be the head of the world's most important bank. This would rule out Larry Summers, a brilliant economist but no banker. The Fed employs lots and lots of economists. But it is first and foremost a banking institution and it requires a prudent banker to get things back to a focus on restrained and prudent bank and non-bank lending in America

Copyright (C) Long Lake LLC 2009

1 comment:

  1. i dont get where youre coming from...this sends the opposite signal that the previous post (buy long treasuries) does...if were gonna have inflation, ok, buy hard assets, but in that case long treasuries will lose value to inflation over time...