The Fed Acts
from Peter Radford
Look for Bernanke to be burned in effigy at the next meeting of the Republican Party leadership. In defiance of the brazen attempt to interfere with Fed independence by that leadership – if that word is appropriate – the Fed announced that it was going to engage in yet another new trick in order to support the economy. Citing continued, and possibly worsening, economic weakness the Fed unveiled a new trick.
It is a variant on the “twist” strategy last deployed in the 1960′s. In this latest version the Fed will sell off about $400 billion in short term treasury bonds, and buy an equivalent amount of longer term bonds. The idea being that this will influence the slope of the yield curve – the difference between short term and long term interest rates. A large shift into longer term, and thus more risky, assets should drive those rates down. By adding its own demand to the normal market demand for longer term securities the Fed will have the effect of driving down their interest rates. Conversely it will, of course, have the opposite effect at the short term end of the maturity spectrum. The net result will be to reduce the risk premium on longer term assets and thus makes investment more attractive. The desired outcome of the entire effort being to encourage business and household investment by reducing the cost of borrowing in the range of maturities normally associated with private sector activity in the real economy.
Will it work?
Well the 1960′s attempt at a similar thing is widely regarded as a flop. But circumstances were different back then. Now we are in a liquidity trap; businesses are awash with cash; and households are still digging out of debt. This is not an auspicious combination. So the context for the Fed’s initiative is not good. Still, we should give them marks for effort. Which is more than we can say for the folks over in Congress. There, it seems, all the effort is being applied to doing nothing.
As an addition, and just to rile the Republicans even more, the Fed also said it was going to reinvest more of its maturing cash flows in mortgage backed securities rather than in regular Treasury bonds. This is aimed to help provide more help to the real estate market, via an inflow of liquidity. Again, it might have little effect. But at least Bernanke is trying.
One last thing: the usual suspects on the Fed Board opposed the initiatives. Those people – Plosser, from Philadelphia; Fisher, from Dallas; and Kocherlakota, from Minneapolis, all objected to any kind of stimulative effort. According to these three the economy is in ruddy health, needs no help, and thus any stimulus will ignite horrible hyperinflation. They have all been wrong consistently since the crisis erupted, so it is re-assuring to see them maintain that consistency. It means we assuredly need to do something. Probably a lot more drastic than what was announced today.
But we are forced to accept what little help we can.
The people in the financial sector live in their own “lilliput” world: They shuffle money around amongst themselves, look at graphs and think they have solved the problem of growth in the real economy.
The answer is so simple that it hurts: Put unencumbered money into the hands of consumers in order to create demand for real products and services and watch corporations invest their hoarded cash in enterprises to meet that new demand.
And stop those d……d speculators from wrecking the economy!!
‘unencumbered money’…. I’ve got to remember that one.
OMGoddess! Hail Helge! or is it Sophia, goddess of wisdom. If you were a little girl, I’d say, “Out of the mouths of babes…” (well. maybe u R a babe anyway) What a beautifullittle comment, so succinct, cogent, potent. However, though I love the associations & potency of “unencumbered” what it means is essentially important. Also, whileI love the metaphorical power of the Lilliputian ShellGame analogy, the Club Fed Ponzi Casino metaphor is closer to accurate. Yet, an Australian or NZ Sheep Shearing Station or Slaughter House 5 may be most appropriate, which is why seeing & feeling the truth hurts. We are not simply discussing a silly game that the big predators do because their slightly neurotic, childishly selfish & incredibly foolish. They are deeply psychopathic, ecocidal maniacs who care more for their delusional scores & illusory status than they do for the quality of life on Earth. But, Peter, we are not forced into going along with their madness or their sick game. Club Fed is a house made of rules and, in this society of law (fundamentally the Constitution & principles of the Declaration which it guarantees), Club Fed rules are illegal & fraudulent. A law or Act of Congress based on fraud and trickery designed to systematically defraud the people and turn society into the context & breeding ground of ecocidal consumer droids is not a valid law, it is a massive crime committed “under the color of law” (a legal term denoting criminal government corruption). The nature or caliber of the crime is capital, capital treason to be more specific. Since the Fed is also the biggest fraud in US history (if not the history of the world), with the largest damages of all, and the Fed is a privately owned corporation whose acts are deliberately devised by its officers & owners in secret, it is the worst organized crime & criminal conspiracy of all. Hence it can be immediately charged as such, the Perps arrested, their records & assets seized, and their accounts frozen. Oh my! you say, “Whatever would we all do then!?” Hmmm….. Good question. What do you suggest? Hey, how about a thorough cultural exorcism and a new renaissance? Or, maybe we could get ready for the destruction of the civilized world as we know it (due to billions of climate change refugees & loss of coastal real estate over the next 20 years). Remember, the data now shows that the multiple interacting processes are accelerating immeasurably faster now. Total loss of Arctic summer ice will happen sometime between 2020 and 2050, though 2030 seems the best guess. As all RW economists know, over 70% of humans live in high risk disaster zones, mostly coastal zones. On the bright side, that means that RWEs & ecotects get to be the big heroes of the End Game Scenario, leading the way to a saner, greener future, or to space and, eventually, other planets. Cool, eh?