The collision of global markets and social mood

Monday, November 8, 2010

"This Is Just Monetary Policy"

The following quotes are taken directly from Federal Reserve web sites or from Bloomberg. These are the people that are tinkering with our economy.

Philadelphia Fed chief Charles Plosser openly admits that they have no idea what they're doing:

“It will be at least 50 years before we really understand very well what happened in 2008-2009."

New York Fed chief William Dudley brags that their unique position as fox guarding the hen house was given to them by congress:

"The Federal Reserve System, America's central bank, was created by Congress in 1913. With this act, Congress delegated to the Fed System its constitutional authority to manage the money supply."

Please note that their authority to manage the money supply could be rescinded at any time. This is not a radical idea, and all we need to do is demand it from our elected representatives.

Atlanta Fed chief Dennis Lockhart reminds us, yet again, of the Fed's mandate:

The Fed is mandated by Congress to pursue two policy goals—maximum possible employment and price stability (or put differently, the acceptable rate of inflation).

With unemployment steady at 9.6%, there is never any talk of failure to fulfill their mandate. Yet when he explains the rationale behind QE, there is zero mention of job creation.

"Further stimulus will raise demand. Purchases of Treasury securities will lower long-term interest rates (some of this effect on rates may already have been priced into the yield curve), and lower rates will generate some additional purchase and investment activity."

Dudley assumes that a slightly lower interest rate is all that's needed for consumers to suddenly refinance their household ATM machine en masse and businesses to begin hiring:

"When the Fed buys long-term assets, it pushes down long-term interest rates. This supports economic activity in a number of ways, including by making housing more affordable and boosting consumption in households that can refinance their mortgages at lower rates. In addition, low long-term rates reduce the cost of capital for businesses, thereby fostering more hiring and investment spending (on equipment, construction and machinery, for example) for any given economic outlook."

But then Lockhart starts getting circular. He believes deleveraging households will magically decide to take on more leverage once QE nudges interest rates just a little lower:

"I do believe there is scope, at the margin, for further monetary stimulus to induce households and businesses to overcome their current spending caution, even while deleveraging. A quantitative easing program of scale should have the effect of making credit cheaper and, if successful in upgrading the outlook, more available as loan demand rises."

St. Louis Fed chief James Bullard openly admits that the Fed relies on PR:

"We at the St. Louis Fed believe that public education initiatives and events like the one today are important in helping individuals, firms, and financial market participants make the best decisions possible."

Maybe that's why top Fed boss Bernanke wrote an op-ed in the Washington Post. QE's ineffectiveness has simply been a communications issue, and he's trying to educate us.

Habitual dissenter and Kansas City Fed chief Thomas M. Hoenig hints at the possibility of a more conservative Fed:

"Purchasing private assets or long-term Treasury securities shifts risk from investors to the Federal Reserve."

Dallas Fed chief Richard Fisher admits that none of this QE stuff has worked yet:

"The key pace of economic recovery is clearly insufficient to create the number of jobs the United States needs to bring down unemployment significantly in the foreseeable future. If we cannot generate enough new jobs to sufficiently absorb the labor force over the intermediate future, we cannot expect to grow final demand needed to achieve more rapid economic growth."

But leave it to Fed chairman Ben Bernanke to make it crystal clear:

“I have rejected any notion that we are going to raise inflation to a super-normal level in order to have effects on the economy,” Bernanke said.

He's right. Total outstanding credit is contracting. We're in deflation.

It seems as though the Fed has already had its effects on the economy.

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