Reader Alan writes ...
Fed QE Expansion Not BeneficialDear Mish,
I enjoy your insightful observations, particularly your understanding that deflation is all about credit contraction. Does this mean that Federal Reserve monetary expansion, so long as it is less than private credit contraction, can have beneficial mitigating impact?
Fed To BlameBen Bernanke and his Federal Reserve weighed in yesterday afternoon with their latest attempt to keep the U.S. economy from plunging back into the tank of despair. Their latest, greatly-anticipated program, known in trade jargon as “Operation Twist,” aims to pull massive investments in short-term Treasury instruments and get them into riskier assets like long-term bonds, stocks, and mortgages by forcing these investments toward more appealing levels of return.
But the positive reaction the Fed probably sought was not forthcoming. After a short market pop yesterday after the Fed’s announcement, the general stock market plunged. The waterfall effect was felt overnight in world markets and has returned to the U.S. market today with a vengeance, with the Dow Jones Industrials down over 400 points as of this writing. Commodities markets were hammered even worse, including the previously hot trade in gold.
Worse, as if on cue, the Republican Congressional leadership piled onto the Fed by publicizing an extraordinary, unusual, and highly critical letter they’d just sent to the Chairman. To read it, parsing your way through the government-speak, you’d think Bernanke was the FBI’s Public Enemy Number One.
Stated the letter in part, "It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate.'' Right answer as far as it goes. It didn’t.
But the problem here is not Ben Bernanke or the Fed. The problem is that, roughly since the beginning of 2009, Washington’s political leadership has entirely failed to do its part to work in concert with the Fed to right the nation’s tottering economy. And this is something that politicians on both sides of the aisle find painfully inconvenient to share with the public. It reflects badly on their politicized and self-serving antics. So they blame the Fed.
In point of fact, whether the Fed’s efforts to provide monetary stimulus to the economy are Keynesian or post-Keynesian is not the real issue here. In the case of an economic emergency (such as 9/11) or an increasingly deflationary environment (such as our current era when plunging housing prices at least initially began to lead to a disastrous decline in the value of commodities), the classic initial fix is to flood the market with liquidity, gradually withdrawing the excess as soon as practicable to avoid the opposite problem of an inflationary environment.
That’s what Bernanke’s Fed has been doing for roughly three years now, yet it hasn’t seemed to have done much good. But the reason is not that the Fed’s policies are necessarily wrong. It’s just that there’s always an implied support expected from the Federal government, courtesy of a competent, concerned Congress that tailors new legislation to aid and abet the efforts of the Fed. In other words, when all the wagons are pulling together, the U.S. can usually extricate itself from any mess—and that means even the current morass.
It’s time to stop the Fed-bashing. It’s time to respect Bernanke for having done what he’s done. And it’s time to give him the hand that he’d been politely requesting all along for those who’d care to listen.