the empty power of the fed according to sir allan and john hussman
John Hussman hussmanfunds.com
SNIP:
Wall Street continues to hold its breath about the upcoming decision
by the Federal Reserve. There's no question that the Fed's decision
will have a market impact. This is not because Federal Reserve
operations matter, but because investors believe they matter.
To believe that the Fed operations matter, you have to believe that a
$13 trillion economy is controlled by a few billion dollars of
reserves and discount window borrowings, none of which vary materially
from year to year.
The Federal Reserve lowered the "discount rate" and opened the
"discount window" a few weeks ago. Total borrowings from the Fed have
increased from about $360 million in July, to $3.2 billion currently.
While some analysts have breathlessly noted that "borrowings from the
Fed have soared to the highest level in years," the total amount of
this "fresh liquidity" is about the same as the total assets of the
[Hussman] Strategic Growth Fund.
FT piece:
ft.com
SNIP:
To his critics, who argue that the Fed fuelled the bubble by keeping
interest rates too low for too long in the early 2000s, this is an
exercise in passing the buck. But to Mr Greenspan, theirs is a
parochial explanation that greatly exaggerates the Fed's power in a
world of globally integrated capital markets.
When the Fed raised rates in 2004 and 2005, he points out, long-term
rates went down rather than up. "We were pushing against something we
could not control," he says. Long-term rates were "being determined
external to monetary policy" by shifts in the global balance of
desired savings and investment.
Critics say the Fed should have tried harder, raising rates sooner and
faster. Mr Greenspan counters that that would not have been acceptable
"to the political establishment" given the very low rate of inflation.
He says "the presumption that we were fully independent and have full
discretion was false."
But he says that even if the Fed had moved to raise rates more
aggressively "we would have failed as miserably in trying to get the
long-term rate up or the mortgage rate up as we failed in 2004."
Mr Greenspan is more certain than ever before that central banks
should not try to burst bubbles once they begin to inflate. "I am
coming to the conclusion that bubbles are inevitable," he says. "Human
beings cannot avoid them . . . They cannot learn."
Other big central banks were also running easy monetary policy in the
early 2000s, but Mr Greenspan does not believe that even collectively
they were driving long-term rates. "Every central bank was confronting
the same global forces we were and responded as a central bank would,"
he says.
In Mr Greenspan's eyes, these global forces are largely market forces,
unleashed by global economic liberalisation. He says central banks
could probably not control long-term rates even if they tried to
intervene directly in long-term markets.
Moreover, he thinks the influence of even those governments that
control large foreign exchange reserves is not all that great on the
markets. Japan, he notes, sold yen for dollars on a massive scale in
2003 and early 2004 before abruptly stopping its currency
intervention. "The impact of their going from huge accumulation of
dollars to none was barely visible in the dollar-yen exchange rate and
in interest rates and in everything else," he says. |
