i find it interesting that there is so much buzz and noise about volcker, especially in his old has-been record as inflation fighter
I think he is perceived as honest and free of improper influences, and thus a valuable rarity. Who knows what his present policies would be, but he is on record as having been on 'let 'em fail' side, so not too terribly out of tune with sensible policies.
He is being embraced by O! for these qualities, which O! and his administration lack. I suppose the thinking is that O!, who is emptier-than-Al-Gore's suit, will somehow have some of V's good qualities rub off on him if he stands near him with Beithner both shunted off to the side.
It's nice Kabuki, 1959 Politburo style, but ultimately stupid for it is sound and fury devoid of meaning and substance.
We are screwed.
As to your other points, Jesse covers them very well:
jessescrossroadscafe.blogspot.com
Quantitative Easing: We Are All Central Planners Now
"What does the Fed think will change if they can avert a crash again and maintain the status quo at the cost of yet another asset bubble?
Is the Fed trying to maintain an inherently unstable economic order that requires increasingly extraordinary means and ever greater imbalances to keep it from collapsing? I believe that they are.
Will the Fed have to keep assuming more and more power and control over the real economy to sustain the unsustainable until they destroy what they had intended to save? I think the answer is yes."
Quantitative easing effectively means providing the financial system with liquidity well in excess of organic commercial demands and conventional open market operations. The Fed does this by expanding its balance sheet extraordinarily, hence the spectacular growth in 'excess reserves' of commercial banks.
The Fed does this for several reasons. The first obviously is to supply reserve capacity to the banks when their own reserve base has deteriorated badly to the point of insolvency. A second reason is to permit the Fed to expand its Balance Sheet in an extraordinary manner, in order to absorb assets that cannot be marked to market by a commercial bank without significantly damaging their own balance sheet. A third reason of course is to take an accommodative stance with regard to real interest rates when nominal rates approach zero.
One of the issues that quantitative easing creates is that it is problematic to continue to effect a fed funds rate. The usual method is to set a target, and then make changes in the levels of liquidity in the system through adds and drains of financial assets like Treasuries to achieve it. This is why Fed Funds is called a 'target rate.'
But how can one do this when the tool of policy making has been thrown in a ditch by the adoption of quantitative easing, by definition driving rates to zero? It is all "adds" and no drains, stuffing the goose beyond its capacity as it were.
Make no mistake: quantitative easing is to central banking what the introduction of nitroglycerin was to conventional warfare. It kicks the power of financial engineering up a notch, to say the least, and brings in an element of risk of more than normal inflationary pressures.
The Fed can set a 'floor' under the overnight interest rate without engaging in open market operations by offering to take reserves and pay a set rate as interest. Presumably banks will take a riskless .25% rather than place funds in the markets at something lower than this. They will not achieve a higher return for a commensurate risk because the system is awash with liquidity.
This works in the first wave of quantitative easing. But what happens when the Fed seeks to add additional tranches of funds through market purchases of even more dodgy assets, or even begin to exercise more control over the banking system as the economy recovers to avoid a hyperinflation? "Draining" through open market operations is not easy if the banking system is still more fragile than its nominal balance sheets would suggest.
The Fed is now seeking a 'deposit rate' which in addition to its 'overnight rate' would commit banks to place funds with the Fed for a set period of time, in the manner of a certificate of deposit rather than a demand account.
This article from Bloomberg is an indirect pre-announcement from the Fed that they may abandon the notion of 'target rates' altogether, and set interest rates by fiat, rather than achieving them in the marketplace by adjusting levels of short term liquidity. This marks a transition from 'Phase I' to 'Phase II' of Bernanke's monetary experiment.
I want to emphasize the significance of this change.
This is becoming a pure 'command and control' economic financial engineering by the Fed, in which it sets rates by its decision, without engaging in market operations which could encounter headwinds against those policy decisions. It is similar in magnitude to the Fed monetizing Treasuries directly without subjecting interest rates to the direct discipline of the market. This is of a pedigree more in keeping with a command and control Five Year Plan than a market economy. Extraordinary times call for extraordinary measures the Fed and its apologists might say.
I do not wish to overstate this, but it also suggests that a continuation of the Fed's open market purchases would place an excessive strain on its own balance sheet, which has a much lower percentage of Treasuries than at most times in its history. One would have to wonder if the Fed itself could pass a stress test or a serious audit of the quality of its stated assets.
It is less costly for the Fed to pay interest directly on bank deposits and just set the rate, especially if they are in the form of time defined certificates of deposit, than if it were to continue buying up decaying financial assets to achieve its goals.
In a sense, the Fed is competing with commercial enterprise in 'borrowing' from the banks for its own balance sheet, to affect its policy measures. This is what is meant by setting a floor under the short term rates.
As an aside, I found this quote in the Bloomberg article quite to this point:
"By raising the deposit rate, now at 0.25 percent, officials reckon banks will keep money at the Fed and not stoke inflation by lending out too much as the economy recovers."
The level of reserves they are holding and the rate which they return through their interest program are being used to throttle lending to the commercial companies at market clearing rates. Granted this is all a part of a more aggressive and complex implementation of interest rate policy, but it presents a new level of financial engineering and explicit control of money flows that is quite likely corrosive to a market system, and fraught with unintended consequences.
The US Federal Reserve did not originate the concept of quantitative easing. It began with the Japanese central bank, which one might uncharitably say erred on the side of supporting the banks and the corporate conglomerates, and drove the economy into a protracted slump. There were, we should add, significant mitigating factors including the Japanese demographics and penchant for high savings at low rates in the government postal system.
This is an 'experiment' on the part of the UK and US in their own go at quantitative easing. The risk is obviously inflation, and they are seeking to downplay that at every turn. It is the perception of inflation that the Fed will seek to quell, as it continues to adjust the money supply in ways and with tools that it thinks it understands, but which it has never used before. Perception of inflation is their greatest fear. Once it takes hold it is difficult to stop.
One has to wonder what the anticipated endgame might be. A global currency regime with comprehensive central planning? Since 1999 the financial engineers at the Fed have been unable to achieve sustainable growth in the US national economy as is it is now constituted without generating asset bubbles through abnormally low interest rates. As recovery goes the last was anemic in terms of jobs growth, and this latest effort appears to be even more fruitless.
What does the Fed think will change if they can avert a crash again and maintain the status quo at the cost of yet another asset bubble?
Is the Fed trying to maintain an inherently unstable economic order that requires increasingly extraordinary means and ever greater imbalances to keep it from collapsing? I believe that they are.
Will the Fed have to keep assuming more and more power and control over the real economy to sustain the unsustainable until they destroy what they had intended to save? I think the answer is yes. |
