Fed Chairman Ben Bernanke has done it. He's thrown down the gauntlet. Desperate times call for desperate measures, as they say, and the Federal Reserve has now gone "all in."
Specifically, Bernanke and other Fed policymakers ...
• Slashed the federal funds rate to a range of 0% to 0.25% from the previous target of 1%. That is the lowest level in U.S. history. The Fed is now pursuing the same "ZIRP" (Zero Interest Rate Policy) strategy Japan tried several years back to boost its economy.
• Said they would "support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level." That's Fed-speak for "We're going to print money and flood the banking system with massive amounts of reserves."
• Reiterated the Fed's intention to buy "large quantities" of debt sold by Fannie Mae and Freddie Mac, as well as the mortgage backed securities (MBS) that those agencies guarantee.
• In fact, they upped the ante by saying the Fed "stands ready to expand its purchases" if necessary. And it said it was continuing to study whether it should also buy long-term U.S. Treasury bonds.
• Said the Fed will "continue to consider ways of using its balance sheet to further support credit markets and economic activity." What does that mean? Potentially whatever the Fed wants it to mean, as far as I can tell.
The Fed and Treasury are already directly manipulating the secondary market for home mortgages. And they've announced that they're going to intervene in the consumer loan market, too.
Why shouldn't commercial real estate mortgages come next? After all, credit conditions there are tight, aren't they?
Or how about buying the Dow? Higher stock prices would allow troubled banks and corporations to raise money and support the economy ... wouldn't they?
What about corporate bonds? Junk bonds? Artwork? My old football card collection?
I used to think the idea that the Fed might buy assets of all shapes and sizes as kind of crazy — "Kookburger" stuff, to use one of my colleague's terms.
But now? Nothing surprises me.
The 10 Questions
We Should ALL Be Asking ...
Wall Street couldn't be happier with what the Fed and Treasury are doing. Thunderous applause erupted in trading rooms after the Fed's statement came out Tuesday. And the buying of stocks came fast and furious. Ditto for bonds.
I watched fund manager after fund manager — you know, the supposed capitalists out there — come on television and praise the Fed. Heck, they were urging even more socialistic ... er, intervention ... to support the market.
Apparently almost everyone agrees with the idea of a small group of men and women deciding that THEY know the "right" price for mortgage bonds, Treasury bonds, or other assets — while the entire universe of private investors out there has things "wrong."
And the consequences? Nothing to worry about, according to the pundits ...
Question #1: Is the 10% plunge in the U.S. dollar in the span of a few days a clear vote of "no confidence" in the Fed's policy from currency traders?
Pundits' answer: Who cares! We can keep shafting our foreign creditors and they'll come back for more. They always do.
Question #2: How about the deterioration (albeit minor) in the cost of insuring U.S. debt against default?
Pundits' answer: Who cares! We're the U.S. and investors will always flock to our shores.
Question #3: Aren't we completely abandoning 200+ years of American free market principles?
Pundits' answer: Don't bother us with that long-term stuff.
Question #4: Isn't the Fed submitting prudent savers to total abuse by slashing the returns they can earn on their savings accounts and Treasuries?
Pundits' answer: Who cares about them! We need Americans to spend, spend, spend!
Question #5: Was it wise to "fix" the dot-com bubble with easy money ... which led to the housing bubble that has since popped ... and which the Fed is now trying to fix with ... you guessed it ... more easy money?
Pundits' answer: Quit whining! The Fed never makes mistakes. You just don't get it.
Question #6: The idea that maybe, just maybe, the cure for inflated home prices is ... drum roll please ... lower prices? Prices that allow NEW buyers to purchase homes without taking out ridiculous mortgages — and eat bread and cereal to make their payments?
Pundits' answer: We can't have that! We have to prop them up!
Question #7: What about the hundreds of billions of dollars of additional debt our country is taking on? The first TRILLION-dollar deficit in U.S. history? The massive interest costs my little girls, and probably THEIR children, are going to pay for years and years as a result of all these bailouts?
Pundits' answer: Who cares! That's someone else's problem.
Question #8: And finally, have we forgotten the whole concept of occasionally having a cleansing recession? A downturn that, while painful, cleans out all the crud — the crud built up by years of recklessness by greedy bankers, clueless speculators, hands-off regulators, crooked scam artists, and head-in-the-sand policymakers?
Pundits' answer: Nope. We have to prevent that at all costs. Don't bother us with that "healthy business cycle" claptrap.
Look, I keep hearing about how the Fed is doing a great job. I keep hearing that "there are no atheists in the foxhole" and that the government has to do what it's doing to save us all from apocalypse.
But I have two more questions ...
Question #9: What if the economy and asset prices are going to get where they're headed ... no matter WHAT the government does?
What about the idea that we're just delaying the inevitable by trying to prop up home prices?
And the biggest question of all ...
Question #10: What if we spend all this money and end up with nothing to show for it — except for a multi-trillion dollar bill that we'll be paying for the rest of our lives?
Sound crazy?
Then maybe you should check out the December 16 piece in the Wall Street Journal entitled "Barack Obama-san." It chronicled how Japan spent exorbitant amounts of money trying to revive its economy after the twin real estate and stock market busts there.
The steps that Japan took included a 10.7 trillion yen stimulus package in August 1992 ... a 13.2 trillion plan in April 1993 ... 6.2 trillion in September 1993 ... 15.3 trillion in February 1994 ... 14.2 trillion in September 1995 ... 16.7 trillion in April 1998 ... 23.9 trillion in November 1998 ... and 18 trillion in November 1999.
Grand total: A whopping 118.2 TRILLION yen or about $1.35 trillion at today's dollar-yen exchange rate.
Yet it was all for naught. The economy still suffered a "Lost Decade" of deflation and lackluster growth. Or as the Journal explained:
"Keynesian 'pump-priming' in a recession has often been tried, and as an economic stimulus it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment."
Maybe Bernanke will get what he wants. Maybe his helicopter drops of money will pay off. Maybe the incoming administration, and its team of economic advisors, will do better than the Bush bunch.
But considering the success rate of the past government programs targeted at helping the housing and credit markets (TARP anyone?), I wonder why nobody is worried about waking up another day older ... deeper in debt ... and right back at square one.
Until next time,
Mike
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