Fed Independence: Raw

I'm going to try to get through this without any F-bombs because I really want you to pay attention and would hate to offend you somewhere along the way (unless you work for the Fed, in which case you might get offended anyway but were you even remotely clever, you'd take notes and report back because you know deep down that I am absolutely right) so buckle in and let's talk about the Fed's tricky predicament, shall we?

Let's start from the beginning, as usual. You know, the world before the unwashed masses knew that bald guy with the beard and cared much about the Federal Reserve, interest rates, or exotic financial instruments with an alphabet soup of acronyms for names. Do you still remember that time? I know I can barely recall what any of that felt like and much like Neo after he'd been unceremoniously unplugged from the Matrix, there are still days when I wish I could crawl back into that life I no longer remember. Guess what? We can't.

The Fed has argued over the years that an independent, politically-neutral Fed is a central bank best equipped to serve its dual mandate of price stability and maximum employment. Now we'll ignore the fact that the dollar has plunged 95% since the Fed's inception in 1913 and we'll even ignore the 13 or so recessions since (I am guessing on that number and don't care to look it up since I am not discussing that point, feel free to correct me) and we will even overlook the abject failure of accomplishing those two simple mandates. Failing in their duties is not necessarily cause for removal of the central bank (trust me, if it were up to me they'd already be gone) so we will disregard these failures for the sake of argument and focus solely on the subject at hand: an independent Fed.

The concept has always been kind of a joke but a necessary evil in a central bank scenario. It's a farce but it's valid in the sense that you can't have a politically-driven printing press available to whichever party happens to be turning the crank. Sure, that leaves the entire thing open to the whims of whomever is running the press but it's the lesser of two evils when you look at the political payoff administrations face versus the Fed's goal which is, ultimately, to stay alive and under the radar enough to keep silently printing away. Like any organism, their ultimate goal is survival.

Fast-forward to 2008. 2009. Today. It doesn't matter, surely the Fed understands the position it is in, the important part is whether or not we do.

My largest fear in the months ahead is that the Fed will be turned into a political machine, serving as little more than monetary whore to the whims of Tim Geithner in the Treasury and the deficit-hungry Obama administration. Like the stray dog thrown scraps at their back door each and every night, the administration will not take getting cut off from Daddy Fed's credit card too well should Ben Bernanke suddenly decide to grow a pair and finally say enough is enough.

What happens when the Fed decides to raise rates? Attempts to execute the exit strategy they don't have? What happens when the FOMC finally adjusts monetary policy to reality instead of serving as concubine to the pimp of debt? Do you think the administration will take this slight lightly? Oh you wish.

Tim Geithner called the Fed's actions during crisis "politically unpopular" but insists these were drastic times that called for drastic measures. But what happens in the scenario where the government - not the banks - has become so tolerant to the constant injection of Fed money that it suddenly starts shaking and heaving like a dope fiend in the throws of withdrawal once that steady infusion is taken away?

Worse, it is not beyond one's imagination to consider a Fed bastardized by Washington for refusing to provide the easy money fix. The administration will stop at nothing to feed its desire for more, even if that means siding with the (traditionally) conservative anti-Fed base to accomplish that goal. My greatest fear is the End the Fed movement being distracted by administration tricks and serving as suckers to execute payback against the central bank that suddenly grew a pair and refused to stop feeding the addiction.

Is it all that crazy a scenario to imagine?

End the Fed now or don't bother, it's pointless to go after them just to satisfy the administration's thirst for revenge when the asset purchases run out and there's no one left to prop up the housing market and the bond market and credit markets. Go after them because they've destroyed the dollar, not because Obama is shivering on the floor in the throes of DTs without his easy money IV.

Dallas Fed President Richard Fisher swore up and down last year that the Fed would not serve as handmaiden to the Treasury but with the precedent already set, does he honestly believe that the Treasury will appreciate being cut off without warning? By the time the Fed actually realizes they need to pull the trigger on the exit strategy they don't have and cut the Treasury's credit card, it will be far too late. And it's their own fault.

I painted this analogy tonight in an interview with Financial Armageddon's Michael Panzner (which you can expect to see on Going Concern this coming Monday once I've gathered my thoughts and upped my dosage of anti-depressants):

There's a crackhead who rides my nightly bus each and every day as I head home from work. Let's just say every night for a month I give him a dollar. Monday? Dollar. Tuesday? Dollar. Wednesday? I'm in a good mood and had a good day at work so I give him $2 and a cigarette. You get the point.

Then one day I suddenly get smart and realize I've handed over $32 of my hard-earned money to this guy who barely thanks me. But he's come to expect the skunk-haired tattooed girl's dollar and can't believe I have the audacity to cut him off. The expectation has already been made before I even step out of my office and out into the cold San Francisco night and God damnit, I better have his dollar or there's hell to pay.

If I get robbed by this crackhead on the night I finally tell him no, whose fault is that? His for being all rotten-brained and out for blood or mine for setting the precedent in the first place?

The Treasury is the crackhead and the Fed is my sweet little tattooed ass just trying to get the guy off my back. Surely they know as much.

The point here is this: I am by no means advocating ANYTHING the Fed has done in the last 97 years, specifically what they have done in the last 2. I am not giving Bernanke a pass and I am most certainly not saying I've suddenly switched sides. I am merely stating the obvious: this administration will stop at nothing to keep funding massive deficits and if the Fed won't keep the crack flowing, well, guess they'll learn what it feels like to get kicked in the balls by a crackhead on the ride home.

Let's keep this in mind in the months ahead as there will most definitely come a point when the Fed realizes it can no longer continue handing out cheap easy money without selling its own ass down the river. It's the definition of lose-lose: if they keep it up much longer, rampant inflation will be the final nail in their already precarious coffin. If they take away the crackpipe, they'll suddenly find themselves in the administration's sights.

Either way, there's no way out. The expectation is already there and it's too late to take back all the dollars they've already placed in that dirty hand.

Sorry, boys, you're on your own with this one, I'm too busy trying to end you for legitimate reasons to come to your rescue.

Chew on that for a minute. And if I am wrong about any of this, by all means let me know, JDA can handle a little criticism and a good kick to the balls she doesn't have should she deserve one.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.


Anonymous said...

JDA, let's face it. For much of our history, America has been a country addicted to cheap credit. It does seem to be at a peak at the moment. Think about it - a furniture store has to give away two years of free financing in order to "sell" a kitchen table. Why? Because their customers (a.k.a. me and you and the unwashed masses) want it that way. I did notice the NY Fed on the boob tube the other day rattling his sabre about higher interest rates come Summer but who knows, right? They claim (with a big capital C) to be winding down their purchase agreements for MBS in March but who knows on that? I'm not seeing it reflected in the rates offered at the moment - one place is paying more on their overnight account than on a 3 or 5 year contract - how's that for a rate inversion? The guy on the bus - I know, you're trying to show some heart but we create our own problems with some recipiants of our good will. No good deed goes unpunished. With smokes at $4 a pack, I give no one my Winston wimp ultra lights.


Pinky Swear said...