The Audible Squeal For More Easy Money From the Fed

One of the very first things you learn in auditor kindergarten is the fraud triangle: a simple demonstration of the three main drivers of fraud. Motive, rationalization and opportunity are the three causes of any fraud, sometimes by themselves and sometimes in combination with each other. The Fed has all three (rationalization: whatever it takes opportunity: hello, they own the printing press and sell it back to us with interest motive: save its own ass... see also: whatever it takes) but its motive at the moment should be self-preservation above all else. I don't believe we are entirely done with the argument over how politicized the Fed has become, nor do I believe the Fed is free of external pressure to fix this thing even if it means taking the dollar down in the process. Congress has no fucking idea what it is doing, it just wants more money. Well gee, where do we turn when we need money?

Bloomberg votes the FOMC will pass on more crap assets this time around (even if some of them *ahemJanetfuckingYellenI'mtalkingtoyou* have to sit on their hands for two days to keep from squealing for more easy money):

Federal Reserve policy makers signaled they will probably pass on providing more stimulus at their Aug. 10 meeting and wait to see if signs of weaker economic growth persist.

Chairman Ben S. Bernanke told lawmakers in South Carolina yesterday that consumer spending is “likely to pick up” amid a “moderate” expansion. St. Louis Fed President James Bullard said on July 29 that he expects the “recovery will continue through the fall.” Three days earlier, Philadelphia Fed President Charles Plosser said in a Bloomberg News interview that calls for more Fed stimulus “are premature.”

Officials indicated they may ease more should the economy falter after reports of a flagging housing industry and persistently high jobless rate. Options include strengthening the pledge to keep interest rates around zero, cutting the rate the Fed pays on excess bank reserves, or buying more Treasuries or mortgage bonds. No consensus has emerged among policy makers for any of those actions, remarks by officials show, and Bernanke didn’t mention them in a speech yesterday.

“You have to get a significant downward revision to their forecast that spills over into next year” to get the Federal Open Market Committee to vote for more easing, says Laurence Meyer, a former Fed governor and vice chairman of forecasting firm Macroeconomic Advisors LLC in Washington.

And we all know in order to get a significant downward revision in their forecast there would have to be some level of collective cognizance that you and I both know is completely impossible for them. There would first have to be a wave of recognition that would hit some of the FOMC's blindest (hint: print, print, print) and then a cooperative effort not to play bitch to the economy's whims. The Fed is back in that same familiar corner it was not that long ago trying to make paper "profits" out of crap assets and sitting very still so as not to cause much alarm. The pitchforks are raised all over the place - mostly DC ahead of November - and while racism and ethics plaster the news, Bernanke can sneak off and actually come up with a strategy. But he won't.

There are two ways out and both of them lead to the Fed exposing itself as a fraud.

It can let this stupid deflation scenario play out (if it's as bad as they say it is supposed to be) and watch prices flop. How about this recent paper by St Louis Fed President James Bullard titled (I am not making this up) “Seven Faces of ‘The Peril’”? For fuck's sake it reads like Revelation. As in you can believe this or you can believe that four horsemen really come out of the sky bringing hellfire and brimstone with them. This is the same guy who said the Fed is firefighter, not arsonist in comments earlier this year. Here's a quick recap:

[T]he monetary policymaker only uses nominal interest rate adjustment to implement policy. The policymaker is completely committed to interest rate adjustment as the main tool of monetary policy, even long after it ceases to make sense. Many of the possible responses discussed in Bullard’s manuscript attempt to remedy this situation by recommending a switch to some other policy in cases when inflation is far below target. The regime switch required must be sharp and credible. Policymakers have to commit to the new policy and the private sector has to believe the policymaker. Unfortunately, in actual policy discussions, nothing of this sort seems to be happening. Both policymakers and private sector players continue to communicate in terms of interest rate adjustment as the main tool for the implementation of monetary policy. This is increasing the risk of a Japanese-style outcome for the U.S. A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.

Get thee BEHIND me, Greenspan!

The only solution is drastic intervention on the part of the Fed because, well, there's not really anything left to do. Maybe you all won't care when your dollars buy less (they'll tell you this is because they were combating deflation and prices had to be forced up to keep people in jobs that won't stop shedding unless they intervene or some such nonsense) but more of you have a job. Don't run to Best Buy and get that flatscreen just yet, cowboy, credit has to come from somewhere and it isn't the bank right now. Hopefully the Fed will get into the securitized LCD business and you'll score yourself a sweet 62" plasma. For $19999. Sorry, it was $799 a few months ago but then Bernanke did the thing with the thing and uhhh QE 4.1 and... well you get it. Hey at least you'll have a job! (Working for the government but don't pout, it pays the bills, right? You'll need $49 an hour when your phone bill runs you $550.)

I fucking love former Dallas Fed President Bob McTeer for being able to admit - outright - that he was totally in on the easy money with Greenspan while addressing this deflation bullshit. Let's bring him back and stage a coup to remove Janet Yellen from the Board before she even gets there. Anyway, check out Monetary Policy, Deflation, and Quantitative Easing:

We should remember that the last deflation scare, especially on the part of Chairman Greenspan, along with a weak economy, low to no job growth, and a potential double-dip recession, led to the easy-money period during much of 2002-2004. I participated in that policy, agreed with it, and even dissented favor of easing in September 2002. The policy was successful in stimulating growth, job creation, and avoiding possible deflation. However, during the recent financial crisis, the motives for and benefits of that policy were ignored. Instead, the policy was blamed for contributing to the real-estate bubble that eventually burst—triggered by the subprime crisis.

My opinion is that while easy money during that period may have help fuel the housing boom and bubble, the proximate cause or trigger of the crisis was the large quantity of securitized subprime mortgage loans that began to re-set to higher mortgage rates and led to massive foreclosures. I can see how low nominal interest rates would fuel the housing boom; what I can’t see is how they were responsible for subprime lending and securitization that bordered on fraud.

I smell a little guilt on McTeer's part but whatever. He goes into the Fed's boring job to make it so you don't actually pay attention to what they are doing: ultimately that's the goal, you all have jobs and buy shit and keep the economy afloat, using made-up money to make more money as that's the only way to pay interest on the money that we already have, by borrowing against what's in your pocket. Sorry. I'd feel guilty too.

Or it can inflate its way out ahead of the real or perceived deflation threat and devalue the currency while it does. This works out well for the government (or so they'll think) for awhile and keeps them from coming for the Fed's throat, at least temporarily. Of course this scenario also fails in the end and eventually Congress - trying to cover their own asses - will naturally go trying to take the Fed down like they tried to do not that long ago. I'm all for ending the Fed as everyone knows but not because Congress is pissed they turned the printer off. Don't you think it's bizarre that Congress has the authority to cut its own checks by lifting the spending cap? Don't you also find it bizarre that Congress "controls" the Fed but the Fed sells them our own money at interest? If they really controlled the Fed, wouldn't they want to lock them in a corner and tell them to sit there and process checks like the good little bitch central bank they are? Instead they tiptoe around Bernanke and play like they're grilling him but really they have no fucking clue what that guy does on any given day or night.

No one is saying the Fed is printing money. Oh wait that's not true, Bernanke said the Fed is printing money. Whatever. Fed independence is a joke, that was thrown out quite some time ago. I understand the motivation to pretend as though the situation has not changed (if a such thing ever existed) but at some point you just have to let it go and concede. That's you as in Bernanke and Co.
No way out but devaluation, buddy.

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.


darkcloud said...

Hi JD,

On another note (before the current Credit/Greed bubbles), a fraud auditor once told us that employee frauds were nearly all traced to "the three R's" - Rum, Racing and Redheads! (i.e. alcohol/drugs, gambling, or sexual indulgences.)

Thanks, and keep fighting the good fight!