Monday, November 8, 2010

What the Fed Officials Are Telling Us About QE2

It is telling us about the abject failure of the government (Congress and the White House) to improve the US economy.

Suppose, just suppose that Ben Bernanke is doing QE2 out of goodness of his heart, that he is doing all he can in the only way he knows how, to support the economy from collapsing.

(Don't laugh.)

He is a central banker, an academic before that, and a Keynesian like all central bankers in the world. He doesn't know how the real world works, he doesn't know why Silicon Valley thrives by selling better products cheaper (deflation). As the Fed chief, he is in charge of monetary policies, as opposed to fiscal, which is the domain of the government. He has only one tool left to possibly stimulate the economy, and that is quantitative easing, as it is supposed to achieve the equivalent of the fed funds rate going into negative numbers. To him, seeing a healthy inflation is seeing a healthy economy.

So he has decided to do QE2, to do his best to see a healthy inflation/economy. What does that tell you about the fiscal policies of the government, when a banker feels such an urgent need for a drastic action over the state of economy, which should be the worry of the government?

It tells me that there has been an absolute lack of effective fiscal policies coming from the administration and Congress for two years. Bernanke felt he had to do something, as nothing was coming out of the admin and Congress. Nothing.

Sure, the health care "reform" bill passed. But it will only create further burdens on citizens and businesses. Ditto for the financial "reform" bill. As for the stimulus bill, what stimulus? It stimulated the Chinese economy, and it stimulated the public union employees.

Rumors say that Obama is very disinterested in actually doing the work as President of the United States. He's habitually late in coming to policy meetings, leaves in 10 minutes. He'd rather watch ESPN and play golf. All he cares about is speaking in front of the adoring crowd (as he's doing in India), reading the script off his teleprompters without which he is reportedly a rather dull, slow speaker. He can't be bothered to do the routine, daily work as the head of the state.

And clearly no one has bothered him.

With the new, Republican Congress and still defiant Democratic leaders comes a gridlock, with all the burdensome laws and regulations that somehow passed during the first two years of Obama presidency intact. The only person who could do something and do it quickly is Ben Bernanke.

I am not saying Ben should be doing QE2. He shouldn't, but I think I can understand why he is doing it. It is to make up for non-action by the Obama government to restore the confidence and trust, and thus improve the economy.

As a central banker, he doesn't have a judicial power to bring fraud perpetrators (like his Fed member banks) to justice and thus restore confidence. He doesn't have a fiscal power to improve the economy. His only monetary tool left seems to be the quantitative easing, but he can act now, instead of weeks and months of inaction by Congress and the White House.

Ben Bernanke's Fed is doing (or thinks it is doing) monetarily what the Obama government should be doing fiscally.

Thus the Op-Ed by Kevin Warsh on Wall Street Journal today. What struck me most is NOT his doubt about QE2 (he voted for it after all) but his push for more coherent and pro-growth fiscal, regulatory and trade policies by the government, which he currently sees missing. What the monetary policies alone can do is limited, according to him.

In the same vein is the speech by the Dallas Fed president Richard Fisher (link from Zero Hedge). Fisher says toward the end of the speech:

The Fed is doing its level best to deliver on the dual mandate it was given by the Congress. But monetary accommodation, by itself, is not the answer to our current woes. The Fed, as I see it, has taken a leap of faith that our political leaders will forge a sensible budgetary and regulatory path that incentivizes businesses to put to work the money the Fed is printing to invest in creating jobs for American workers...

We need for the Congress to move quickly, beginning in its lame-duck session. As Winston Churchill said, “We need action this day!”

Otherwise, the effect of quantitative easing will, in my view, simply result in financial speculation, further investment in more welcoming quarters abroad and, ultimately, in “super ordinary” inflation. The FOMC is taking a calculated risk. If the Congress and the Executive fail to deliver, I believe the FOMC will have to consider changing course.

Here is the message: The Fed is going out of its way to be a good citizen. It is time for the Congress to do the same.

For whatever reason, the Fed officials see a grave, imminent danger to the US economy due partly to the inaction, wrong policies, or both, by the government in the past two years. And they say they've acted unilaterally, hoping that the government gets in shape very quickly, even during the lame-duck session.

But then we see Ms. Pelosi partying to celebrate her accomplishments, we see the President of the US in campaign style again in India, doing the town hall meeting and dancing with the locals and shipping more jobs out of the US.

Fisher's fear that the Fed's gamble may end up in financial speculation, money flowing out of the US, and out of the ordinary inflation seems well justified.

Oh well. Can we at least have Dow 16,000 then please? And gold at $2,000? By the year end, if you can.

Somehow, I am not as angry at Benny and the Inkjets as before. At least they can say they did all they could (whether they should have done or not is another question), unlike the partying leadership of the government.


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