Monetary Policy

Here is why an open-ended QE2 may be a very moot point: Slate reports that Ron Paul, Ben Bernanke's greatest nemesis, will chair the all important monetary policy subcommittee. In other words, Bernanke v Paul theater will soon be a weekly feature. Too bad Alan Grayson will be no longer present.

And now back to the popcorn.

The Tea Parties have returned the 10th amendment and constitutional governance to the discussion, and clearly impacted elections. What they don't seem to talk about much is the weak dollar's role in our malaise. Absent changes in dollar policy, the Tea Party movement could be discredited too.

As if there was any doubt before which way the arrow of control, and particularly causality, points in America's financial system, the following stunner just released from Bloomberg confirms it once and for all. According to Rebecca Christie and Craig Torres, the New York Fed has issued a survey to Primary Dealers, which asks
for suggestions on the size of QE2 as well as the time over which it would be completed. It
also asks firms how often they anticipate the Fed will re-evaluate the program, and to estimate its ultimate size. This is nothing short of a stunning indication of three things: i) that the Fed is most likely completely paralyzed due to the escalating confrontation between the Hawks and the Doves, and that not even Bernanke believes has has sufficient clout to prevent what Time magazine has dubbed a potential opening salvo into a chain of events that could lead to civil war: in effect Bernanke will use the PD's decision as a trump card to the Hawks and say the market will plunge unless at least this much money is printed, ii) that the Fed is effectively asking the Primary Dealers to act as underwriters on whatever announcement the Fed will come up with, and thus prop the market, and, most importantly, iii) that the PDs will most likely demand the highest possible amount, using Goldman's $2-4 trillion as a benchmark, and not only frontrun the ultimate issuance knowing full well what the syndicate of 18 will decide in advance of what the final amount will be, but will also ramp stocks on November 3 to make the actual QE announcement seem like a surprise. This also means that the Primary Dealers of America, which include among them such hedge funds as Goldman Sachs, such mortgage frauds as Bank of America, such insolvent foreign banks as Deutsche, RBS, UBS and RBS, and such middle-market excuses for banks as Jefferies, are now in control of US monetary, and as we explain below fiscal, policy.

"Many participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate or if inflation continued to come in below levels consistent with the FOMC's dual mandate, it would be appropriate to provide additional monetary policy accommodation. However, others thought that additional accommodation would be warranted only if the outlook worsened and the odds of deflation increased materially. Meeting participants discussed several possible approaches to providing additional accommodation but focused primarily on further purchases of longer-term Treasury securities and on possible steps to affect inflation expectations." - FOMC Minutes

One of the more amusing side-effects of the Keynesian system's death throes are the ever greater disconnects between a central bank's lies about reality and its actions. In this case, there is likely no better recent example than the BOJ (our Fed has been less vocal in its minutes recently in extolling the virtues of the US economy, which is the primary reason why the only thing driving the market are expectations of the arrival of "QE the Saviour"). Goldman has compiled a handy table showing how beginning in September 2009 there has been a major divergence between the BOJ's economic assessment and actual policy decisions, confirming that a nation's central bank is nothing but a populist tool to preserve a political system, even as it acts completely in opposition to its convictions.

Regarding our collateral framework, the Governing Council has decided to keep the minimum credit threshold for marketable and non-marketable assets in the Eurosystem collateral framework at investment-grade level (i.e. BBB-/Baa3) beyond the end of 2010, except in the case of asset-backed securities (ABSs). In addition, the Governing Council has decided to apply, as of 1 January 2011, a schedule of graduated valuation haircuts to the assets rated in the BBB+ to BBB- range (or equivalent). This graduated haircut schedule will replace the uniform haircut add-on of 5% that is currently applied to these assets. The detailed haircut schedule will be based on a number of parameters which are specified in the press release to be published after todays press conference.

Earlier Alan Greenspan shared some Fed insight, explaining the diagonal rise of the stock market, which can be summarized as follows - "stock prices determine the economy, not the other way round." In one simple sentence, Greenspan demonstrates that the Fed is not only chock full of people who can't read economic textbooks good (sic) but is populated by a subset of people suffering from cause-and-effect inversion disorder (it is also chock(er) full of new and improved stock traders and algos populating Liberty 33, doing all they can to make sure that in 13 up days, there is just one down). Yet in a market which has broken all laws of rationality, is the Fed's flawed self-fulfilling prophecy gaming the only thing that the amazing American's recovery is based on? To be sure, the main reason why economic skeptics such as Rosenberg, Edwards, Janjuah, and (ever decreasing) others retain their pessimism is that while the marker has now priced in one of the most ebullient, V-shaped economic recoveries in the history of the world, the underlying economy has stagnated and even downshifted into a double dip along numerous metrics, even despite ongoing fiscal stimulus and monetary pumpatude. So what is going on? Simple - the Fed, and by implication the administration, believe that once confidence and the market reach a given level, Joe Consumer will forget that the mortgage bill has not been paid in 12 months, the credit card in 3, that all neighbors lost their jobs a year ago and still can't find a new ones, and instead will merely look at the Dow (not the S&P - for some reason government/Fed workers still don't realize that nobody follows the DJIA, but whatever) and the UMich consumer confidence, for a barometer of economic health. The fallacy of this proposition is of course beyond preposterous, but these and such are the thoughts of the Federal Reserve.

Appropriately, Goldman's Sven Jari Stehn has just published an analysis looking at whether there is a two-way relationship between asset prices and the economy (merely the latest in a long line of such queries), and most relevantly: monetary policy.

Joseph Mason from Roubini Global Economics has written an interesting analysis of Fed monetary policy, focusing on the Fed Fund rate as the primary tool of economic intervention, in which concludes that the Fed's traditional weapon for moderating the business cycle is becoming increasingly irrelevant, and has reached a point where the traditional central bank arsenal could be considered irrelevant. By analyzing historical data of rate tightening into and during recessions, coupled with loosening interventions, Mason observes that by "reducing rates before recession may both add to the speculative fury that will (eventually) necessitate the (potentially larger) downturn and leaves no room to lower rates in order to address lagging effects like unemployment." If correct, and if the excess reserve phenomenon currently witnessed, which is purely a function of negative implied interest rates per the Taylor rule, is unable to force the economy into a recovery mode, the Fed will be left with absolutely no additional mechanisms to facilitate monetary expansion, resulting in an impotent Federal Reserve, whose only function would then become to fund balance sheet shortfalls at major financial institutions. And if there is a an actual empirical point arguing that the Fed no longer needs to exist, in addition to all the rhetoric we have witnessed over the past year which implicates the Fed as merely a proxy vehicle for banker status quo perpetuation, this could very well be it.

Yen drops, Dollar, Euro surge. Yen - The Carry Currency, the sequel coming to a theater near you.

TOKYO (Dow Jones)--The Bank of Japan policy board will hold an unscheduled monetary policy meeting from 0500 GMT "to discuss monetary control matters based on recent economic and financial developments," the central bank said Tuesday. BOJ Gov. Masaaki Shirakawa will also meet the press from 0730 GMT.

The one moniker that may just stick. And seeing how the Chairman is having illicit (and excess liquidity lubricated) liaisons with the entire US middle class, yet is sufficiently covert about it that TMZ will never figure it out, it is about time that Senators do the right thing and prevent Bernanke's reappointment, as well as make the Federal Reserve fully transparent, even as they set it on a path to its ultimate dissolution. With fiat monetary systems and the entire Keynesian experiment proven to be one uncontrollable fiasco, leading to exponentially increasing bubbles and bursts, the last thing Central Bank countries can afford now is delay.

It seems these days everyone is happy to blame Greenspan for creating the biggest housing/credit bubble in American history, yet few have the same problem when it comes to voicing their support of Ben Bernanke, who is repeating exactly the same monetary steps (mistakes) as performed by his predecessor. Proponents will say that this time the justification was to prevent a full financial systemic collapse, and the trillions of excess liquidity (an approach that even Greenspan did not embark on full bore) that drowned the capital markets were just what the doctor ordered. Whether that is true or not will be debated by historians who analyze the 2009 as the year when China, the US and the Eurozone let loose the most unprecedented monetary loosening in the history of the non-gold standard world.

Yet is today really that different?