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Guest Post: The Fed Gave Congress A Bottle Of Whiskey And The Car Keys
Originally posted at Monty Pelerin's World blog,
At the last Fed meeting, Bernanke’s decision to not taper even a little bit damaged what little credibility he and his Fed have left. If one discounts stupidity (not something that should be relinquished easily when dealing with government decisions), then what remains for an explanation of such strange behavior?
As I see it, the most likely justifications and the ones most frequently used in the past no longer hold:
- The government needs the Fed to continue buying in order to keep paying its bills.
- The Fed believes it is helping the economy with this policy.
The first reason is not plausible, at least in the short-term. For a while, Fed bond buying appeared to be necessary (indeed was almost equal to the government deficits) in order to fund the government’s shortfalls. Deficits have dropped recently, providing room for a token taper. Had the Fed wanted, they could have tapered without putting undue pressure on the federal government’s ability to fund its deficits. Indeed, putting some pressure on Congress would probably have been wise.
The second reason is also invalid. The Fed has fired most of its weapons (zero interest rates, money creation, etc.) at various levels of intensity for five years. It quadrupled its balance sheet during this period. The economy remains stalled. There is little evidence that the Fed boosted the economy. Of course one cannot know what would have happened or where we would be had the Fed’s actions been less aggressive.
Regarding Fed effects, there is no question that they saved banks who would have (perhaps should have) failed. In doing so, they prevented a collapse of the financial system and the ensuing havoc that would have occurred in the economy. But saving these banks was done in the beginning of the crisis. The last several years presumably has been targeted at the economy with no apparent effect.
Sadly, these same banks are now bigger than they were when they were deemed too big to fail. No meaningful regulation or policies were enacted to downsize them and prevent the same scenario from recurring. Next time it will be on a larger scale.
If neither of these reasons explain Fed behavior, consider two other possibilities:
- The Fed sees something more sinister coming than the rest of us.
- The Fed has unilaterally chosen to expand its mandate and influence.
I don’t mean to discount the possibility of something quite sinister ahead. I for one believe that something very bad comes our way. However, I reject this consideration as the basis for recent Fed policy. History shows us quite clearly that the Fed never sees the future with clarity. They seem clueless and well behind whatever curve markets throw at them. Mr. Bernanke never even saw the housing crisis coming.
The second possibility is plausible, whether understood by the Fed or not. Ben Hunt provides his opinion in a recent email (see his Epsilon Theory website) on this matter (my emboldening):
...the Fed’s use of QE as an insurance program against whatever fiscal policy errors they believe Congress might make in the future is not only a problematic expansion of the Fed’s governmental authority, but is also myopic on its own terms.
If you want Congress and the White House to establish “good” fiscal policy, then the last thing you want to do is provide an incredibly expensive insurance program against “bad” fiscal policy.
It’s moral hazard in the first degree, which any competent politician (and these are very competent politicians) will use to their professional benefit. I’m sure that FOMC members believe in their hearts that they are doing the responsible thing by “protecting” the economy from the “risks” posed by smash-mouth politics in Washington.
But I believe that they have (again) misunderstood the behavioral context in which their signals are understood. Twice since June the Fed has missed the market context of their communications. Now I think they’ve done it with Washington.
The irresponsibility of Congress and the rest of the political class cannot be understated. Underwriting this behavior is equivalent to the Fed providing a teenager with a bottle of whiskey and the keys to an automobile.
In a context where the Fed could have done no harm by tapering, they instead created a huge moral hazard that will be exploited by politicians of all stripes. They also exceeded their charter and acted without any apparent authority in assuming a new responsibility.
The chances of Congress reining the Fed in for this behavior are highly improbable, likely equivalent to the teenager declining the car keys.
Batten down the hatches. The Fed fools have just told the political fools to let the good times (for them, not the economy) to continue to roll.
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Cause Congress was just about to get serious and "do the right thing"...SARCCCCCCCC
Every major CB is determined to lower interest rates to allow the party to go on - Spain and Italy yields down 300 bp's, Japan maintaining .69% 10yr, and our benevolent Fed lowering our 10yr to 2.6% and ultimately new lower lows. What could go wrong?
Monday Humor?
This whole article is moot as the author somehow fails to realize that the Fed is a criminal enterprise (along with the rest of DC).
to repeat Bernanke's lie about the Fed not "seeing the housing bubble" is rediculous. of course the Fed saw, they induced it...on purpose. they only told some dumb as congress types that the "didn't see it" to deflect the truth.
Bukkake Ben with his MOAR Schnozzle is a one dimensional solution to a multi-dimensional(generational) problem because it's the path of least resistance. All the financial voo doo and techno chart babble just illustrate the lowest common denominator - human character
when humanity goes backwards it always ends with a lot of blood spilled and a lot of bullshit spread to motivate people to kill
you don't need to be a financial analyst to understand this
“Therefore, the authority and responsibilities of elected politicians were permanently curtailed. Put another way, the elected government was allowed to be permanently irresponsible – free to indulge its own follies and protected from the accountability by the higher authority, the non-elected central bank. The creation of the Federal Reserve represented a great retreat from democratic possibilities. The maturing of selfgovernment was forever stunted.” Pg. 534, Secrets of the Temple – How the Federal
Reserve Runs the Country, William Greider, Simon and Schuster, 1987
One does not "batten down hatches"
You can take the battens out and secure hatches
"The FED Gave Congress A Bottle of Whiskey and the Car Keys"
Problem? Let the boy get out in the world and find himself.
...and giving the FED control of the money supply did what again?
The article forgets to mention that the Prezzy of the United Stezzies is in his own car, smoking choom and drag racing along side the Congress.
There is another possible reason for the FED decision not to taper: Generate asset price inflation to balance deflation of the dying (non-financial) economy.
This way Bernanke doesnt have to spend USD to charter helicopters. Also, the super rich elite likes this kind of (wealth) inflation better.
So that's where Congress got its booze this weekend.
http://www.huffingtonpost.com/2013/09/28/government-shutdown_n_4010592.html
"Win or lose, we still booze!"
Always blame Congress and never, no never blame the 'I will never negotiate' Obama ..WTF
IWM green!
That may be safer than giving me a bottle of whiskey and the internet connection.
Darwin could solve this problem...
I dont know how you can not blame the president for at least part of this. Damned Bush.
Re: "In a context where the Fed could have done no harm by tapering..." The stockmarket is floating on an ocean of Fed-provided liquidity; the strength of the market is not based on economic fundamentals. If or when the Fed withdraws the liquidity, the stockmarket will collapse. This is suggested by the clumsy way in which the Fed did not announce a taper last week after signaling that it would taper; the Fed did not want to risk a market rout. Earlier this year, the mention of tapering was enough to cause the market to drop. Based on those events, I don't think that the Fed will taper. They would much rather kick the can down the road for as long as they can even if doing so will make the crash that much more severe when it comes.
A market crash is inevitable; the only uncertainty is when it will happen. Ludwig von Mises explained the process when he spoke of a "crack-up boom," a market blowout followed by a depression. You can read about it here: http://mises.org/daily/4016
Well, the Fed was jammed when it was mandated to support employment numbers. I suppose it was an offset much like welfare is the offset to warfare...
It's all based on a an improbable premise anyway -perpetual growth on a finite planet- in which case we cannot be surprised at the degrees of insanity that can then be perpetrated on top of this...
Simple, they can not taper even if they wanted to. The economic reality, the fiscal reality and the greed of the 1% makes it a no go! The economic wealth, most of it fake printed money, is flowing to the banks and the investors. They are very happy campers. The main street economy is stuck in recession for some, depression for others. The government funded sector of all types is still in a mini boom. To taper would crash what little economic activity is left, and put the only economic engine we have, government work and military activity, into the crapper.
So NO taper!
Obama's about face on an attack on Syria, and his talks with Iran are living proof that Mr. Putin has pulled the rug out from under a massive neocon offensive in the Middle East. Mr. Putin has drawn a line when he said that all arms are on the table for Iran should the USA attack Syria. The US military can fight third rate nations and destroy them, S-400 missiles in Iran make it too expensive to fight. America will not tolerate dead and captured American pilots, of a USN warship a smoking heap of scrap iron with 200 dead sailors. The money is not there to fight an enemy who can defend himself. Again, to taper, would gut this military machine to where it could hardly afford to destroy Syria. No taper or the neocon dream of conquest is dead.
No taper. Max Keiser says the USA can not taper, or it will implode, I think Max is on to something. Obama may hate RT and never watch the Max Keiser show, but even the fool, liar, killer and Al-Qaeda supporter, our president, Mr. Obama, knows that to taper is to retreat from the battle lines in the Middle East. Israel is reported to be livid over the Iranian talks and the Syrian war delay. They have sent their leaders to arm twist Obama, and AIPAC had got congress by the balls demanding the wars commence.
Obama is a screwed, in every sense he is a failed president and a crazed killer whose gun is running out of bullets. Taper would be suicide!
No taper. As Marc Faber says. "They will print and print and print, then they will go to war." Who would argue with Marc? Not me!
"Mr. Bernanke never even saw the housing crisis coming."
Who's to say he wasn't lying thru his teeth to reel in all the guppies that he could? Cui Bono?
Cloward Piven economics.
It is more that a criminal killed the father, and stole his car and a case of whiskey, and drove it around recklessly for a while, drunk driving, then brought that car and the last bottle of whiskey left to the son of the father that the criminal had killed, and told that teenage son of that murdered father lies about what had happened, and who was to blame, and THEN gave that teenage son the keys to the car, and the last bottle of whiskey ... That is a better metaphor for what has happened, which was the best organized gang of criminals were able to covertly take over control of the government of the USA, and drive it into the ground, while being able to maintain the lies for the youth that that had not happened, but rather something else happened.
The "strange behavior" of Congress is due to the history that they are covertly controlled by the best organized gang of criminals, who use those politicians as puppets, to perform for the masses of muppets. Since almost all the successful, surviving politicians in the USA are the banksters' puppets, performing for muppets, they are grossly irresponsible. However, any politicians that would have been more responsible were eliminated, since their careers would not have been able to become successful, or they would have been discredited or destroyed, if they did have successful careers, that became a significant threat to the banksters.
THE ORIGINAL CREATION OF THE FEDERAL RESERVE BOARD WAS THE PRIVATIZATION OF THE PUBLIC MONEY SUPPLY. That social insanity was due to the application of the methods of organized crime, through bribery and intimidation, backed by assassination, so that the current crop of politicians are all puppets within that established system. AFTER THE PRIVATIZATION OF THE PUBLIC MONEY SUPPLY, EVERYTHING ELSE AUTOMATICALLY GOT WORSE FASTER. The paradoxical ways that will probably play through are that the abilities to operate the established systems of organized robbery will degenerate into becoming more disorganized robbery.
To be realistic about the possible "solutions" to these problems, one has to face the deeper reality, that governments ARE organized crime controlled by the best organized gangs of criminals. (Those best organized gangs of criminals are NOT the public faces presented in any of the mass media portrayals of political institutions.) There are fundamental reasons due to the inherent nature of energy systems for why that situation evolved.
The ONLY "solutions" are to work towards better dynamic equilibria between the different systems of organized lies, operating organized robberies, which are the ONLY actually existing systems. The more that people refuse to face those facts, then the worse that must get, since then the more that huge deceptions are controlling what happens. Indeed, we are reaching a point where the established systems of legalized lies, backed by legalized violence, are getting so totally unbalanced that there are no apparent ways to bring them back into better balance within their frame of reference. Instead, the whole thing has to go through radical transformations of state, one way or another, sooner or later ...
I agree that there is NO DOUBT that "something very bad comes our way!" However, what I would recommend is that the way to PERHAPS benefit from being forced to go through those transformations is for the survivors to learn from that process, so that some possible new emerging dynamic equilibria of whatever surviving forms of organized lies, operating organized robberies, emerge from those transformations MIGHT become better informed about themselves, and their real relationships.