Message To The Fed: Here Are A Few Things That You Can't Do

Tyler Durden's picture

Submitted by F.F. Wiley of Cyniconomics blog,

[A]sset purchases are not on a preset course, and the Committee’s decisions about their pace will remain contingent on the Committee’s outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
-March 19 FOMC statement

The excerpt above or some variation has appeared in every one of the Fed’s post-FOMC meeting statements since the beginning of QE3 in September 2012.

Unfortunately, it doesn’t give us much comfort. We don’t see evidence of the Fed’s economists accurately gauging QE’s “efficacy and costs,” notwithstanding its oh-so-slow wind down. On the contrary, history shows that these economists have an inflated view of what they can achieve with monetary policy.

Take the link between QE and jobs, for example. We were struck by the following question, asked recently by commenter “liongterm investor”:

How does a dollar (or trillion dollars) added to the Fed balance sheet create a job? This is a serious question; I am not trying to bait someone into an argument …  What I do understand about QE is how money the ends up [in] excess reserves earning interest from the Fed larger than what my deposits or short term treasuries earn. I also understand how the money can end up driving up equity prices. But job creation??

We don’t doubt that “liongterm investor” is aware of “wealth effects” – the idea that a booming stock market encourages happy investors to buy an extra luxury item or two, and this might eventually create a few positions at, say, Tiffany. But it’s not a very powerful effect, is it? Nor can we be sure that it won’t come back to bite us, for reasons we’ve written about in the past (see here, here, here or here).

What’s more, questions of what the Fed can and can’t achieve go beyond QE. We touched on the limitations of monetary intervention in recent research on where the economy stands today:

We’ll build on that research below with a handful of charts showing that there are many things the Fed can’t do when it comes to manipulating the economy.

Household borrowing and spending: What the Fed can’t do

In a debt-saturated household sector, the Fed can’t prevent mortgage demand from stagnating:

things fed cant do 1

Based on 40 years of history (and the fact that banks need to cover their costs), the Fed can’t shrink the spread between mortgage and deposit rates much further than it did in 2012:

things fed cant do 2

Consequently, the Fed can’t push debt service costs much below current levels:

things fed cant do 3

Nor can lower debt payments provide much of a subsidy in the first place, since falling debt service is matched by declining interest income:

things fed cant do 4

More broadly, there’s a downwards trend in income after tax and financial obligations, and the Fed can do little about this:

things fed cant do 5

Business borrowing and spending: What the Fed can’t do

The Fed can’t convince businesses to revert right away to the borrowing habits of recent bubbles:

things fed cant do 6

Especially as net business debt is already at an all-time high:

things fed cant do 7

And while the Fed can affect the amount of cash deposits, it can’t force businesses to make spending decisions based on those cash balances:

things fed cant do 8

Consequently, business spending growth has slowed alongside consumer spending, and the Fed can do little about either of these developments:

things fed cant do 9

Housing: What the Fed can’t do

The Fed can’t undo past overbuilding, and therefore, it can’t conjure up another residential construction boom (for awhile, at least):

things fed cant do 10

What the Fed can do

On the other hand, here are a few developments that our central bank can accurately claim to have achieved:

  1. Lifting prices on stocks, houses and other risky assets, which creates a wealth effect and boost for high-end consumption.
  2. Creating windfall profits for financial firms aiming to exploit the bubble, then bust and then bubble again pattern in the housing market.
  3. Creating windfall profits for primary dealers through the Fed’s Treasury and mortgage purchases (even as central bankers may occasionally discipline traders who aren’t careful).
  4. Preserving the “heads I win, tails you (the taxpayer) lose” mentality in the financial sector that leads to reckless risk-taking.

What the Fed shouldn’t do

Another way to look at the data and observations above is to ask why the Fed’s achievements have been so limited (and of dubious value). It’s evident that the economy isn’t growing strongly because of conditions that central bankers themselves created, by encouraging excessive borrowing and disregarding moral hazard.

In other words, the problem isn’t so much that the Fed can’t deliver another debt-fueled boom, but that it shouldn’t be trying to cure a credit bust with more borrowing in the first place.

Sadly, though, this idea falls in the same category as the notion that the Fed’s balance sheet isn’t the right tool for job creation. It’s too damning a thought to be accepted by central bankers who’ve shackled themselves to a philosophy of ceaseless intervention. It’s also too basic for economists who prefer abstract theories and mathematical models over reality-based thinking.

Such straightforward concepts as not fighting a debt hangover with more debt just don’t enter into the Fed’s calculus about “efficacy and costs,” even as they make perfect sense to so many of the rest of us.

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yogibear's picture

"conditions that central bankers themselves created, by encouraging excessive borrowing and disregarding moral hazard."

Guess they running out of people capable of being debt slaves.


The Gooch's picture

shareholders, please.


EDIT: OT. Cops shoot and kill unarmed man for "illegally camping" in N.M.


ArkansasAngie's picture

I can proven anything given an unaudited excel spread sheet

kaiserhoff's picture

This is a solid article and timely, but before 2008 no one in business or academia believed the Fed could nail long rates to the floor for five long years.  That is new and quite troubling information.

OpenThePodBayDoorHAL's picture

Reminds me of a letter to the editor in 2009: Dear sir, thank you for your explanation, I now understand what QE is. My problem is that I no longer understand what money is.

A Lunatic's picture

What the FED can't do: Manage the economy. What the FED can do: Destroy the economy........

Quus Ant's picture

For every thing the Fed can't do there exists a dosier detailing what the US military can.

ebworthen's picture

The only thing the FED can do is miss-allocate capital and resources while punishing savers, rewarding banksters, and ballooning the national debt.

They do that very well.

Cacete de Ouro's picture

Here is an interesting fact about the air exercises a few weeks ago above South Carolina. This is based on some initial pointers from other sites about the Charleston exercise, I can't recall where.

On Thursday, March 13, the SC Air National Guard conducted air exercises in a few locations in SC. Some (all) of the exercises had been postponed from the previous day.

1. Charleston / Myrtle Beach: the Wednesday March 12th exercise was postponed. Notice also that "most of the flying activity not visible from the ground"

"Thursday March 13: COLUMBIA, S.C. (AP) - Members of the South Carolina Air National Guard are conducting an air defense exercise along the coast.

Guard Senior Master Sergeant Edward Snyder says people might see fighter jets escorting a civilian aircraft Thursday over the North Charleston and Myrtle Beach areas.

Snyder says the Air National Guard exercise includes members of the 169th Fighter Wing from McEntire Joint National Guard Base near Eastover."

1B: Tuesday March 11th: Air National Guard to hold fighter escort exercise Wednesday morning (10am to 11.30am)

"If you see fighter jets in the skies over North Charleston Wednesday, don't be alarmed.

The South Carolina Air National Guard on Tuesday announced it plans to conduct an air defense exercise in the areas of North Charleston and Myrtle Beach on Wednesday.

SC Guard jets in exercise over coastal skies
As part of this routine exercise, fighter jets assigned to the SCANG's 169th Fighter Wing at McEntire Joint National Guard Base might be seen escorting a single-engine aircraft belonging to the South Carolina Civil Air Patrol between 10 to 11:30 a.m., according to a news release from the Guard.

Carefully planned and closely controlled, this exercise has been coordinated with the FAA to ensure the rapid-response capability associated with the SCANG's Aerospace Control Alert mission. Most of the flying activity will not be visible from the ground, the release said.

The McEntire unit is a component of the nation's strategic force, which is poised to respond around the clock to airborne threats over the United States, the release said. The unit is part of North American Aerospace Defense Command's Operation Noble Eagle, which was initiated after the terrorist attacks of Sept. 11, 2001.

2 Columbia And Anderson, with separate exercises for Columbia and Anderson: between 11am and 1pm

Air Guard Drill Over Anderson Postponed Wednesday
Posted: Feb 26, 2014 2:47 PM WET
Updated: Mar 12, 2014 12:47 PM WET
By Fred Cunningham

"The South Carolina Air National Guard postponed an air defense exercise scheduled for Wednesday over Anderson.

Poor weather conditions forced SCANG to move the exercise back 24 hours to Thursday between 11:00 a.m. and 1:00 p.m.
Fighter jets will be seen escorting a single-engine aircraft that belongs to the South Carolina Civil Air Patrol.

The guard wants to get word of the exercise out in advance so Anderson residents don't become alarmed at seeing the jets. There is a separate exercise for Columbia that has also been postponed until Thursday.
The McEntire unit is considered a critical component of the strategic force that is poised 24/7 to respond to airborne threats over the United States."

A prior report about Anderson and Columbia air exercises in February mentioned McEntire Joint National Guard Base near Eastover.

And an earlier report from last October mentioned Anderson and Greer.

"The South Carolina Air National Guard plans to conduct an air defense exercise October 8 over Anderson, Greer and in the Florence area of the Pee Dee."

Anderson and Greer are each side of Greenville, SC.

OK, if you're still reading this, here's the punchline:
On Thursday March 13th there were air exercises over the South Carolina Coastal area around Charleston / Myrtle Beach, and Columbia, and around Greenville.

If you plot a flight path from Charleston through Columbia and then through Greenville, the next major airport of interest is Godman AAF in Fort Knox, Kentucky:

Code Source Location
CHS FAA Charleston [Charleston AFB/International], SC, US
CAE FAA Columbia [Columbia Metropolitan Airport], SC, US
GSP FAA Greer [Greenville Spartanburg Intl], SC, US
FTK FAA Fort Knox [Godman AAF Airport], KY, US

See here for flight path

This is just "interesting" to me that adjacent air exercise areas with a civilian plane, with overlapping timings on March 13, when extrapolated, end up at Fort Knox.

Any thoughts welcome...

fijisailor's picture

I don't know about that but in answer to your quest for facts earlier today concerning gold price manipulation:

Just a fact that you should recognize.  The BOE has acknowledged that 1300 tons left their vaults

So I would call that a fact.

FED manipulation of the gold market?  It is a fact that it has been admitted by the FED in the past, just not in 2013.  So you actually believe that it isn't manipulated now by them?

ebworthen's picture

Delivering the Gold from the MH370 Malaysian Airlines flight originally bound for Beijing, now bound for Fort Knox.

Germany DID request their Gold back.

BullyBearish's picture

Like overeating to cure obesity...

xamax's picture

We think job creation is at a good level and see S&P500 easily touch 2400 by year end,as there is no alternative to stocks.

Uber Vandal's picture

Personal Interest Income.....

Ha ha ha hahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahahaahahahahahahahahahahahahahahah

QQQBall's picture

Why is any recovery unsustainable? Becuase prices never reached a clearing level; they were maintained at an artificially high level. Over-leveraging was not cured via default; debt-service was lowered via suspect refinancing. All the demand has been pulled forward except perhaps for college loans and sub-prime auto buyers. What is a safe yield today? Maybe -2% per annum in cash? 


If interest rates rise, the next CRE refi cycle will be brutal

NihilistZero's picture

Rise in interest rates is the only thing that can save CRE.  Unless Housing Bubble 2.0 is popped quickly and we revisit the 2010 troughs or lower the lemmings can't spend.  LLowered housing costs would be the quickest way to get J6P and family back into the malls.  Residential RE must RBJ to save commercial.




Al Huxley's picture

How does a dollar (or trillion dollars) added to the Fed balance sheet create a job?

What makes you think that's what they're trying to do?  They've accomplished exactly what they wanted - make the banks whole for all their shitty investments and offload the tab to the taxpayers or foreign treasury buyers.  Now if they can extricate themselves from the balance sheet mess without pulling down the whole house of cards, great, if not, who gives a fuck - just stick the rest of the treasury holders with the tab, shut down the markets, declare martial law and reset the system.

Similarly straightforward concepts as not fighting a debt hangover with more debt just don’t enter into the Fed’s calculus about “efficacy and costs,” - they don't enter into the Fed's calculus because they're irrelevant to what the Fed's trying to accomplish.

As long as you look at what they do and not what they say, there's not much mystery around the Fed's actions.

NihilistZero's picture


QE was all about making the FED "the bad bank" and saving the big 4 banks from nationalization.  Mission accomplished they will now let the deflation continue...  Until the next bubble.


fijisailor's picture

The FED's not even trying to extricate itself from the balance sheet mess.  See my post below.

ebworthen's picture

OT - ZeroHedge has been going offline a lot today, is it traffic or the N.S.A. poking around?

Hi N.S.A.!  You Constitution rapers suck ass!


silverserfer's picture

5.have their soul back?

Atomizer's picture

All a bunch of fucking idiots. 

You landed your degree from a crackerjack box. Tell us when the Aliens will attack, you sack of shit. We adore your clinical thinking of spending some other fuckers money to repay a fucking deadbeat like yourself. Paul Krugman's alien invasion strategy (Real Time with Bill Maher

kaiserhoff's picture

Some great comments on this thread.

It shows the readers here understand the real economy, and the Fed simply does not.

BullyBearish's picture

We'll know they're really tapering when emerging markets are ALLOWED to tank.

So far...they're not:


madcows's picture

message to the FED?...

here's one:  "I think you promissory notes (fiat) are worthless, and I don't want any of them.  They are backed by nothing but your faith and credit.  I believe you have neither.  Please give me gold in exchange for your deflating toilet paper."  sincerely, angry dissenter.

q99x2's picture

Arrest the globalist traitors, the FED and Janet Yellen too. Where is that monster Bernanke hiding? not in my pants. Long live gold and Bitcoin.

Colonel Klink's picture

Here's one thing the fed CAN do....Kiss my ass!

Seal's picture

Alan Greenspan was described by Alan Abelson as insane - the same goes for the Fed.




Saint Alan?

WHAT DO YOU CALL A FIRE DEPARTMENT that concentrates not on putting out the fire, but on cleaning up afterward? Different, if you're polite. Insane, if you're us.

For Mr. Greenspan, in the course of delivering a glowing tribute to himself before a meeting of the American Economic Association, proudly enunciated the monetary equivalent of that aberrant fire-fighting technique. More specifically, he trumpeted the great virtue of passively watching a stock bubble grow bigger and bigger and bigger until it bursts - but making sure you have enough palliatives on hand to ease the pain.

nostromo17's picture

"Wealth Effect" oh please. Rich people get "richer" at expense of poorer people, while everyone collectively is getting poorer. Deflation ride. The lower bound of an economy's interest rate constrained performance is not Zero but a negative number. The cost of mispriced risk in an economy turns to the opposite of profit for taking risk; instead mispriced risk leads to general dimunition of growth, higher costs to support unemployed and only the appearance that those that have money already have their wealth "protected against inflation." In fact Capital not invested (risked) is wasted capital, monetary and human capital - its not productive. Zero Growth is an illusion passed through momentarily on the path between growth and deflation or deflation and growth.

If its called a "something effect" its probably not science but instead would be "economics" as practiced by the U.S. Central Bank, The Fed. Having no effect on anything the Fed claims to have a causal relationship to an economy that is a figment of their statistical imagination to serve bank propoganda, usurp control of the banks and money from the people and bail out banks when they think they need to at a cost to all other people and organizations and to the detriment of all.

The greatest cost of mismanaging all money to the narrow purpose of banking profit eliminates consideration of long term objectives and consideration of national social objectives and national costs involved for financial decisions  that have an effect on the national economy. Exporting jobs to cheaper markets in other countries, for example, eliminates jobs in the mother country, destroys industrial infrastructure (since it has no reason to exist here) has social costs for supporting the newly unemployed and perhaps puts a country that is competitive with the country exporting its production infrastructure to amass wealth and power. A company that does this to its home country should be taxed for damages to the economy it displaced - or not be allowed to exist. ANd hunted down as treasonous criminals if they just leave the country and their products banned.

In a political world there is no such thing as a "free market." GLobalization, free markets are just misnomers for colonialism and corporativism. Lets cut the crap.

The FED, they don't do anything, we don't need them, we don't need huge bailed out banks. Getting rid of the FED would improve the economy and only make a few bad economists unemployed. Good trade-off.

nostromo17's picture

When a beaurocracy rules a nation to its own ends (read that government and banks) and a national fails to rule is beaurocracy (which is there to serve the nation at large) then follows the end of the possibility of a civilized society. The same applies to a Nation that "rules the world" which does not serve the world. These self serving entities self destruct and destroy their nations and the world.

nostromo17's picture

An "economy" is just a abstracted small portion of the world (often erroneously derived). Rather than just managing an economy one has to manage the world. Just for short term profit, is not how one manages a world.

nostromo17's picture

The FED is Moral Hazard. Worse its a moral hazard of the intellect where the Fed propoganda factory believes its own delusions. Where is the morality to be hazard(ed) in deluded pseudo-scientific thinking. At the end there are only lies and no actual efficacy.