Guest Post: Fed Has No Hammer, Uses Handsaw And Chisel To Pound Nails

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Fed Has No Hammer, Uses Handsaw And Chisel To Pound Nails

The next time the Fed unleashes quantitative easing, maybe we'll finally wake up to the fact the Fed is not just powerless, it is actively destructive.

The Fed is promising once again to pound nails with the only tools in its toolbox, a saw and a chisel. The "nails" the Fed is trying to pound down are unemployment and deflation. Needless to say, whacking these big nails with a handsaw and a chisel is completely useless: they can't get the job done.

The Fed claims all sorts of supernatural powers to sink nails at will--"unconventional monetary policy," quantitative easing, money dropped from helicopters and so on. But all it really has are two tools which have no positive effect on unemployment or the real economy.

1. The Fed can manipulate interest rates to near-zero

2. The Fed can shove "free money" to the banks

That's it. That's all the tools the Fed has in its toolbox. Let's consider what these tools accomplish in the real world.

Zero interest rates do not cause potential employers to hire unemployed people. Zero interest rates incentivize financial speculation (yield-chasing via trading risk assets) and malinvestment in projects that would be marginal if rates were normalized.

If capital cost 10% to borrow, only high-quality, low-risk ventures would attract funding or qualify for a loan. At 1% interest, the borrowing costs are so low that all sorts of high-risk, marginal schemes can afford to float loans.

Low interest rates also lead to money flowing to marginal borrowers. If rates were 10%, only those with good credit, credible income streams and collateral qualify for loans. At 1%, marginal borrowers (the kind who are most likely to default) qualify for loans.

All the Fed accomplishes with zero-interest rates is to build up a new wave of borrowers who will default. The Fed's policy simply adds to the mountain of impaired debt that is crushing the global economy.

The Fed's zero-interest rate policy (ZIRP) has impoverished savers and pension funds and provided disincentives to capital formation. In its anxious rush to lower the cost of borrowing, the Fed has stripped hundreds of billions of dollars of interest income out of the economy, and punished those who accumulate capital (cash savings) that is the bedrock of capitalism (a meaningless myth now that the Fed and Federal government are central-managing the economy).

Talk about unintended consequences. The Fed's ZIRP punishes the prudent and rewards financier gamblers and encourages marginal borrowers who are tomorrow's defaulters.

Pushing "free money" to the banks was supposed to do three things: It was supposed to enable the banks to lend lots of money at a premium and skim enormous profits that could be used to rebuild their ravaged balance sheets.

It was also supposed to spur consumption and investment, because money was so "cheap" how could you refuse to borrow more?

Lastly, it was supposed to enable homeowners to refinance their underwater mortgages at lower rates, creating disposable income that the homeowners would then spend on Chinese-made TVs, clothing, etc., creating "growth."

As Mish Shedlock often points out, you can't force people to borrow money, and offering marginal borrowers more debt does not make them magically creditworthy. The truth is that 95% of American households have taken on ever-rising debt loads while their adjusted incomes have been flatlined for decades.

The Fed's "solution" to over-indebtedness and excessive leverage is more debt and more leverage. Financial media lackeys and assorted analyst-toadies keep proclaiming that "households have deleveraged" and are now ready, willing and able to take on a couple trillion dollars more of debt to buy stuff, but this is the usual propaganda of cherry-picking data to fit the happy story being "sold."

The top 5% have improved their debt-income ratios, but the lower 95% don't qualify for new loans or refinancing. Now that the banks are weighed down with bad debt and writedowns, they are wary of loaning more to marginal borrowers.

So the Fed's "free money" that it shoved to the banks sits in reserves. It's dead money. It isn't funding wonderful new enterprises that are hiring millions of unemployed workers, it's sitting as reserves, bolstering balance sheets, or it's funding trading-desk speculations in the foreign exchange, stock and bond markets.

Maybe trading desks added a few traders to play with the Fed's "free money," but that's like hitting the unemployment nail with a handsaw blade: it doesn't do anything in the real economy or the labor market.

Fed Chairman Ben Bernanke's famous "helicopter" from which he drops money into the economy is a misnomer. He can't drop money into the real economy; all he can do is drop it into the banks, where it languishes as reserves or is used to fuel speculative bets in global markets.

The Fed is powerless, as its tools have no effect in the real world. It can fuel "risk on" market rallies with its trillions in "free money," but it can't lower unemployment or accomplish anything in the real economy except rob savers and pension funds of hundreds of billions of dollars each and every year.

It's actually, pathetic, isn't it? Ben and the rest of the impotent board are uselessly banging away at nails with their handsaws and chisels, while claiming to be financial wizards with unlimited powers. The next time the Fed unleashes quantitative easing, maybe the citizenry will wake up to the fact the Fed's only power--to steal from savers in order to benefit insolvent parasitic banks--is actively destructive.

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SWRichmond's picture

That's it. That's all the tools the Fed has in its toolbox.

Not true.  The Fed can poison the well by CHARGING interest on all of those excess reserves they have shoved into the banks.  Then there will be men standing on street corners with loan applications, and/or handing out free money, no helicopters required. 

Let's consider what these tools accomplish in the real world.

That's another matter entirely, but inflation we will have in any case.

TaxSlave's picture

The article glosses over the fact that the amount of 'money' given to banks is a drop in the bucket compared to the Quadrillion in erased 'value' they are pretending still exists.  Just consider what 'mark to market' would mean for them.  The screwing has already taken place on a magnitude that makes all the rest simply a cosmetic joke.  When the mark realizes he's being conned, the game is up.  All this QE crap is bright copper-clad aluminum pennies being flashily flipped, to draw attention away from the fact that the system crapped its pants long before the first dribble escaped when Lehman plopped on the floor with an embarassing thud.

And when the magnitude of the pantsload is finally beyond denial, they will blame it all on the speculators and greedy producers, naturally.

SheepDog-One's picture

True, they strain at a gnat and swallow a camel.

Hugh_Jorgan's picture

More like; "Fed has no hands left, pushes on string with chin."

I am more equal than others's picture

Creating more malinvestments that will need to be purged at some later date. 

 

 

strangeglove's picture

More like they screwed the pooch and are now screwing the pooches strangled bloated corpse.

Thank You Very Much!

Precious's picture

The Fed has a fire hose they use to douse any investor rationality that still has the audacity to burn.

kraschenbern's picture

Good imagery!  necrobestophilia

DaveyJones's picture

"Fed Weighs More Stimulus" - WSJ 7/12/12

Leave it to the government to treat the economy like a sexual toy

SeattleBruce's picture

"they will blame it all on the speculators and greedy producers, naturally."

Then the question will be, will we let this same crew come through on the other side and do this to the people all over again after the reset?

Hugh_Jorgan's picture

"The "nails" the Fed is trying to pound down are unemployment and deflation. Needless to say, whacking these big nails with a handsaw and a chisel is completely useless: they can't get the job done."

This statement is about problems that are actually the responsibility of the US Congress NOT the Federal Reserve. Even experts are engaging in debate on a topic that should never even come up. Every one of us have been programmed/brainwashed.

Chuck Walla's picture

@TaxSlave

Fortunately for them, most of the marks(aka taxpayers) will never catch on until way too late and they are broke. The welfare checks won't buy anything. Then the real fun begins...

TaxSlave's picture

The plan is for them to beg for the government to swoop in and save them, by taking over everything to make sure they get fed.  See Obama's latest round of executive orders.

Paul451's picture

"All this QE crap is bright copper-clad aluminum pennies being flashily flipped, to draw attention away from the fact that the system crapped its pants long before the first dribble escaped when Lehman plopped on the floor with an embarassing thud.

And when the magnitude of the pantsload is finally beyond denial, they will blame it all on the speculators and greedy producers, naturally."

Best analogy I've read yet! I'd give you +50 if it was allowed!

SheepDog-One's picture

I see, your theory is they can just make broke people pay higher interest on loans they cant get, and pay higher prices for things they have no money to buy in the first place. Uh huh, sure.

Sophist Economicus's picture

True!    Also, based on the chart Chuck posted, he should be rooting for currency debasement -- it would help the 'poor witless debtors' and screw the 1%.   Debasement is the 'safe' way out of this for the politicos -- it keeps the 'great unwashed' and themselves relatively whole and takes its pound of flesh from those with capital (that were too stupid not to put a significant portion of their fiat into PMs)

SeattleBruce's picture

"it keeps the 'great unwashed' and themselves relatively whole"

I assume you mean relatively benign debasement and not hyperinflation.  Can they control the throttle on that, because if they can't, relatively few will be 'whole.'

JustObserving's picture

It sure appears that someone is supporting markets whenever they are threatened.  And gold and silver have spectatcular falls whenever the Fed speaks such as the $100 fall in gold on Feb 29th of this year.

The Fed has lots of tools in the toolbox - many of them are unannounced.

Thomas's picture

The Federal Reserve is filled with tools.

kito's picture

ben is buddha, he has discovered enlightenment.....he sees that he is "one" with all world markets.........ben is the markets, and the markets are ben.............nonduality..................

Errol's picture

SWRichmond, you're right; the Fed has more tools. CHS is a smart guy and all, but it seems to me that he has overlooked:
1) the Fed charter allows them to put pretty much anything they please on their balance sheet as an asset. Buying common stock, for example, helps pension funds and anyone else with enough assets to own common stock.
2) in cooperation with CONgress, by buying up ANY issued amount of federal debt, they enable getting new money to people who don't own common stock. Think SNAP, liberal definition of "disability", early Social Security payouts, extended unemployment benefits, etc.

Do not underestimate the ability and willingness of the current regime to come up with creative and baroque ways to stimulate a zombie to appear life-like.

pods's picture

They might be able to do that, because the rules only apply to the small people.

But, would any of these actually help?

1.  Nope.  Buying stock with freshly printed money would raise stock prices, and would inflate them above "market" value.  Thus crowding out people who would rather not get fucked.

2.  The debt limit target, ceiling, whatever is one limit on this. The bigger one is twofold.  Government spending into the economy would dilute everyone's purchasing power, thus exascerbating the problem. Two, there is a very real ceiling on how much the government can borrow.  The interest on the debt.  It is already a large amount with the debt we do have even with near zero rates.  Imagine if rates were to rise commensurate with MORE debt?

As an aside, the current low rates are killing any chance that pensions,etc can ever fund liabilities.  Keep this up and everyone's nest eggs are scrambled.

Nope, the FED may bark that it can do many things, but it has already done what it was set up for.

It has backstopped it's owner banks with funny money.

The rest of us can suck lemons and worship at their altar to save us.

Fuck em, burn the whole system down and shoot anyone that EVER suggests a central bank in the future.

pods

mrktwtch2's picture

maybe they should bang a gong..

El Oregonian's picture

The only nails that are left for the Fed are the one's he uses scratching the economic chaulkboard.

LoneCapitalist's picture

The nails theyre pounding are the ones in the global economic coffin.

midgetrannyporn's picture

The "nails" the Fed is trying to pound down are unemployment and deflation.

 

BULLSHIT! the fed gangsters don't give a rat's ass about unemployment. they can steal all the more when the poor are powerless.

SheepDog-One's picture

The 'Fed dual mandate' is-

1) Support banksters no matter what.

2) Fuck everyone else.

bigdumbnugly's picture

uptake:

fed has a small tool.   doesn't care to talk about its impotency.

Bazinga's picture

Another uptake:

The Fed are a bunch of useless tools.

Dr. Richard Head's picture

But according to Paul Krugman's response to this hot Spainard's question about inflation equaling theft, Charles is horrifically wrong. 

http://www.youtube.com/watch?v=bQcRPJMyVKw

Does Charles nave a Noble prize in economics?  No he does not!  So, according to the punditry, the views Charles expresses are invalid.  Now go be a good serf and line up at the Fed's discount window.  The terrorists will win if we don't fucking shop.  YOU DON'T WANT THE TERRORISTS TO WIN DO YOU?  THINK OF THE FUCKING CHILDREN!!!!!!

Sudden Debt's picture

I don't know...

I like the free money part!!

The more they print, the brighter my silver's future is :)

 

Dr. No's picture

Well, short term your silver is headed down.  The FED is tightening since FEB.  The adjusted Monetary base is down $150B since FEB.

RSloane's picture

Really? That's good news, I thought they were down to a used Q-tip and a bath sponge.

proLiberty's picture

The Fed can also toy with the interest it either pays or chages for "member financial institutions" (its shareholders and co-conspirators) to keep their reserves on deposit at the Fed.

Roy Bush's picture

What's Brian Sack been doing lately if the Fed has no power?...the Fed has a lot of ways it "can throw money around".  Don't underestimate their ability to start up the helicopters.

SheepDog-One's picture

Helicopters? Hell at this point theyd need fleets of C-130 Heavy Cargo Lifts running around the clock.

Doug_Canada's picture

Can't the Fed also impose rules on Banks. I'm not saying they do but can't they? For example can't the Fed declare that banks must hold more securities?

SmackDaddy's picture

You guys worry too much....

Gotta say this somewhere.. you guys cool?

My sister in law is so hot.  I mean so hot.  She looks like Marissa Miller.  If I'm going to die for a word, my word is poon-tang. Sweet sweet poon tang.

 

 

SmackDaddy's picture

Trust me dude, you would smell her bike seat after spinning class. 

MFL8240's picture

 

You forgot one very powerful tool and that is the Jewish controlled media (In place to protect the Jewish controlled banking gangsters)  corrupt to the core and will lie, steal, cheat and manipulate for the Fed at the expense of the public.  That tool is more powerful than any of the others you mentioned.

 

spondoolix's picture

I had a boss who once tole me...."the best time to borrow money is when you don't need to.  And the best time to pay it back is when you don't have to".

 

Does anybody here know what that means?

 

bigdumbnugly's picture

yeah, that the best time to ask is when you don't need to know.

midgetrannyporn's picture

 Does anybody here know what that means?

Yes.

SmackDaddy's picture

Yeah and your boss is dumb as fuck.  Tell that motherfucker it all depends on what your rate is and what you can earn...

overmedicatedundersexed's picture

if the fed is a criminal organization run for elite banksters, the the question is what tools do criminals use to rob the sheep? the mafia get's it's vig no matter what.