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Guest Post: Fed Has No Hammer, Uses Handsaw And Chisel To Pound Nails
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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Futurama - One Single Nail - YouTube
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.
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.
True, they strain at a gnat and swallow a camel.
More like; "Fed has no hands left, pushes on string with chin."
Creating more malinvestments that will need to be purged at some later date.
More like they screwed the pooch and are now screwing the pooches strangled bloated corpse.
Thank You Very Much!
The Fed has a fire hose they use to douse any investor rationality that still has the audacity to burn.
Good imagery! necrobestophilia
"Fed Weighs More Stimulus" - WSJ 7/12/12
Leave it to the government to treat the economy like a sexual toy
"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?
"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.
@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...
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.
"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!
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.
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)
"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.'
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.
The Federal Reserve is filled with tools.
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..................
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.
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
maybe they should bang a gong..
The only nails that are left for the Fed are the one's he uses scratching the economic chaulkboard.
The nails theyre pounding are the ones in the global economic coffin.
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.
The 'Fed dual mandate' is-
1) Support banksters no matter what.
2) Fuck everyone else.
uptake:
fed has a small tool. doesn't care to talk about its impotency.
Another uptake:
The Fed are a bunch of useless tools.
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!!!!!!
I don't know...
I like the free money part!!
The more they print, the brighter my silver's future is :)
Well, short term your silver is headed down. The FED is tightening since FEB. The adjusted Monetary base is down $150B since FEB.
Really? That's good news, I thought they were down to a used Q-tip and a bath sponge.
http://1.bp.blogspot.com/_FiNhXIv5StE/SNmmpFEB68I/AAAAAAAACSM/2RsC4OuQsGA/s320/deregfail.jpg
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.
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.
Helicopters? Hell at this point theyd need fleets of C-130 Heavy Cargo Lifts running around the clock.
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?
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.
Jeebus. Tits on a stick.
Trust me dude, you would smell her bike seat after spinning class.
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.
It is all for your spiritual enlightenment!
http://blogs.timesofisrael.com/jews-do-control-the-media/
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?
yeah, that the best time to ask is when you don't need to know.
Does anybody here know what that means?
Yes.
Not anymore.
Yeah and your boss is dumb as fuck. Tell that motherfucker it all depends on what your rate is and what you can earn...
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.
While trying to destroy the middle class they screwed the pooch.
This is truly a train wreck in slow motion.
I'm flabergasted more people aren't paying attention. People go on with their daily lives with no clue as to what is about to hit. The time to prepare for impact is a blessing, but few see the signs and won't be jumping off the train. The catastophe will be sickening to watch.
I see the hoards using their plastic at the mall, travelling or fine dining and wonder if they don't know the world is in trouble or if they are just in denial of the situation.
I suppose if they slow their spending things might get worse, perhaps they act as the Fed and the rest of the world does, spending ourselves out of debt?
All tools are hammers except chisels. Chisels are screwdrivers.
-Old remodelers adage
Not all chiselers use chisels, that's for sure.
Eric Bogosian wrote a play called "Pounding Nails in the Floor With My Forehead". The title of this story just reminded me of it.
Wow, CNBC actually wrote "Fed-dependent market":
"Stocks opened lower Thursday, with the Dow threatening to post a sixth consecutive losing day as the Fed-dependent market sold off as hopes for monetary stimulus faded."
FYB!
US citizens at their favourite hobby: claiming that their mandate, their spoken words, fit their intent and action.
Indeed, when looking at what the FED is aiming instead of the mandate would force a complete overhaul of the thesis.
But hey, US citizen is as US citizen does. So keep up the good US citizen work.
AnAnon inherit monkey-eye from Big Amelican Sayror. He fertilize grandma because she need money for food, grandpa just lay on rice stalk mat and smoke clay opium pipe all day all night.
Now central propaganda authority give all monkey-eye tall kids big computer job, using their hatred of Monkey eye progenitors as mighty internet weapon.
Did you hear the one about the Central Banker who studied The Great Depression and vowed with his knowledge and tools it would never happen under his watch? Apparently, all you have to do is destroy the currency.
Ben there, done that, got the tin cup.
Perhaps the Fed should go pound sand............
I see said the blind man as he picked up his hammer and saw.
Love it when someone calls out the FED for the paper tiger they are.
Of course Ben says he can drop FRNs out of a helicopter! That is so nobody will question his power.
How's that pushing on a string going there Ben?
pods
"How's that pushing on a string going there Ben?"
It's going just fine and even though the housing crash started back in`06-`07 and financial collapse in `08 he just needs 15 minutes to solve it all...just 15 minutes.
I'd say Charles Hugh Smith nailed it.
I thought the Fed's only too was "one Swedish made penis enlarger." Pumping and pumping to no effect...
http://www.youtube.com/watch?v=3WCvULMRUq8
I think there are a LOT of TOOLS in their toolbox with Timay and Ben being the biggest tools!
quote
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
Let's not forget "manipluate asset prices" such as
3. the stock market
4. precious metals
Manipulate the stock market will cause many peoples' 401k's to go up, giving them a false sense of wealth (the so-called "wealth effect") which causes them to spend more of their hard savings, like actual non-retirement account cash than they would have otherwise. This is obviously foolish and results in malinvestment..
Manipulate precious metals, the mother of all fakery, this simply causes the illusion that paper money has value. It doesn't.
The Fed can (has and will) monetize deficits and agency and bank losses.
"cause many peoples' 401k's to go up, giving them a false sense of wealth (the so-called "wealth effect") which causes them to spend more of their hard savings"
I don't think muppets consumers need any reason to spend spend spend, but if they are so incomprehensibly stupid that they can be coaxed to spend in the present by an increase in the present nominal values of their 401ks THEY ARE TRULY AND UTTERLY FUCKING DOOMED.
Last I saw the Fed, they went out to look for a metric crescent wrench -- preferably a left-handed model. That's the only way they can fix the Knutsen valve of the economy.
This guy speaks the truth. Every quarter I have to explain to clients why they aren't 100% invested into SPY and/or FB. Most of my clients are self-made through hard work. Fortunately they are able to see through the Keynesian bullshit--that we have experienced growth rates over the past 40 years that have been higher than they should have been due to leveraged economy--now we are running out of ways to leverage. The fed is trying to buy time until the consumer can re-releverage--maybe we're headed for a new subprime-all-the-time economy, where sovereigns and consumer alike borrow to live. It will last until, as Jeff Gundlach says, "the Fed throws a risk party and no one shows up."
Bernanke is a tool
Fuck You Ben
Metric even.
Love to see ZH post even ONE analysis* that checked to see if the Fed is making progress on their goal - getting America past the housing debt overhang.
But maybe it's more fun just to endlessly chant "the world is coming to an end".
*Here are three:
http://finance.yahoo.com/news/u-debt-load-falling-fastest-040045522.html
US debt load falling at fastest pace since the 1950s (NB we still have 'a ways' to go.)
http://www.usatoday.com/money/world/story/2012-01-18/world-economies-deb...
From the peak of the global credit bubble in 2008 to mid-2011, the U.S. cut its private and public debt as a portion of gross domestic product by 16 percentage points, says the McKinsey Global Institute. That's tied with South Korea for the top spot among the 10 largest economies, including the United Kingdom, Germany, Australia and Canada. McKinsey says the U.S. is further along than South Korea because it reached more milestones, such as growing private investment.
http://www.bloomberg.com/news/2012-06-14/americans-see-biggest-home-equi...
Well Here's the deal, the Helicopter that Benny Bucks speaks of (credit to Uncle Milton Friedman) is actually what could be done on the fiscal side by cutting taxes and giving everbody their own money back, it would then not have to be "loaned" into the economy and could be used immediately to repair personal balance sheets and once that is in order the economy can resume.
I'm speaking hypothetically here as if the Government was doing what it was supposed to be doing all along and operating with a balanced budget and maybe a surplus to boot, putting money aside for future catastrphic events so the country as a whole doesn't have to borrow and go deeper into hock. Imagine a world were people had to "earn it" instead of have it "taken" from one person who has a little self respect and dignity and is willing to contribute something of value to society, and then have his hard earned wages funneled to pet projects and the DEBT SERVICE of others who want incessantly, but never have to produce to get. The social safety net can only get so big until it can't be continued without killing the host. This is where we are headed. People can opine all they want about how big the "Net" should be, but it does not matter if you let it get out of control because you can't say NO, because that would be the kiss of death as a politician. You would be labeled as usual, Racist, xenophobe, etc.
So there is nothing the Government or the FED can do now as the debt curve and the service of said debt will only increase until the collapse of the economy because draconian tax measures and capital controls would have to be put into effect to try to stave off calamity, but by this point the economy may have already broken down as well as the last vestiges of civil society. Compund interest is a bitch huh?...
PLEASE HAMMER, DONT HURT EM.....
Ben Bernake: "I've toured around the world, from London to the Bay, It's "Hammer, go Hammer, MC Hammer, yo Hammer"
And the rest can go and play
Parachute pants seem so apropos...
Have no fear!! Everything is just fine! Keep spending! Nothing to see here!
http://finance.yahoo.com/blogs/daily-ticker/sky-not-falling-recession-fears-unfounded-economist-says-131937655.html
Yeah, but, his hammer is bigger than THOR's......
Due to low interest rates at the banks, nmy family is spending significantly less (perhaps $3,000 a year).
How to reconcile these two statements? First CHS says the marginal borrowers qualify, leading to more crappy loans, then he says they don't qualify so they can refinance their "high" interest mortgages, etc.
Maybe a refinement, that large investors are more likely to go out on a limb with hare-brained venture capital, but why should they reduce the rates they are charging to the little people?
Oh, please the fed and cental bankers know exactly what they are doing. the system has been designed to maximize the wealth stealing and reduce the potential benefits of lower interest rates to the real economy into the financial sector.
it does exactly what they want. it's not about the economy at all, and even talking like it is is a real lie to the public.
I have witten several news papaers in ways the fed could wok to assist the transmission mechanism of monetary policy. the involve altering the structure of the financial system.
Why should a bank that can borrow at zero for trading purposes invest at all in the real economy. the baig banks aren't banks anymoe, they are trading houses. they acan borrow at nothing, change the currency, and deposit it in a foreign bank account and gain interst. these fucks know exactly what they are doing
This is the Fed's problem: it announces QE3, the market reaction is briefly positive (take as your model the LTRO announcements by the ECB) and then downward.
Oops -the jig is up, the Emperor has no clothes. The Fed may be at the point where it does not want to risk this outcome.
No money velocity. Rates keep dropping and nothing happens.
http://confoundedinterest.wordpress.com/2012/07/11/mortgage-purchase-app...
"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."
I invested most of what I had in the stock market June 2010 - September 2010; in uranium miners, rare earth companies, and silver bullion. In the nine months ending April 2011 I'd made 120% and was ready to start a business and hire. That extra money gave me the ability to hire. So an uplift in the markets can cause business invesment and employment. (I never did hire because a protective put I had planned on placing on silver in late April 2011 never happened. I'd never placed an options trade in my life and I froze at placing a $100,000 first options trade. My fault. But the logic still stands. The money I'd made in the markets could have resulting in hiring.)