The Fed May Be Pumped Up

Via Mark J. Grant, author of Out of the Box,

Not So Fast
“For every action there is an equal and opposite reaction,” Isaac Newton tells us. It is within this context that we also account for “unintended consequences;” those nasty things that no one thinks of that tend to jump out of the bushes at you when you thought you had everything figured out. In Bernanke’s rush to increase employment and raise asset prices and lower mortgage rates, if not to help the President with his re-election; I would assert that the Fed did not go far enough in its thinking and that they may get stung by what they have not considered.
The issue here is gas at the pump.
Far more important to most Americans than the interest rate on their mortgages is how much they have to pay to fill up their cars. This is true, I think, for the group affected by both costs but the amount of people in the United States that have no mortgages and still have to pay for gas to go to work and the grocery store is a far larger amount of people than those that own houses. Further, the amount of time necessary to lower mortgage rates is a much longer proposition than the time it takes to raise prices at the gas stations. With oil hovering around $100.00 and likely to go higher as a consequence of the Fed’s recent actions; trouble may be brewing.
Even without Bernanke’s recent move the price of gas has escalated dramatically. Regular gas, since July 1, has risen 54 cents to $3.87 which is a 14% move up in just two and one-half months. It is now highly likely, in my view, that regular gas will reach $4.00/gallon and move higher from there. This will cause a hue and a cry from the streets and the Press will turn its attention to this and the Fed and Mr. Obama may well get blamed for this outcome and hence the “unintended consequence” swings fully into view.
European Banking Oversight
After this weekend’s meeting of the European Finance Ministers it is crystal clear that no new banking oversight authority is imminent. While it was a grand plan concocted in Brussels and unveiled with virtual threats that it had to be enacted immediately to save Europe; it was a flop at the meeting. The Financial Times says that any of the twenty-seven nations can veto the proposal and the push back from Sweden, Finland, Britain, Germany et al was loud and boisterous. You may recall that this concept was one of the cornerstone’s for Germany to allow the ESM to provide money directly to European Banks but it appears that it may have been more of a political place to hide than what the Germans really wanted and, in any event, the Brussels plan is nowhere close to what the Germans had in mind. The meeting had any numbers of countries intoning, “Not Happening” in a variety of languages and dialects. The two connected issues of loss of sovereignty the lack of desire to be accountable for the banks of other nations poured like a Tsunami on the scheme dreamt up in Brussels. The Germans were quite clear, once again, that any money for the Spanish banks, as one example, would have to go through the Spanish government and they would have to be accountable and also audited by the various EU institutions and by the IMF. The odds are virtually 100% that nothing will be accomplished in 2012 and quite high that nothing will be accomplished ever given the absolute power of a veto on this issue. The roll down would then be no money directly for any banks of any nation and no change to the current structure of the Stabilization Funds.
Vive la Difference
The recent position of the Fed was spelled out and will be enacted. You may be happy, unhappy or camped in between but they will do exactly what they have said they are going to do. This is a Continent apart for the recent announcement of the ECB and should be noted. The European Central Bank waved the banner of “unlimited” and “without cap” subject to the CONDITION of the EU’s acceptance and audits and the approval of any nation applying for aid. It may not have dawned upon you or most of the world but the ECB may never do anything as a result of the yoke that it placed upon itself; nothing at all may ever happen. If the Austrians and the Dutch are to be taken at their word and no more of their money is going to be used to bailout other nations then all of the fluff raised upon giant banners may be no more than flags waving in the wind. The strategy has worked to date and driven down interest rates but when people figure out that the condition is actually an impediment; the winds may begin blowing in the other direction. If “A” depends on “B” and “B” is not forthcoming then “A” is a worthless proposition.
Tell no one that I told you though. It could cause indigestion in Brussels and their food is rich enough now and costly enough for the other nations in Europe. It is a funny thing you know; when a promise made is not a promise kept then Pandora jumps about with her little box of miseries.
“Let the key guns be mounted, make a brave show of waging war, and pry off the lid of Pandora's Box once more.”
                         -Amy Lowell