Well, The Fed announcement just came out. They decided to continue “Operation Twist” buying Treasuries over 6 years and selling those under 3 years to maturity. They also announced that Agency Bonds which run off will have principle reinvested in new Agency Bonds (along with the interest). So if, for example, the FDA issued a bond to finance some project it would be held to maturity and allowed to “run off” with any revenue from it used to buy any added Agency bonds (from the FDA or from some other Agency of the government).
The “outlook” was for very slow growth and that both employment and growth had slowed, but no change in interest rates (that are already near zero) on Fed Funds.
This is all in keeping with the notion that “Monetary Policy” (things The Fed can change) has done about all it can do. In a talk to congress, The Bernanke had strongly pushed that there was a need for “Fiscal Policy” (spending by congress) to take on some of the burden of stimulating the economy. Basically, at this point, The Fed is having a hard time moving the needle on economic activity all by itself. IF they had a further “Quantitative Easing” (pushing a load of easy / free money out to banks) it would be unlikely to cause much of an increase in lending and economic growth. (Though it might well end up shoved into asset markets and drive up prices of things like stocks or currency swaps… a bit of ‘leakage’ that The Fed and Congress rarely like to talk about…)
So they, too, decided to “Kick the Can” and just keep doing the modest stimulative things they are doing now.
In looking at this, it is clearly all Keynesian and not looking at larger international issues. Yes, that’s what The Fed is supposed to do. Still, it isn’t all that bright to ignore the elephant in the room.
The basic thesis is that “cheap money” from The Fed handed to banks at very low interest rates will be rapidly loaned out to businesses. Businesses will be eager to borrow money at 1%-4% and put that money into productive investments in plant and equipment (supposedly returning 5%-10% real rate of return, so netting 4-9% profit).
That thesis is the foundation of Monetary Easing. It even worked reasonably well back in the ’50s and ’60s. Basically, the thesis matched the economic structures of the time and worked rather well then.
Today is a different world. First off, if J.P.Morgan picks up $10 Billion from The Fed, that money can be in London overnight. Buying swaps and derivatives on various index funds from around the planet. (The trade that got them in trouble was something like that). That kind of investment banking activity was banned to banks under Glass-Steagall that was repealed; so now Fed money can be bet on Greek Credit Default Swaps in London, not just invested in a new business in the USA. Just as rapidly, that money can be loaned to GE and used to shut down a light bulb factory in the USA and move it to China (which they did).
In essence, “easy money” today does not necessarily flow into productive investment in growth of the productive economy in the USA. Given the large spending by government, that money can even be loaned (via bonds or directly) to some Agency (such as the NSF) to be handed out as grants to friends to conduct worthless politically directed “Climate Research” and spent on things like junkets to Rio.
So The Fed shoving money at the banks to make loans is no longer as directly tied to increases in economic activity in the USA.
Similarly, the borrowing side is being spanked by Congress and so is reluctant to take up the money either.
The main thing that The Fed wants to do (and that Congress wanted done) was to support asset prices in real estate. Essentially to prevent all those “Troubled Mortgages” from collapsing to their real (much lower) value and putting millions more homes into foreclosure. So “easing” is done on the Monetary side. At the same time, Banks were subjected to severe increases in regulatory burden and higher “lending standards” were demanded. (Never mind that Congress had mandated the “lend to anything with a pulse” standards that caused the mess via the CRA). So on the one hand Monetary Policy was being asked to increase lending to folks who were not a good credit risk ( home value underwater or they always were a bad credit risk) while at the same time the regulatory and legal context was making such lending punishable by Congress…
The end result being that the banks took the ‘easy money’ and put it in the vault. This raised their “reserves” and made them more highly “capitalized”; so they could meet the new regulatory burdens; but did nothing for housing nor for home prices nor for the folks with “troubled mortgages”… And somehow Congress was surprised by this.
Similarly, Obamacare and a Rabidly Carnivorous EPA have made an outright hostile and entirely unpredictable business environment. How can I plan an investment to return, IF I’m lucky, 5% to 10%; when I’ve got a completely unknown labor cost component but likely rising fairly fast? How can I plan an energy intensive operation like Aluminum Smelting if energy “prices will necessarily skyrocket”? (to quote Obama)
So The Fed is nose to nose and belly to belly with Congressional Multiple Personality Disorder and Presidential Policy Hostility. They can push on the Monetary rope all they want, not much happens.
Thus the presentation to Congress where The Bernanke asked for some Fiscal Policy help…
Unfortunately, were Congress to act, that would most likely be in a form that did not address any of the real issues (as listed above) but would instead be more Porkulus Spending. Shoving money borrowed from the Chinese at Friends Of Congress. (Buying more GE Windmills and moving more GE factories to China. Pushing more money at academics to spend in Rio Party Grande. Lining the pockets of the well connected who financed Silly Solar Ventures and bet badly, but are “Friends of Democrats”, so get a public bail out.)
IMHO, that’s the basic problem set. Congressional and Presidential (administrative) actions are actively hostile to business in general and specifically killing banking and energy industries (and strongly wounding the food and agricultural space with the FDA over reach into “food safety” that has potluck dinners at organic farms shoved into the garbage for not being “FDA Inspected”… and wants to force a chip to be put in every farm animal so someone makes a bundle on chips and readers.) They are acting very stupidly. That puts folks out of work and moves industry to places like China that are much more business friendly. Then they want “easy money” to fix it.
But there comes a time when even 0% free money can’t “fix it”. IMHO, that’s where we are now.
So The Fed kicked the can down the road to September. (Any guess what they will do one month before the election? Yeah, kick just a bit further…)
At the G20 meeting about 1/2 $Trillion of more money was pledged to the IMF for emergency relief, yet none of it was earmarked for Europe or Greece / Spain / Italy. As we saw with the USA, even a full $Trillion does nothing when faced with structural and legal forces to the contrary.
Oddly, much of the money is to come from the same places that are likely to need it. It looks to me like a bit of a shell game to just reposition the Lending Blame onto the IMF and off of individual countries or central banks.
It reminds me of a cartoon I once saw. That one was a computer company barb. Unisys was being formed out of Sperry and Burroughs via a merger. Both were losing badly in the marketplace to companies like DEC and IBM and HP. The cartoon showed two rocks on the bottom of a river one labeled with each company name. They had a rope tying them together and the caption said “Maybe if we tie ourselves together, then we will float!”
IMHO, that’s what is happening in the Euro Zone and writ larger in the Industrialized West. We’re all desperately hoping that tying ourselves together will make our rock float. The EU via integration ever more tightly into One Big Rock… The USA via ever more “Be Like European Socialism!” policies, that ignore what made the country great, in a fit of EuroEnvy of social policies. Loads of added “treaties” and “free trade zones” and a dozen and one other “tie us together” actions. And with things like the UN and IMF acting ever more like an octopus of oppression preventing anyone from leaving the pit.
When all that is really needed is to unfetter Adam Smith’s “Invisible Hand” and let individual initiative innovate and improve the economic status of all of us. We have many existence proofs that “Central Planning” fails, that over regulation just results in large bloated industries feeding at the government trough (and demanding ever more protective regulation to prevent competition), and that free markets and free people have “emergent behaviour” that is superior in asset allocation to that which can be done by any committee or commission. There is even information theory that shows that the distributed information flow and processing power of the “cluster computer” of individuals must exceed the capacity of any small central group.
So why do we do “stupid things” like we are presently doing? Why is The Fed in this box? Why is the Euro Zone slowly dissolving into muck? IMHO for the simple reason that the decisions of “The Few” are best in outcome for them, and not for the rest of us. A few Crony Capitalists get very rich off of a Fascist style Socialism where Herr Commissar makes sure they get all the business in exchange for certain “social goals”. Herr Commissar gets a nice salary and pension from the Taxpayer too. The Unions get a cut of the action from the large Crony Capitalist enterprise that they could never effectively blackmail out of 20,000 individual entrepreneurs. In short, those who are politically well connected LIKE using politics and government for their own enrichment and folks in government LIKE being important (and having a nice post-government job offer…)
The system grows until there are just not enough “losers” left outside that cozy little system to support it anymore. Then it collapses. At present, the Government Take is about 1/3 of the economy. Some other large part goes to excessive prices of goods and services ( electricity that ought to be 7 to 10 cents / kW-hr that is instead 14 to 24 cents / kW-hr; light bulbs that were 19 cents each 2 years ago and are now unavailable so you must buy the $8 GE ‘curly bulb’). Eventually there is not enough left for the middle class to live on, and folks just stop. The “Tax Take” comes in way short, and deficit spending balloons as The Players in the grand game are completely unwilling to cut back their take; and everyone hopes “If we tie ourselves together, maybe then we will float!” while looking at that next wallet over…
Then begins the reaching into other pockets. Greece is borrowing from Germany who wants the money to come from the IMF (so spread around more). The USA is borrowing from China and anyone else with greater fear in their own money. Ever more borrowing to keep the game alive. Ever more binding of each stone to the next. That game continues as long as there is “fresh meat” in the game. And The Fed keeps pushing just enough Novocaine for folks not to notice that we’re broke, we’re not getting better, and we’re not fixing the system.
One can only hope that the economies that are working will decide to stop funding the mutual pick pocket game of musical wallets…
But for now, the music continues to play and we can all walk slowly in a circle inspecting the wallet of the next person over. While Greece nervously eyes the place where it last sat being taken from the circle…