US Federal Reserve Chairman Ben Bernanke gave a speech last week. It was hard for me to tell if he didn’t really believe some of the things he was saying and was saying them solely for political purposes, or if he really did believe them and was therefore totally delusional. I can’t read his mind … and frankly if I could I’m not sure I’d want to. In the end, however, Ben’s thought process isn’t really important. What matters is his actions. What matters is the implemented policy his thought process leads to. Useful actions can arise from delusional reasoning, after all, and vice versa.
For those not up to speed on the Fed’s current activities let me summarize. In 2008 and for years prior the Fed kept a working “book” of about $900Billion. This was working capital for them, necessary to fulfill their mission. It was composed mostly of US Treasury (UST) bills, notes and bonds and enough foreign debt instruments to service routine exchange commitments with other central banks. You have money in your checking account to manage the household; the Fed had $900Billion to manage its chores effectively, too. All well and good.
In 2008 we fell into a hole. The Fed ran that total up to $2Trillion, essentially purchasing home mortgages in an attempt to stop the housing crisis by engineering a drop in mortgage interest rates. This program was called Quantitative Easing 1 (QE1).
In 2010 the Fed decided to reinvest the monthly cash it was receiving from those mortgages, called ‘runoff’, by buying more mortgages to hold that balance at $2Trilion. It also started buying UST. The Fed bought sovereign US debt because Congress and the President were not addressing the deficit, nor the rising debt. We were (and are) running $1Trillion deficits annually, and show no signs of getting that in hand. This was QE2.
Ben’s QE1 was, in short, an attempt to stop the bleeding in the housing market. It can be said to have helped, but not much. Bubbles that huge, when they pop, create havoc. There are just not enough monetary band-aids to stop that sort of massive bleeding entirely.
QE2 was different. It showed a bit of panic on Ben’s part. QE2 was initiated in 2010 just as the Republicans were taking over the House of Representatives, and gridlock as obviously going to be governmental reality for a long time. QE2 ran the Fed’s total of mortgages and UST up to $3Trillion, as of today. Of course, all of this buying had to be paid for in cash. Not having that cash on hand, the Fed just created it out of thin air. There’s more than a fringe opinion that this whole money-printing gig is going to do more harm than good, setting in place an inflationary pressure the Fed will not be willing or able to contain.
That’s $2.1Trillion of freshly printed US money in just four years. Ben’s religion is printing money would forestall another recession and allow WDC to get serious about the deficits. Interestingly, Japan and the EU are doing the same and for the same reason: buying time and praying the politicians will get their act together. Hey, don’t get cynical…it could happen.
As of last week, however, that still has not happened, so Ben gave a speech. A contradictory speech, at it’s core.
On the one hand, Ben announced QE3. He’s still trying to get the housing market inflated back to health (and if you see the irony in that statement come sit by me), so a couple months ago he announced that in addition to the mortgages he currently owns, and in addition to the new mortgages he’s buying each month with the ‘runoff’, he intends to buy still more. An additional $40Billion in mortgages. Per month. $480Billion in new mortgages a year. Indefinitely. Forever if necessary. Ergo the new nickname: QEternity.
Just as a quick aside: what does it say about an economy in which the most crucial element of economic recovery is perceived by the Fed not to be the manufacturing sector, nor research & development, nor new business formation, nor natural resources development, but housing? Housing? If housing the now the essential core of our economy, worthy of the massive intervention of the Fed to the virtual exclusion of all others, we are already a zombie economy.
Ben also announced he intends to continue a program called “Operation Twist”, a program in which the Fed sells short dated UST it owns and buys long dated UST in the market. This is a technical program, entailing a process called “sterilization”. The essential element of it is that it involves another $45Billion a month in purchases of US sovereign debt.
In 2013 these two programs will bring the Federal Reserve into the bond markets as a buyer to the tune of $85Billion a month; $1Trillion a year. Which just happens to be the size of the federal deficit. It’s that a strange coincidence?
So one half of Ben’s contradiction is that he has announced … whether out of genius or insanity … that he will be the autocrat of the long term debt market for US sovereigns and mortgages into the indefinite future. He said clearly he will print as much money for as long as it takes to fund these buys. Forever if necessary. QEternity and sovereign debt purchases too.
On the other hand, Ben’s issued a series of what what were intended to be stern, frightening warnings to Congress and to Obama, as they face off over the specific issues of the ”fiscal cliff” and more generally and broadly, over taxation and spending. I had to laugh. The warnings were risible in the face of the Fed’s announced actions.
Toothless Warning One: Ben insisted that deficit resolution must be undertaken immediately. He waved the bloody rag, saying the Fed had done all it could. He then cautioned that all deficit reduction policies should be long term and credible, but not be contractionary; not give the economy a hit in the short term. If you are going to print money to infinity this is utter, mindless nonsense.
Debt is financial heroin. You get the high of living on money you can’t earn, and to sustain the high you borrow more until the supply runs out. Then there’s hell to pay. And all that’s left to do is print money until that short term supply fix destroys the economy, which printing money always eventually does.
Heroin addiction isn’t solved by providing a steady, reliable supply … printing more money in monetary terms … it’s solved by reducing the size and frequency of injections until the addict is clean. Starting today. Right now. Not five years from now.
The contradiction is that Ben is saying we won’t start reducing the size and frequency of the heroin injections until the addict is totally clean and sober. This is completely irrational. Fixing the mess “later” means fixing the mess “never”, because one congress can’t bind the next. And no sitting congress in the future will ever allow that pain to happen.
Toothless Warning Two: Ben made what was for a central banker a harsh statement. He said the Fed does not have the tools and the ability to fully offset the ill effects of going over the “fiscal cliff”. This was intended to scare the bejesus out of Congress and the President. I felt sorry for Ben, a bit. The audience was polite; they didn’t chuckle but there must have been a bunch of them biting their lips.
Ben’s warnings are lame. Useless. Pointless. Toothless unless he really intends to cut off the QE3 and Operation Twist purchases unless Congress and Obama get with it. Which he does not. He’s been mouthing these same stale ultimatums for several years now. Ben’s become the equivalent of an old man standing in his front door, waving his cane and yelling “you kids get off my lawn.” I could hear Congress yawning, and Obama’s snores, all the way down here in Texas.