Why Should Anyone Including The ECB Take The Fed Seriously?

Top Fed economist slams ‘incoherent’ ECB

The US Federal Reserve has launched a blistering attack on the European Central Bank, calling for quantitative easing across the board to lift the eurozone fully out of its slump.


These are the same guys that incited and fed a bubble in credit and mortgage finance after the dotcom equity bubble imploded. And when sub-prime gave the first warning sign that the credit bubble was imploding, the wizards at the Fed claimed it was “contained”. Then they looked at their Ouija Board (aka models) and claimed that housing prices will remain robust and that the rest of mortgage finance (alt, prime, jumbo) was in pristine shape and that the economy would not be impacted at all.

So the biggest correction in credit inflated asset markets in recent memory were completely missed by the prognosticators at the Fed. And they want to lecture the ECB and others.

But the track record of the Fed is even worse. Under their tutelage the purchasing power of American citizens has been shredded by over 95%. And they have the gall to advise German citizens that they should tolerate greater than 2% annual debasement of their purchasing power of their hard earned labor for some ephemeral rationale. Look, over the past 5 years the Fed has tripled their balance sheet by printing over $2 trillion dollars. The federal government has provided fiscal stimulus by increasing their debt load over this same period by some $6 trillion. After all this the US economy is barely limping along with the weakest post-war recovery. Recently, the first quarter GDP was revised down to 1.1%. Whoopedeedoo! This is the great achievement by the snake oil salesmen at the Fed with their money printing and government debt monetization.

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The Fed incited and sustained inflation in the 70s which then had to be crushed by high interest rates in the 80s. Some of us think that the American and world economy would do much better if the Fed and other central bankers stopped meddling with markets and refrained from more harebrained schemes than we have had from them over the past century. Enough of their snake oil. The best policy for the west would be to restrict the central bank to only being a lender of last resort discounting real bills of trade of solvent institutions. It’s time to end their monetary mis-management. Isn’t a century of failure enough?

What the Fed Does Control

For context, let’s recall what the Fed actually does control:

  1. The Fed controls the Fed Funds Rate; i.e., the lending rate between banks.
  2. The Fed can influence interest rates in the real economy by buying and selling Treasury bonds and other securities; i.e., increasing or decreasing liquidity/money supply.
  3. The Fed can make funds available to the financial sector. During the 2008 Global Financial Crisis, the Fed loaned over $16 trillion to large global banks. This is roughly equal to the entire gross domestic product (GDP) of the U.S.; all residential mortgages in the U.S. total about $9.4 trillion.
  4. The Fed can invoke the public-relations magic created by belief in its power to issue grandiose pronouncements; for example, “we’ll keep interest rates low essentially forever.”

That this is, strictly speaking, not completely within the Fed’s power is left unsaid, lest the magic dissipate.

So the godlike powers of the Fed boil down to three monetary levers.

What the Fed Doesn’t Control

Here’s what the Fed cannot do:

  1. It cannot force any enterprise or person to borrow more money.
  2. It cannot differentiate between productive investments and financial speculation/malinvestments.
  3. It cannot distribute money to households by dropping cash from helicopters; all it can do is make money available to banks.

Since it can’t do any of these, its powers in the real economy are severely limited.




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