Quantum Pranx


The Federal Reserve is Deaf, Dumb and Blind

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by Justice Litle, Editorial Director, Taipan Publishing Group
Posted originally October 8, 2010

IT WAS REPUTEDLY GEORGE ORWELL WHO SAID “SOME IDEAS ARE SO STUPID only an intellectual can believe them.” He could have been talking about the Federal Reserve… As touched on earlier this week, the foreclosure fraud debacle just keeps getting better. In the latest news thus far, JPMorgan and other major lenders have become sitting duck targets for the State Attorney General. Which state, you ask? Take your pick… there are seven different ones (and counting) to choose from.

“You’re going to see a tremendous amount of activity with all the AGs in the U.S.,” Ohio Attorney General Richard Cordray told Bloomberg. “We have a high degree of skepticism that the corners that were cut are truly legal.” This is rather bad news because 1) the states are desperately in need of cash, and 2) state AGs have the ability to sock lenders with truly mammoth fines.

“In Ohio, penalties include fines of up to $25,000 per violation,” Bloomberg reports, “with each false affidavit or document considered a violation, according to state law enforcement officials.” In Iowa the cap is $40K. Ouch. Multiply that times tens or even hundreds of thousands of foreclosures, and it’s not a good day to be an irresponsible lender. No wonder, then, that the Federal Reserve is anxious to get on with the job of “QE2” (quantitative easing part 2).

The Fed is so anxious to get going, in fact, that some of its most outspoken members appear to have lobotomized themselves in a show of pre-emptive enthusiasm. Radical elective brain surgery may sound extreme, to be sure, but what better explanation could there be for the sheer epic dumbness of recent comments made?

It Failed Utterly the First Time… So Let’s Do More
Lobotomy exhibit A is Charles Evans, president of the Federal Reserve Bank of Chicago. Evans is considered a barometer of consensus thinking in the bowels of the Fed. This is what the Fed’s consensus man told the WSJ in a recent interview (emphasis mine):

In the last several months I’ve stared at our unemployment forecast and come to the conclusion that it’s just not coming down nearly as quickly as it should… This is a far grimmer forecast than we ought to have, [giving reason to favor] much more accommodation than we’ve put in place.

Well, gee. That darn old unemployment number just isn’t coming down. We printed up a lot of money the first time around, and still it didn’t come down, so now we should print “much more.” Can you see, now, why one might reasonably suspect this man has self-lobotomized himself with a screwdriver and a ball-peen hammer?

Printing money is not a cure for unemployment. It has never been a cure for unemployment. Most recently, we have seen just about the most dramatic evidence possible that printing money is not a cure for unemployment. And the only thing this man can come up with is “much more accommodation than we’ve put in place.”

Never mind the example of Japan slogging along with rates at zero. Never mind that, two years into the Fed’s “great experiment” in which a great gob of liquidity has failed to hit its mark, a record 41.8 million Americans are on food stamps and the jobless rate is near a 27-year high. And never mind that, if printing money were somehow a long-term cure for lack of jobs – as opposed to a short-term fix that quickly wears off – politicians would have drunk deep of that well already and joblessness would have been eradicated some 50 election cycles ago.

To the extent that other Fed officials think like Mr. Evans, they are not just dopes. They are deaf, dumb and blind dopes, oblivious to evidence that assaults the five senses. Everywhere and always the Fed can only print money, so it makes this the solution to every problem.

Entering the Land of Make Believe
And now, having dealt with the dope, let us move on to a Fed official who appears to be smoking dope: Mr. Brian Sack, keeper of the QE flame. Mr. Sack’s actual title is executive vice president of the Federal Reserve Bank of New York. In a recent speech, Mr. Sack unleashed this howler (emphasis mine):

Some observers have argued that balance sheet changes, even if they influence longer-term interest rates, will not affect the economy because the transmission mechanism is broken… Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.

So, Mr. Sack, help me get this straight. You want to fix the economy by screwing around with asset prices – keeping them “higher than they otherwise would be” in order to help the average Joe. Let us first ponder the Alice in Wonderland quality of this world view.

One of the key functions of the marketplace is something called “price discovery.” In theory at least, Mr. Market is supposed to be good at telling us what a stock or a bond or a commodity should be worth. Furthermore, investors depend on market signals to make rational capital allocation decisions. Putting one’s savings to work depends, at least in part, on the assumption that Mr. Market’s signals are reliable.

But here comes Mr. Sack saying “No, no, no. Let’s just artificially prop up the price of everything, shall we? This way everyone can feel richer, even if they are not. Never mind that the elevated prices are a lie in respect to real intrinsic values, or that the reliability of the market as signaling mechanism — vital to productive capital allocation — goes to hell when we (the Federal Reserve) decide to muck about with prices. Our shenanigans will make folks feel good, and that’s all that matters.”

Destroying the Middle Class
Sad to say, the drug does not even give a decent high. For most of America, the “feel good factor” Mr. Sack alludes to is a myth. This is because, in reality, the Fed is not helping the middle class with its asset-propping efforts. Instead they are DESTROYING the middle class, inch by inch. This is demonstrable by way of the following chart.

The Reuters/Jefferies Commodities Research Bureau Index, or just the CRB index for short, tracks the price of vital commodities. That basket contains everything from crude oil to copper to corn, covering a wide variety of hard asset staples.

Here is the point. When Brian Sack extols the Federal Reserve virtues of “keeping asset prices higher than they otherwise would be,” he neglects to mention that the “assets” in question encompass FOOD and ENERGY, both of which are non-negotiable cost of living inputs for the middle class.

It is true that the Fed’s policies have a distinctly Viagra-like impact on stock valuations. But the average family of four in Kansas or Nebraska, struggling to get by on a single reduced income because dad lost his job and mom is only part-time, doesn’t give a damn about that. Most Americans, deeply in debt and behind in their saving, do not have a significant enough body of investments to make hay from a surge in stocks.

The average American does, however, have a few persistently expensive habits – like eating food, heating and cooling their place of residence, and driving some type of automobile.

This means that juiced-up asset prices, through the impact of a Fed-weakened U.S. dollar and aggressive “QE,” gives the American middle class very little of the benefit and almost all of the headache. As stock prices go up, so too do gas and grocery bills… even as wages stay compressed and unemployment stays high. (The further harsh impact of artificially low interest rates is yet another topic for another day.)

Obtuse, Cynical or Worse
So why are the men of the Fed so pig-headed? Can they really be so blind as to advocate incorrigibly bad policies that fail to fix the problem, running into the same brick walls over and over again, without seeing the glaring error of their ways? The charitable attitude is one of embarrassed sympathy. These men have been lobotomized after all — or at the very least, mentally debilitated by their Ivy League educations.

The less charitable attitude is suspicion, and with it, anger. If the Federal Reserve understands the bankrupt nature of its prescriptions – and one can take the “bankrupt” part literally – that can only suggest a working cynicism so deep and dark it is almost breathtaking. It may, in fact, be that the Federal Reserve is not in truth deaf, dumb or blind… that, instead, these hollow men are tasked with perpetuating a con job, in which the main idea is to keep the game going as connected and moneyed interests bleed the middle class dry.

From this darker alternative point of view, one is best off anticipating the hidden interests of the Fed’s true masters… working to figure out the impact of the Fed’s true motives, as opposed to believing the claptrap put out for public consumption. In which case, clueless lackeys like Mr. Evans and Mr. Sack are not so clueless after all, but amicable puppets wielded in service to some old and sinister cause.





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