EconoMonitor

Pushing on a String

By now, I am pretty much bored silly with the nonstop Fed watching, commentary, will they/wont they chatter about today’s FOMC announcement. So much ink has been spilled over the subject, that much of this is well trod ground.

Rather than repeat the usual blah blah blah, I thought I might raise a few points that might otherwise be overlooked:

1. Zero: With Fed rates pressing at the zero boundary, there is only so much ANY central bank can do to help the economy.

2. Not the usual cyclical recession: The Credit Crisis creates a specific recession recovery cycle. It is markedly different than a regular recession, and characterized by consumer de-leveraging. Hence, low rates are ineffectual to stimulating growth.

3. Fiscal vs Monetary: Problems with unemployment and weak growth will eventually be repaired via the elapsing of time. The alternative is concerted, targeted, intelligent stimulative action from Congress and the White House, unlikely to occur due to ideological rigidity, partisan posturing, and lack of economic intelligence in DC.

4. Wealth Effect: Is widely misinterpreted by economists, including those at the Fed. (It is more correlation than causation). Hence, the Fed’s focus on asset prices such as equities is utterly misguided, and doomed to disappointment (as we have already seen).

5. Liquidity vs Solvency: Central banks can provide a gusher of liquidity to prevent the financial system from seizing. They cannot make insolvent banks whole; they cannot turn debtor nations into creditors; they cannot spin dross into gold.

6. Bailouts: Do not resolve the underlying problems, they merely paper them over. Hence, the 2008 rescue plan, now 3 years old, is fading, once again revealing the underlying problem with a finance sector that still has too much debt, too little capital.

7. FOMC Transparency = Central Bank Failure. The Fed’s moves to be more transparent is an admission that their prior policies have failed to gain the traction they hoped. Interest Rates are totally transparent, the time period they will stay where they are has been unequivocally stated. More jawboning is not a solution.

I am curious to see if Ben Bernanke has any more rabbits to pull out of his hat. If he fails to produce another QE2 like miracle, the odds of a 2012-13 recession will tick higher.

This post originally appeared at The Big Picture and is reproduced with permission.

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Dan Steinbock

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