Federal Reserve Social Engineering

“Federal Reserve policy makers may want Americans to expect inflation to accelerate in the future so they spend more of their money now.”

Apparently, it is no longer the governments role to provide a stable currency, It is the citizens’ role to see their savings stolen in the name of the greater economic good. Assuming we define that greater good as buying more rubbish from China, paying $100+ (coming soon!) for a barrel of oil to despicable regimes, and pushing citizens into extreme debt to buy overpriced housing. Now the final straw, since 0% interest rates haven’t done the trick, we carry a failed policy to a new extreme. Savers will be treated like parasites on society they are, told to consume now or lose their savings. A policy by unelected Fed officials implemented by a corrupt and socialistic financial sector that privatizes profits while socializing losses.

When Obama pushed through a $800 billion stimulus and a $700 billion bank bailout, we were rightfully outraged. Now the Fed will seek to spend somewhere around $1 trillion buying assets at all time high valuations. On top of $2 trillion spent last year. Since they are printing the money to buy these assets, there appears to be no cost. That is not true. We are all paying the cost. Conservatives should recognize the false siren of “something for nothing”. In fact, proper fiscal stimulus (focused on sound infrastructure investments where there is very limited crowding out of private investment) is less wasteful than monetary policy at this point.

The question is where does this money go? The money goes to the holders of bonds (primarily banks and private individuals) and comes from depositors in those banks. Banks are net borrowers of capital, so they benefit from lower costs. In most situations, they turn around and lend the money to real productive enterprises. But the problem in America today is not a lack of credit, it is a lack of qualified borrowers. Corporate America is already sitting on a record $1 trillion plus in cash, waiting for regulatory and market certainty before investing. A .2% reduction in mortgage rates is unlikely to stimulate a revival of the housing market.

So what will the banks do with the lower cost of capital. I have 3 ideas- 1) fund LBO’s, basically returning to excessive debt and lax credit policies of the bubble 2) fund speculation in foreign exchange and derivatives trading and 3) invest in emerging markets. All of these are fine, if they are not being effectively subsidized by a policy. Why these 3? Because they are the easiest way to deploy $1trillion. Bubble banks like huge profits with minimal work- who doesn’t? Finding $1trillion of real economy loans is hard work, especially when corporations are already holding well over $1trillion in cash. Lending to the real economy requires a lot of commercial bankers. It justifies fewer $10 million bonuses.

Lending to financial speculators on the other hand is easy, highly scalable, and appears to be lower risk (at least until we get a systemic breakdown that sticks taxpayers with a bailout bill). How many advertisements do you now see on CNBC for FX trading (and the 50-1 leverage that banks will provide retail customers here)? That is where the money is going now.

Effectively US policy is now encouraging accelerating inflation- that is keep printing money until we have healthy rate of inflation (presumably around 4-5%) because the current inflation between 1-2% is unacceptably low. The beneficiaries of this policy will be TBTF bubble banks, leveraged investors, emerging markets, and commodities producers. Losers will be US savers and consumers. 

I blame the Fed here, but the real source of the problem is the Humphrey Hawkins act that requires the Fed balance inflation with unemployment. The Fed should focus solely on stable prices. 1% inflation is stable. But they pursue a destructive policy that is based on the false premise that inflation creates jobs and economic growth, something Milton Friedman explictly refuted. For this policy to work, we must assume Americans are fools who will mistake this inflation for real economic growth? Given how little outrage there is over the Fed’s actions, maybe they’re right. Looking at Maxine Waters on the finance committee, they’re definitely right.

The Fed’s work is some of the sickest social engineering going on right now, largely unnoticed. Their actions are unprecedented and widely misunderstood. But they are effectively penalizing savers to support banks, that by any market standard should be bankrupt. The policy will create massive market distortions while providing little benefit to the US economy. It is a bailout to banks and a welfare system for leveraged speculators. QEII is the policy equivalent of curing a hangover with a bottle of vodka. And it will be just as effective, ending in some cataclysmic bust up before a wrenching rehabilitation.