by Aaron Krowne
How soon we forget.
There has been a lot of good commentary on the Fed’s latest round in its programme of “quantitative easing” (or “QE”), announced Tuesday, for $600 billion in additional bond buying (or is it $900 billion?) But it all seems to have missed the most important point: the Fed has shattered its credibility because it has broken its own promise, maintained doggedly over the last 1-2 years: that it would quickly exit from its emergency intervention programmes (most notably QE).
While people can argue all day, fruitlessly, about whether the Fed’s interventions are of the right sort or wrong sort, too little or too much, and whether they “worked” or did not, the one thing no one can dispute is that the Fed has failed by its own benchmark–the most important of this economic crisis–whether it can ever exit them and return the financial markets to normalcy.
Bernanke even did a whole song-and-dance in the Wall Street Journal (or some other such rag–does it really matter?) last year about “having an exit strategy” when too many people were seen to be making bothersome noises out the blatant lack of one. Ben laid out a number of vague “strategies” to ostensibly do so. I never figured these were worth the paper they were printed on. And indeed, any “exits” the Fed & friends have made since then have been counter-acted by other areas in which they have in effect poured massive amounts of new money into the fixed income markets (not to mention the increased reliance on FHA mortgages, and other forms of implicit and explicit fiscal props). There has be no overall “exit” at all. The Fed’s balance sheet is still inflated to near record highs, and is still filled with (at minimum) tens of billions of what are almost certainly dodgy assets (Fed asset chart courtesy of Ryan Puplava).
One has to ask the question if these kind of assets, then, are what now back the dollar. The Fed still has subprime assets, and now there are revelations that loss-making flaws may be rampant in all mortgage-backed securities, regardless of estimated credit quality. How is the Fed ever going to sell these back into the open market? It can’t–at least not without the money being printed by the government somewhere else.
The new round of QE overtly acknowledges this. The Fed justifies the policy backslide by pointing to the soft economy — but as they had also predicted we’d be back on track to robust growth by now, this is just another sense in which they are discrediting themselves. There is also no plausible mechanism by which the Fed’s 0% rates and toxic asset/bank support could even “re-start” the economy. So once again, those unsavory contrarian internet financial pundits have been proven right, and the venerable Fed has been embarassingly wrong.
As if that were not enough to cast terminal doubt on the dollar, the Fed slyly asked Wall Street in the weeks prior to its big announcement how much money they would like it to print. Beats a dartboard, I suppose. But it is disturbing to the core: it belies that the Fed really has a plan at all or knows what it is doing; that they are proceeding in a consistent, scientific (if legal) manner; or even that “quantitative easing” is an appropriate term–if there’s no specific quantity or even methodology to determine one, isn’t it really qualitative easing?
And that hits the nail on the head, I think: all the Fed (as well as the Treasury and Congress) are doing in response to the crisis is papering over the qualitative problems with our debt markets. They were hoping the problems were “isolated” to just subprime residential mortgages, but the bad debt is turning out to be much more widespread, since it was really the result of an economy-wide credit bubble (brought on by decades of inflationary Fed and federal government policies). They have in fact sacrificed quantity entirely for an innumerate theory of central banking–one, I might add, which has been tried by Japan since the burst of its financial bubble in 1990, and has failed.
So now they are painted into a corner (like Japan still is). The financial markets have only looked OK in the past two years inasmuch as they knew they could depend on the Fed and Treasury to directly underwrite the problem areas. Actually fixing the problems would require that major financial firms take losses, or at least, large permanent fiscal allocations be made by the government for them to be truly bailed out. Since neither has been done, the Fed is stuck.
What does this mean? Fool us once, shame on us; one could perhaps be excused for thinking the dollar would survive bailouts & QE 1.0. But twice–with no credible path to change– is permanent policy. That policy is that the dollar is being thrown under the bus. It’s fate is sealed.
I hope you all have your gold and silver. If not, please look at the below chart, and ask yourself what you are waiting for.