No this is not a post about the American peoples’ rejection of Obama/Pelosi/Reid/Washington politics. Many others are having fun welcoming the Republican wave that swept away many notable Democrats…though not nearly enough. Jerry Brown as governor? California you have got to be kidding me. I am holding in a wait-and-see position having been sorely disappointed by Republicans far too many times.
Unbeknownst to many Americans the Federal Reserve (The Fed) had scheduled a meeting today to decide future monetary policy. I find it interesting that they chose the day after a hotly contest mid-term election to meet and announce their policies. The centerpiece of their plan is Quantitative Easing 2 (“QE2”). The Wall Street Journal describes QE2 as:
“the electronic equivalent of starting up the Fed’s printing presses to create money for buying financial assets in the market – in this case long-term U.S. Treasury bonds. Buying bonds pushes down their yields, and the interest rates across the debt markets that are closely tied to U.S. Treasury rates.”
So the Fed may not literally “print” money, but will make more of it available by buying hundreds of billions of dollars worth of Treasury bonds. Actually 600 billion dollars worth of bonds. Any guess what happens to the value of something when there is a lot more of it available? It is worth less so if you have any savings or items of value they will effectively be worth less. The Fed is bolstered in QE2 since QE1 did not create runaway inflation and in fact has held interest rates low. What it did not accomplish was an increase in commercial borrowing or a reduction in unemployment. I think we should be concerned since there are no tried and true recipes for monetary policy success. Does it make sense to do more because the first attempt didn’t blow up in our faces?
I am uncomfortable with a bunch of bankers meeting in private to tinker with our economy. The only thing worse would be allowing Barney Frank and Chris Dodd to do it. Oops too late there. I ask you to understand my trepidation with The Fed who at worst is complicit in our economic downturns in history and at best missed all of the signs that it was coming. The Fed was created to stave off such large economic events and they clearly didn’t. Many others saw the signs while The Fed missed which leads me to believe that they share the blame.
The actions are not without risk…to us. The bankers face little recourse for any repercussions. The Heritage Foundation lists the risks as follows:
- The second round will have no effect on the economy. They make the case that interest rates are already quite low and that has not spurred the economy. I attribute that to the uncertainty created by this White House.
- Inflation will rapidly increase to catch up with previous monetary policy. If inflation is coming (as I fear that it is) then additional QE2 will compound the impact.
- This will trigger asset price bubbles. Essentially loose monetary policy will promote bubbles in different sectors of the economy. As we have learned with the “DotCom” and housing bubbles, bad things happen when they inevitably break. Really bad things happen.
If you are like me you have never heard of Bill Gross. He is the manager of the world’s largest bond fund (Pacific Investment Management Company). Two thing he said recently should scare you; first is that the QE2 will likely signify the end of the 30-year bull market in bonds.
““Check writing in the trillions is not a bondholder’s friend. It is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead end where those prices can no longer go up.”
The second item hits all of us. Gross feels that The Feds’ actions could lead to a 20 percent decrease in the value of the dollar. So we are all going to take a 20 percent pay decrease, a 20 percent devaluation of our retirement accounts and a 20 percent decrease in the value of your house.
We can rest assured, however, that The Fed will have considerable oversight of its actions. Well actually we cannot rest as The Fed has absolutely NO Congressional or White House oversight. They do what they want when they want and we bear the consequences. The Fed is perhaps the most passionate “windmill” for Congressman Ron Paul (Rand’s Dad). I used the term “windmill” with tongue-in-cheek as many like to portray him like a Don Quixote character…maybe a little off-center. Paul has been fighting for thirty years to bring transparency and openness to The Fed, but the bankers and their backers have proven too strong.
Perhaps with a new Republican majority in the U.S. House of Representatives some action will be taken or at least some light being shed on the shadowy organization. Unless the new “tea party” conservatives wrest control from the entrenched politicians there is probably little hope for significant change, but there is hope and always remember what the American people shouted yesterday…