In response to an FT article by Glenn Hutchins on 16th July 2015, entitled ''Audit' the Fed and you blunt our best economic tool'
"Equally clearly, they saved the economy"
Equally clearly they did not, unless 'saved' includes the following:
1. The highest non-participation rate since the seventies
2. The replacement of hundreds of thousands of high wage jobs with part-time minimum wage jobs giving a totally misleading picture of employment
3. A huge transfer of wealth from the middle class to the rich
4. Massive misallocation of resources and totally bogus EPS figures that are spawned by ZIRP and QE
5. The neutering of 'consequences' and the continuation of 'moral hazard' - giving the casinos their chips back so they can do it all over again
Dr Yellen and the present generation of central bankers use models of the economy that do not include money, banking, or debt. They do not even begin to describe the real economy of people resources and relationships, and are no more useful than a detailed map of a flat earth. The economy is a complex system, not a machine - there is no 'optimal control' except in the heads of people who have spent thirty years talking to a group of like-minded, I would say similarly brainwashed people, who award each other PhDs and mark each other's homework.
You might argue that they did the best that they could. I say maybe they did, given their view of the world. But saving the economy - no. They have continued the same set of blinkered policies that led to the last crisis, they have kicked the can down the road. The next crisis is on its way - a sovereign debt crisis that has started - Greece is the canary that fell off the perch. Capital will flee into the dollar but eventually the contagion will wash up in the US. The Fed will be hopelessly ill equipped to deal with it.
Do they shine compared to the fools on the Hill? Maybe they do, but then the Adams family would shine compared to that dysfunctional shower of 'know it all-do nothings'.
I don't buy your argument Mr Hutchins - personally I think the Fed is as bankrupt intellectually as its balance sheet is financially. I don't think a set of rules will fix them, neither do I think being overviewed by a group of fools will fix them. I think the invisible hand of the the natural system we call 'the market' will audit them out of existence after the next crash. I hope we don't fall for 'no-one could see it coming' - many of us do.
A Fellow Reader replied:
So what should the Fed have done instead?
They could have allowed the market to complete the de-leveraging and creative destruction that was taking place. They could have temporarily nationalised the banks, allowed the shareholders to be wiped out, negotiated a haircut with the bondholders, protected the depositors, fired the management, and prosecuted the CEOs for any and all illegality.
They could have cut out the poisonous 'assets' and ring-fenced them, allowing the bad stuff to die over time, using anything that proved to have some value to reimburse the tax payers. Then they could have sold the cleansed banks back into the private sector, after reinstating Glass-Steagall.
Whilst all this was going on, they could have got together with other central banks and the IMF and said 'hey guys this isn't working is it?' - How about we acknowledge that the solution to a debt problem is not more debt. How about we sit down and reset the monetary system consciously and deliberately? How about we ‘get’ that we have structural problems not cyclical problems, and therefore purely monetary solutions will not work.
That's one, I am sure there are others.
Pretty much all those ideas are sensible, but they are policies that only the government could enact and not the Fed.
You're right...but what was 'the government' at that time?
The power players as I saw them were:
1. A clueless and economically illiterate President who would've believed whatever he was told
2. A Treasury Secretary who was a bagman for Wall Street in general and Goldman Sachs in particular
3. A Chairman of the Fed, who just couldn't wait to get his hands on the printing machine, in order to vindicate his theory of what policy makers should have done in the thirties...a guy who couldn't see a bubble when it was right up his nose, but was 100% certain that more debt was the cure for debt
4. A spineless Congress, who initially said no to TARP, then got suckered into the melodramatic 'Chicken Licken' tales being spoken into every microphone available by Hank Paulson, and other members of the 'Committee to Save the World'
The Fed are part of the 'government'. It's not black and white, however much these guys would like us to think it is. And as for the Fed, or any central bank being independent...look up what Alan Greenspan has to say about that :-)