“MONEY IS A PROBLEM…”

8/28/10

The Dow jumped 165 points yesterday, closing over 10,000, on reassurance from Obsequious Ben Bernanke that “policy options are available to provide additional stimulus.” Dr. Bernanke outlined the following “policy options,” none of which seem all that promising, but some seem downright frightening, to this observer:

--Resumption of purchases of long term treasuries and mortgage backed backed securities.

Does anyone think the problem with this economy is that treasury or mortgage rates are too high? See my 8/3/10 post, GIMME THAT NEW AGE RELIGION.

Perhaps the Fed is thinking of taking the turbocharger off its printing presses and replacing the entire mechanism with a good old large block V-8 to give the presses some real grunt. Then the Fed could just buy everything in sight; why limit its sights to treasuries and mortgage backeds? Why not corporate bonds, houses, common stock…what the heck? It’s a “crisis,” after all, so such trite philosophical concerns as free markets and private property sometimes have to be sacrificed in the interest of the common good.

--Lower the interest rates the Fed pays banks on reserves those banks hold at the Fed.

This one is promising; when banks are getting paid 25 basis points to hold money at the Fed with no risk, the banks have less incentive to do other things with their money. Reducing, or eliminating, the interest rate the Fed pays thus might induce banks to lend more. However, we only have 25 basis points to zero. And if there are no borrowers, or at least borrowers who can repay (a quaint qualification that seems to have been abandoned in the nuttiness that characterized the early years of this decade but is now making a strong comeback, apparently much to the dismay of policymakers and investment types whose idea of distant history is 2008, but I digress), even 0 basis points might look acceptable to understandably, and newly, cautious banks.

--Continuing to keep short term rates low for a longer period of time, and/or promising to do so in a manner which would seem credible.

Here we are dealing with one of the classic definitions of insanity; to wit, repeating the same action and expecting different results. This policy has not worked and, even though a classic political reaction to something not working is assuming that more of it will, it has not worked because this policy has a fundamental flaw, as does effectively doing the same thing in the longer reaches of the curve: it punishes savers and rewards spenders. This is not a salubrious prescription for an economy that ran aground due to excessive debt and non-existent savings.

--Increasing the inflation target to more than 2% from its current 1.5% to 2.0%.

My first reaction to this piece of sheer brilliantness from our central bankers is that such a move is completely unnecessary; the inflation rate is headed up, and way beyond 2%, as a result of the Fed’s actions to date. The market will give as much consideration to the Fed’s targets as Mexican drug cartels give to law enforcement in our troubled neighbor to the south.

My second reaction is that, taken to extremes, this policy might actually “work.” One “solution” to a problem of too much debt, and unpayable debt, is to abrogate the debt. Inflating it away is one way to abrogate debt. This worked wonders in Weimar Germany.

Perhaps the truth is that, despite Obsequious Ben Bernanke’s anodyne assurances, the Fed is out of measures it can realistically take to solve our economic problems. Or maybe the truth is even worse: the only “solutions” the Fed can provide involve either buying everything in sight and/or effectively abrogating debts by inflating them away…and it is seriously considering such measures.