Friday, January 15, 2016

The Joke is on The Fed

If you had no idea what the Fed had been up to and someone simply told you the facts, you might get to the wrong conclusion.  Try this set of facts:

Since mid-December, virtually all market interest rates including short term treasury yields, mortgage rates, etc. have fallen precipitously.  As of today, the excess reserves of the commercial banking system is 2 1/2 trillion dollars, making banks essentially desperate to increase their own lending activity, if only they could.

Now, if someone told you the Fed made a major policy decision in mid-December, would you suppose that the Fed had tightened or loosened monetary policy?  Right.

The only thing the Fed has accomplished since 2008 is to create massive distortions in member bank reserves and to provide a backstop, unneeded, to parts of the fixed income market.  Why this was useful is not clear.  The idea that low rates fueled the stock market rally seems not consistent with the effect of the recent decline in interest rates and recent stock market behavior.  If there really was a link why are lower rates preceding a major drop in the stock market?

The truth is that lower interest rates reflect the meager amount of commercial lending in the US economy and the pitiful economic performance since 2009.   Millions of Americans have given up hope of ever finding a job in the Obama economy so "unemployment rates," which don't factor in the millions who have given up looking  for work, have fallen to 5 percent.  The real unemployment rate, after including those who have given up hope, is well over 10 percent -- that's recession territory.

The Fed attracts a lot of media attention, but the Fed's impact on the economy is minor, at best.  The real bad actor is Dodd-Frank legislation and its accompanying regulatory regime, which has strangled the once mighty financial sector of the American economy,  Commercial lending is all but outlawed by the repressive Obama regime, unless loans are made to their political friends.  This is China banking, not free market banking. 

But, China is going the other way.  They are moving their banks toward free market banking, while America moves its banking system toward becoming simply another arm of an ever-increasing government sector. 

Hence, no economic growth and a growing malaise.  But don't blame it on the Fed. Admittedly, Fed policy is ridiculous, but it is mostly irrelevant.

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