The money masters at the Federal Reserve have done a splendid job, haven’t they? Well, no, and all the more reason to End the Fed, in the legendary slogan of Ron Paul.
Every few months since the great meltdown of 2008, there’s been some announcement that appears in the financial press about the latest fancy-pants move that the Fed will undertake to save the day.
These guys aren’t just printing money! They are engaged in amazingly technical maneuvers that mere mortals can’t fathom. The catchphrases are multiplying: quantitative easing, Operation Twist, sterilized QE, ZIRP (zero interest rate policy) and now reverse repo.
Stay tuned for other amazing tricks. They could pull out the camel clutch, the bite of the dragon, the hammerlock, the bridging chickenwing, the gorilla press, the octopus hold, the sunset flip, the inverted figure-four three-quarter leglock and finally, if they really get desperate, the Tree of Woe.
These names are all, of course, drawn from the world of professional wrestling. Sadly, the world of central banking is not nearly as entertaining, mainly because instead of just hurting each other, the bankers are hurting the rest of us.
You know this when you look at your bank statements and see that all your efforts to save money are for naught: Your money is losing more value through higher prices than it earns in cash.
The Fed is sending the message: If you save, you are a fool. What message is it sending to investors? It is telling them to put their money in something, anything, besides short- and long-term bonds. In this way, it hopes to stimulate some kind of artificial boost of stocks and any form of financial arbitrage besides buying and holding debt. (See the Cleveland Fed for a wicked picture of what has happened.)
This is outright market manipulation of the sort that the government criminalizes if done by the private sector. For example, the Justice Department has said it is looking into charges that book publishers are manipulating the price of e-books and also said that it might force a settlement that could wreck this wonderful emerging market. Thanks a lot!
But how does pushing up the download fee of e-books by a buck or two compare with completely wrecking the price-signaling mechanism of interest rates, the very thing that every human soul relies to estimate the profitability of long- and short-term economic planning? As a result, no one knows for sure what is real and what is not.
This is not only perfectly legal, but it has also become the job description of the Federal Reserve itself. It is nothing more than an elaborate and insanely contorted central plan designed to manipulate prices. But because the Fed has the legal monopoly and claims to be doing this in the public interest (thanks for wrecking my reward for saving!), they get away with it.
Worse, they demand our respect and deference to their brilliance. But do they deserve it? The Fed set out in 2008 to rescue the credit markets, boost the housing industry, save the employment sector from stagnation and boost the economy.
It has failed on all four fronts. Bank lending for industrial and commercial purposes is still at 2007 levels. Housing price pressure is still pushing downward, there’s no end in sight to the foreclosure fiasco and the Fed is the proud owner of as much as a trillion dollars in mortgage-backed securities. The unemployment picture is grim: Jobless claims are up, and labor force participation is at 1980 levels!
As for economic growth, it is so sparing that the whole financial press celebrates over the slightest good news like prisoners of war cheering the arrival of scraps of bread. Meanwhile, China, India, Argentina, Indonesia, Vietnam, Mongolia and even Botswana are managing growth rates between 6 and 10%. And this in times when economic growth ought to be as easy as breathing, giving the digital revolution that has blessed us with astonishing productivity gains.
The Fed couldn’t possibly have screwed up more than it has. Its zero interest rate policy (ZIRP) has been a complete failure by any standard but one: It has kept the borrowing costs to the federal government at the lowest possible levels. Even then, the fiscal budget crisis is never ending. Should interest rates come back up to something approaching a human and realistic level, the budget will blow, which the Fed surely knows and which further gives some indication that the Fed knows who and what butters its bread.
But let’s say a quick word on this new trick called reverse repo. The Fed prints money to buy long-term bonds. But then the Fed “locks” the use of the new money by borrowing it back again for short periods at lower rates. It can conduct this operation with institutions other than banks, such as money-market funds. As James Grant has said, borrowing short and lending long is a great way to go broke.
There’s a line from the Hayek-Keynes video made by John Papola and Russ Roberts put into the rap by F.A. Hayek: “You’ve got to save to invest, don’t use the printing press.” That sums it up. There is no sound investment that is not preceded by savings. To save, you have to forgo consumption. Once saved, the money can be loaned out for future-oriented projects and pay higher returns than one could experience without the initial steps of saving. That’s how capitalism grows the economy: an ever more complex expansion of the division of labor sitting on a rising stock of capital.
The Fed’s claim to be spurring economic growth rests on a doctrine that gets this whole process backward. We are supposed to consume more and save less. If that works, the ticket to good bodily health is to be a beer-guzzling couch potato and avoid the gym like the plague. Or maybe the plague is exactly what all these fancy Fed moves are actually bringing us.