Fed Folly

There's a room where the light won't find you
Holding hands while
The walls come tumbling down
When they do, I'll be right behind you
--Tears for Fears

Fed chairman Ben Bernanke's Washington Post piece following last week's QE2 announcement seems destined for the history books. It has long been apparent that those at the Federal Reserve either don't believe or don't understand basic laws of economics. But Bernanke's statements last week elevate that institutional incompetence to a new level.

The most laughable passage is this one:

"This [quantitative easing] approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur lending. Increased spending will lead to higher incomes and profits that, in a virtuous cycle, will further support economic expansion."

Even novice minds should recognize that if such a 'virtuous cycle' could be created merely by printing paper, then we'd all be bathing in prosperity by now. The virtuous cycle the Mr Bernanke seeks to put in motion is called a bubble. And there should be little lingering doubt that the Fed is a chronic bubble blower.

To all those people wringing their hands over the increasing chasm between rich and poor, consider the central bank's role in widening that gap. As Bernanke notes above, he wants to jack financial asset prices higher. Financial assets, not base salaries, form the bread and butter of the wealthy.

Meanwhile, lower income people bear the consequential brunt of Fed policy. Tiny yields on saving vehicles where the poor and elderly park the bulk of their financial assets. Ultra cheap lending rates that encourage excessive borrowing and debt. Higher prices on basic necessities as markets bid commodity prices (below) thru the roof.

Bubble blowing creates no virtuous economic cycle. It does not relieve pressure at the bottom of the social pyramid. It increases squalor.

Perhaps the recent election will drive action to reverse the corrosive effects of central banking in the United States. While hopeful, I realize that history stacks the odds against it.

Absent proactive change in this regard, it's hard not to forecast an epic crack up--one that will make events over the past couple years appear tame in comparison.

position in USD, Treasuries, SPX