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The FED FOMC Meeting : What is a Central Banker to do?

 

The markets would prefer to see an Operation Shock and Awe than an Operation Twist. After all, this economy is going nowhere and there is Europe, again. Well, in terms of monetary easing, we can’t say that the Fed is sitting on its hands because the money supply is still growing at an annual rate of 23% – so there is plenty of QE going on. It is what’s needed to prevent the system from collapsing.

So what is a central banker to do? Operation Twist? Buying longer term bonds, reducing the yield curve by .oooo5%? Won’t do much in reality. More money to save Europe, as weakness is clearly felt from that side of the Atlantic? Maybe. QE2 was, after all, a life line to European banks anyway. It would only be the same story unfolding.

As you may have notice, the Fed is feeling more pressured now, ironically to do less, or stop doing something, than ever before. Hey even the Republicans wrote to the Chairman Bernanke asking him to “stop whatever it’s doing ‘cause it sure ain’t workin’”. It is indeed harder to hide the fact that after 3 years of money pumping and rescuing, the economy is still in the dumps. What? The mortgage rates have never been so low and still people are not buying houses? Damn. Well, how about real unemployment at 20%, do you think that could have anything to do with it? Or that banks don’t really want to lend to a deadbeat who may lose his jobs because – guess what – we’re back to square one – this “non performing” loan will be transferred on Uncle Sam’s balance sheet in a NY minute. The media is disappointed by the latest numbers on the US housing starts (weak or inexistent). Well isn’t that weird, there is overcapacity of one good (houses) and the producers stop producing it, who can believe it? They did not get the memo from the central planners?

But I would not let these details get in the way of more easing. It will be termed differently but they will try all their mighty to save the banks, in this case, the European banks. It doesn’t mean it will work, but they will try, since the US taxpayer does not seem to mind, for now. Also, on the effectiveness of liquidity injecting – we can have our doubts – as last week coordinated intervention by 5 central banks showed: they lent massive amount of US dollars to these troubled European banks and the effect lasted a couple of days. Their stocks went south soon after. Well if 5 central banks can make it work… wait a minute… as our Keynesians friends are fond of saying: it was probably not enough! Mr. Bernanke, get that printing press in overdrive!

Modern Bank Runs
The traditional way to look at bank runs is a line of people outside banks waiting to get their money out of there. Today it’s less graphic. It’s done by computers. A simple email will do: “please wire our funds to X institution, Thank You”. That is how the dominos start because that bank needs to write a similar email to get access to funds. In the last days, we saw a couple of multinationals withdrawing generous amounts from French banks and China even stopped its Forex swaps with European banks. Not a good sign.

Papering over a solvency problem is a very bad idea but this is the path chosen since 2008. Until liquidation occurs, we are in for a wild ride. Very good for speculators though because politicians will continue this nonsense and distort the markets – that’s when you can take advantage of it – but if you are positioned “stocks are for the long term or it’s a buy buy buy”… you may want to grab that bottle of liquor (hey governments allow us to drink now – how sweet of them – they just tax the hell out of it but hey – we should always be thankful to our overlords like good slaves) before you open those statements.

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Articles by MJ Loiselle, the MJ Economics web site and the MJ Economics Newsletter ("MJ Economics publications") are published by MJ Economics, a division of Nuno ID Inc. Information contained in MJ Economics publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in MJ Economics publications is not intended to constitute individual investment advice and is not designed to meet individual financial situations. The opinions expressed in MJ Economics publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and MJ Economics has no obligation to update any such information.