The Fed Can’t Do It, But That Doesn’t Mean They Won’t Try

EconomicPolicyJournal‘s take on what the Fed did yesterday:

Thus, at this point, this move has to be classified as jawboning in the sense that it is not a clear money supply booster as say a cut in the interest rate on excess reserves would be. That said, under perfect storm conditions, this move could be enough to result in double digit money growth. The mad scientist Bernanke has mixed a concoction that is bubbling, brewing and could very easily explode. Or another way to put it is that Bernanke is in his helicopter, he has filed a flight plan, but no one knows how much money he has taken in the helicopter. He doesn’t even know, so buckle your seat belt, put your goggles on and as long term protection buy more gold.

In my opinion, Bernanke has reached the desperation stage. He didn’t want to say he was going to engage in QE2, but he couldn’t say (for fear of markets tanking) that he wasn’t. Markets dropped anyway. The policy that he outlined is not enough to keep the government solvent for very long. It will be changed soon.

The WSJ described the Fed’s actions:

Yesterday the Fed decided it won’t slowly shrink its balance sheet, which would have resulted in monetary policy moving from 200 miles per hour to 190 or so.

Fed watchers, keep an eye on the balance sheet not on their words. If the balance sheet starts to increase (and it will), QE2 is underway, with or without an announcement.

The Journal ends their piece describing the real problem:

The federal government has imposed so many obstacles to risk-taking, and so many new costs on business and hiring, that business and consumers are hyper-cautious. The Fed can print more money, but it can’t make people lend, borrow or invest.

The danger to this fragile recovery isn’t that the Fed will repeat its overtightening mistake of 1937-38. With Mr. Bernanke at the helm, there was never even a remote chance of that. The danger is that our politicians keep hoping the Fed will save the day when they should be removing the barriers to growth that Washington keeps piling on.

The Fed cannot do everything, but that won’t stop it from trying. We are on our way to massive QE.

This airplane is held together with wire and bubble gum at this point. Don’t get on board!

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