Severe storms ravaging the Midwest and South have caused unprecedented flooding of levees and riverbanks—an occurrence not seen in 74 years. If water levels continue to rise at the confluence of the Ohio and Mississippi rivers, federal authorities may be forced to breach a levee, redirecting floodwaters onto open farmland to prevent severe damage to downstream communities.
In a parallel fashion, the Federal Reserve has unleashed a torrent of monetary policy measures that also hasn’t been witnessed in over seven decades. As unemployment and inflation converge, if the influx of money continues unabated, the Fed may have no choice but to destabilize the dollar, fundamentally altering our financial landscape.
On Wednesday, Federal Reserve Chairman Ben Bernanke addressed the situation, raising eyebrows with his unwavering commitment to current economic policies. What we mean is that Bernanke reaffirmed his intention to pursue what many consider reckless strategies…
“Federal Reserve Chairman Ben Bernanke indicated on Wednesday that the U.S. central bank is not in a hurry to reduce its economic support, noting that the labor market remains in a ‘very, very deep hole,’ as reported by Reuters.
“The central bank’s policy-setting committee concluded a two-day meeting, confirming the completion of a $600 billion bond purchase by June to aid the recovery, while maintaining its balance sheet, currently at $2.67 trillion, to ensure steady support.
“Additionally, it reiterated its commitment to keep overnight interest rates, near zero since December 2008, extraordinarily low for ‘an extended period.’”
A Big Fat Goose Egg
If you recall, in late 2008, following a severe downturn in the financial markets, Bernanke and his colleagues at the Treasury implemented strategies that would have shocked former Fed Chairman Alan Greenspan.
These unconventional methods included TARP, CPFF, MMIFF, and TAF, aimed at rescuing major banks, cleaning toxic asset-backed securities from their balance sheets, and replenishing the credit market with artificial liquidity. Within just 18 months, Bernanke managed to double the size of the Federal Reserve’s balance sheet—an achievement that had taken his predecessors nearly a century to accomplish. But that’s not all…
He also initiated quantitative easing policies to artificially lower mortgage rates, providing a false sense of security to the housing market. When that fell short, he escalated his efforts with QE2, akin to a high-stakes game of roulette.
Despite these extensive measures, the Federal Reserve faced a stark reality: a significant failure accompanied by a surge in debt. Unemployment, economic growth, and commercial activity showed little improvement. Recent reports indicated that GDP growth for the first quarter was a mere 1.8 percent—which, when adjusted for inflation, essentially results in no real growth.
In most sectors, such a colossal setback would prompt a reconsideration of strategies. Surprisingly, the Federal Reserve appears more determined than ever to persist with its current approach.
Shooting Monetary Blanks
The Federal Reserve is experiencing a dwindling base of believers. International currency markets are showing signs of discontent. During Wednesday’s press conference, the dollar index slipped to a three-year low, while gold surged to an all-time high of $1,530 per ounce.
Nevertheless, the Federal Reserve seems committed to salvaging the economy, albeit at the expense of the dollar. Their training emphasizes that when the economy falters, an influx of easy credit, typically achieved by lowering the federal funds rate, is essential to jumpstart growth. Once the economy revs up again, interest rates can be gradually increased to restore balance.
For the past 30 years, the Federal Reserve has adhered to this principle with notable success, resulting in prolonged periods of economic booms. However, unforeseen challenges have emerged along the way.
With each interest rate cycle, economic busts have grown more frequent and damaging, while the booms have become increasingly sluggish. Genuine economic growth driven by capital investments and production has been replaced by asset bubbles and credit-fueled consumption.
After decades of easy credit, the once-reliable solution of monetary manipulation appears to have lost its effectiveness. When the economy needed decisive action, the Fed misfired with empty strategies. Rather than stimulating growth, public and private debt ballooned, and subsequent attempts yielded no better results.
In closing, the Federal Reserve faces an uphill battle as it navigates a precarious economic landscape. The strategies employed may require a reevaluation, as the stakes continue to rise.
Sincerely,
MN Gordon
for Economic Prism