Many contemporary economic challenges stem from an optimistic assumption: that the wealth effect generated by soaring asset prices would spark increased demand within the economy.
The theory posited that as stock values climbed, investors would feel more confident about their financial standing. This newfound confidence might lead some individuals to splurge on 72-inch flat-screen TVs and cutting-edge electric cars, all financed through credit. Eventually, this would result in a rise in gross domestic product, a spike in wages, and a decline in unemployment—leading to an enduring economic boom.
However, this optimistic theory has revealed itself to be a significant miscalculation. While asset prices indeed ballooned, and purchases of luxury items reached unprecedented levels, the unemployment rate—as reported by government statistics—declined only nominally. Conversely, real GDP growth failed to exceed 3 percent in any calendar year, rendering the anticipated economic boom nothing more than an illusion.
Meanwhile, the reputation of the Federal Reserve Chair, once held in high esteem by journalist Bob Woodward, has dramatically diminished. No public relations strategy or press briefing can reverse the damage incurred. Adjusting policies or modifying the balance sheet won’t restore the Fed to its former stature.
The current image of Fed Chair Janet Yellen has descended to that of a rogue figure, comparable to a scandal-ridden Congressman. The transformation from respected leader to disreputable official in just over a decade has been astonishing. From Zero Interest Rate Policy (ZIRP) to Quantitative Easing (QE) and Operation Twist, it has been one absurd decision after another.
Sanitized for Public Consumption
Indeed, the Fed has brought this disgrace upon itself. They’ve made their bed yet remain reluctant to lie in it.
This week, the minutes from the June FOMC meeting were published. The documents revealed that several FOMC members recognized that “equity prices were elevated when measured against traditional valuation metrics.” Some expressed concern that the low market volatility and diminished equity premium could foster financial instability.
Regrettably, these minutes are presented in a sanitized format, stripped of identifying details and anecdotal color. The raw truth and candid exchanges are lost in this genteel summary.
Perhaps decorum and refined etiquette still prevail within the hallowed walls of an FOMC meeting, but this is highly questionable. In recent years, the standards of social interactions, both professional and public, have dramatically deteriorated.
Consequently, we have taken the liberty of crafting a brief reimagined dialogue from the FOMC discussions, aiming to restore the true nature of the conversation. What follows is a fictionalized adaptation of actual events that transpired during the June 14 FOMC meeting. Enjoy!
Tales from the FOMC Underground
“What should we do?” began Yellen. “A decade of lax monetary policies has transformed financial markets into a Las Vegas casino, while our economy has been as lazy as my unkempt housecats.”
“What on earth was Bernanke thinking?”
“Honestly, Janet,” retorted New York Fed President William Dudley. “He wasn’t thinking at all. He made a mess and then made it worse.”
“Now we’re left to clean up his mess while he flaunts his newfound courage to act. The reality is we need to orchestrate a market correction, and we need to do it by year’s end.”
“Well, for crying out loud, Bill!” exclaimed Dallas Fed President Richard Fisher. “With the exception of Neel, the bailout kid, don’t you think we all understand that?”
“Hey now!” interjected Minneapolis Fed President Neel Kashkari. “Don’t point fingers at me. I was merely following Hank Paulson’s mandate, right Bill? Rescuing our friends at Goldman to keep them ‘doing God’s work’.”
“Besides, Fish, it was you all who supported Bernanke and backed his radical QE policy while I was busy battling for my spot during the California Governor’s race against Jerry ‘Moonbeam’ Brown, of all people.”
“Fair point,” responded Fisher. “The real issue is that destabilizing the stock market will disturb our fragile economy. The public will storm our offices with torches and pitchforks.”
“The trick is to carry out the necessary actions and then slip away amid the confusion. That’s what Greenspan would advise. How can we pull that off?”
After a moment of thoughtful silence, a finger raised to gauge the political winds across the nation…
“Eureka! Let’s shift the blame onto President Donald J. Trump!” proposed Chicago Fed President Charles Evans. “Is there a more convenient scapegoat for an economic downturn of the Fed’s creation? Hardly since Herbert C. Hoover!”
“Hear, hear!” Yellen concurred.
“To hell with the economy!” they chorused, excluding Kashkari. “This one’s on Trump!”
“Bill, one last thing,” Yellen wrapped up. “After the meeting, don’t forget to share that concoction you dreamt up about plummeting unemployment. We must project an image of being dependent on data.”
“That diversion will keep them busy until NFL football begins. Soon after, our task will be complete…”
“…and by New Year’s, Congress and the public will plead for us to rescue the economy from the Fed’s… I mean… Trump’s failing economic policies.”
Sincerely,
MN Gordon
for Economic Prism
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