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Wednesday, November 24, 2010

The Flawed Failing Fed

Items of Interest:

James A. Bacon / boomergeddon.us / Washington Times:
Bernanke's raid on the middle class -- Fed action will reward the profligate and punish the prudent

Here's one fact that is indisputable: The intent of Quantitative Easing 2 (QE2), as Fed Chairman Ben Bernanke's initiative is known, is to push intermediate- and long-term interest rates even lower than they already are. Here is a conclusion that can be stated with certainty: Lower interest rates will bail out the profligate and punish the prudent.

The ranks of the profligate include the world's largest debtor, the U.S. government, and the irresponsible risk-takers, namely the big banks and investment houses, that helped finance trillions of dollars of residential and commercial real-estate projects that either have gone bad or soon will. Lower interest rates will reduce the United States' borrowing costs by billions of dollars a year, masking the dangers of an ever-escalating debt, and will pump up the profitability of the very same banks that plunged the world economy into a recession.

Who pays for QE2? The middle-class stiffs who have worked all their lives, played by the rules, refrained from borrowing money they could not repay and socked away money for retirement...

Stephen Roach / Financial Times:
Time to Recast the Fed's Flawed Mandate -- The Federal Reserve’s grand experiment is a flop. Not only has the second round of quantitative easing roiled markets, but it has become a lightning rod for debate in Washington, academia, and in policy and political circles around the world. The US central bank’s uncharacteristic defensiveness has only deepened the suspicion – putting over 30 years of hard-won credibility and independence at risk. Sadly, this backlash is well founded. The Fed is running a real risk of destabilising a still precarious post-crisis world...
Lawrence A. Hunter / Forbes:
Save The Dollar, Not The Fed -- Remove all the Federal Reserve's discretion, not just half of it...

the Fed has actually feathered the nest of the banking cartel it created and produced a century of monetary instability and ancillary economic problems.

The real challenge is to remove both the Fed's mandates and its discretionary monetary authority along with them, and replace them all with a simple statutory directive to calibrate dollar liquidity so as to maintain the dollar price of gold within a narrow band around a statutory gold price that defines the dollar. Any other legislative "solution" simply exonerates the Fed from responsibility and gives them more cover to fail. Indeed, diverting attention from the real problem and the real solution is a classic instance of playing the useful idiot on behalf of the real culprit.

The objective is simple and straightforward: Save the dollar, not the Fed. Remove all its discretion, not just half of it.
John Carney / CNBC:
Why the Fed Plan Is Failing: We’re All Austrians Now -- It’s no accident that Austrian economics is newly popular. It provides the best explanation for the business cycle we just lived through... I think that we may have entered a new era.

We may all be Austrians now... If I’m right about this, it could mean that Ben Bernanke’s plans to push along the recovery through further easing could be stymied—or at least delayed. I’m not sure how long business will be able to hold out against the lure of low interest rates—especially as investors push banks and businesses to put the money on their balance sheets to work. But the downturn could last much longer than history would suggest...
Naked Capitalism:
The Question Isn’t Whether the Fed Should Be Stripped of Its Mandate to Maximize Employment … The Question Is Whether the Fed Has Too Much Power -- So the problem isn’t the Fed’s dual mandate … the problem is that the Fed has too much power. And the Fed has wielded that power to save its shareholders (the big banks), at the expense of Main Street and the real economy...
John Hussman / Hussman Funds:
Outside the Oval / The Case Against the Fed -- Bernanke offered a defense of QE2 last week in Europe that was reported as "coming out swinging," but what he swung before the world was ignorance. Bernanke correctly observed that quantitative easing was capable of "moving asset prices significantly." But he incorrectly said that "we don't know what effect this will have on the real economy." In fact, we do know. The elasticity of GDP growth to stock market changes can be easily estimated to be on the order of 0.05% or less, and transitory at that. In other words, a boost to the stock market isn't interpreted by consumers as "permanent income" or stable wealth that should be consumed. Since QE2 doesn't operate on any constraint in the credit markets that is binding, it is simply a way to blow asset bubbles, and nothing more...
Bernanke Turns His Game to Defense -- The Fed chief shoots back at critics of his policy. Will the bond market be convinced? ...
Paul Krugman / NY Times:
Ride, Bernanke, Ride
Bud Conrad / SafeHaven:
Bernanke Is Making the Crisis Worse -- The Fed is a corrupt and powerful institution, and Chairman Bernanke is making the global crisis worse. His new speech given last week in Europe was terribly misguided and will upset markets as the Chinese and Germans won't ignore his challenges. Bernanke's interpretations of the markets have been wrong since before he was appointed to head the Fed, and his actions are doing nothing but aggravating the situation...

Calculated Risk

MishTalk - Mike Shedlock

Paul Krugman - NY Times

The Big Picture - Barry Ritholtz

naked capitalism - Yves Smith

Pragmatic Capitalism

Washington's Blog

Safe Haven

Paper Economy

The Daily Reckoning - Australia