A Federal Reserve That’s Out of Control

At MarketWatch Sven Henrich castigates the Federal Reserve Board of Governors and those who rely on them:

Stock markets can’t sustain gains or record prices without intervention, without a helping hand, without dovish and intervening central banks. This has been true for 10 years, and it continues to be true in 2019 because that’s where all the big gains are…

This is not capitalism, nor does this ongoing farce constitute free-market price discovery. It’s politburo-based central planning, desperately trying to keep the balls in the air.

“To extend the business cycle,” Powell said this week. Since when is this the primary purpose of the Fed? What happened to inflation and price stability? Already they are tossing their stated inflation goals and are talking about letting inflation run hotter if they can juice it up. There’s no integrity, only moving targets and carrots driven by equity prices.

The pretense is gone; it’s all about keeping the illusion alive that the Fed knows what it’s doing, that it’s always there to save markets from any trouble.

But its track record is obvious: It has failed to meet its inflation targets (ill-guided as they may be) for 10 years. It has failed to normalize policy despite years of promises to do so, and will never be able to normalize. Between 2008-2019, the Fed was non-accommodative for three months. It blew up in their faces in December. They’ll never be non-accommodative again. They can’t.

That means two things. First, it means that not just the U. S. Federal Reserve but all of the central banks will not have the ability to act when the next contraction occurs. They know that they should have raised rates long ago but they didn’t have the courage to do it. Now rates have been kept low during an expansion for far too long. That by the law is the pragmatic reason that MMT can’t work. Policy-makers will never take the necessary actions on a timely basis and things will inevitably get out of hand.

But second it means that income and wealth inequality, driven by the central banks’ urge to create asset inflation by any means necessary, will grow beyond anything we’ve ever seen.

8 comments… add one
  • bob sykes Link

    We are in a strong deflationary phase, but the Fed is preventing price and wage collapse with extremely low interest rates. The ECB still has negative interest rates.

  • We are in a strong deflationary phase

    At least in part because the Chinese are exporting inexpensive consumer goods and deflation while importing employment and inflation.

  • Gray Shambler Link

    And the tariffs add money to the U.S. treasury because Chinese central banks subsidize affected exporters. In effect, we are only drawing down PRC dollar reserves. They will continue to do this because , as they say, they play the long game.

  • TastyBits Link

    Modern monetary systems are based upon trust, and as the money becomes trust-based, the central banks become less important. The value of credit-backed money is based upon the trust that it will not lose value.

    Because money is created through lending, the biggest lenders control the money supply, and the central bank is not a big lender. This is why the financial industry is paramount in the economy. When they lend, the economy grows. When they stop lending, the economy stagnates. When they call in loans, the economy contracts.

    In order to insure banks will lend to each other, the central bank’s regulatory functions establishes the trustworthiness of banks. (When banks lend to one another they do so using the much reviled ‘liar’s loan’.) The central bank has very little ability to actually back-stop the monetary system, but it is trust that they can that provides some stability.

    MMT does not fully appreciate that this trust can be quickly lost, and the government cannot provide the trust needed to fully back-stop the credit supporting the monetary system and, subsequently, the financial system as well.

    Hyperdeflation is the result of the loss of trust that the credit backing the monetary system will be repaid. The Great Depression and the Great Recession were both deflation events – a run on the financial system.

    Glass-Steagall, Bretton Woods, and the gold cover instill trust. That is their value.

  • By far the biggest lender is the federal government. There’s really no contest. It has more outstanding than the ten highest-lending banks combined.

  • steve Link

    The other part is running a debt financed economy to keep it moving. That is essentially what the tax cuts accomplished. We had tax cuts leading to more debt and a temporary increase in GDP (to the same rate of increase we had in 2014 or 15) with most of that increase going to the small group at the top.

    US consumers pay for tariffs.


  • Guarneri Link

    “The Fed is out of control.” Milton Friedman was correct.

    BTW – Doctrinaire libertarians and the left have suddenly discovered the consumer and forgotten the worker. I think we know why. Do you ever whup Mataconis up side the head and ask him to consider both sides of the issue?

  • TastyBits Link

    @Dave Schuler

    Total debt is around $72 trillion, and the US government has about $25 trillion: All sectors; debt securities and loans; liability, Level

    Private banking (shadow banking) should drive that number up.

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