Let’s start here: Unlike “End the Fed” alarmists, on the whole I think a central bank is a necessity for the United States, and I think Ben Bernanke has — on the whole — done a fair job in the face of huge obstacles.
However, all that aside, like many investors I have serious concerns about recent central bank actions and whether they are beneficial to the global economy — or in the absence of real economic growth, that they can even sustain the strong rally we’ve seen in the stock market across 2012.
(Ron Paul supporters: Please scroll down to the comments now … and try to play nice.)
For those of you who aren’t interested in rehashing the same tired arguments, let’s take a look at some recent news and commentary about the Fed that questions whether central bankers can do anything right these days — either thanks to their own incompetence, or simply because of economic conditions beyond their control.
Where’s the Impact of QE3? Let’s start with QE3. In the first two weeks of September, the market rallied “in anticipation” of the Fed’s pending QE3 announcement (at least, so the pundits were saying). After the news, the Dow soared 244 points on the day immediately after QE3 was unveiled … but the gains didn’t stick, and the past two weeks have seen the market slide despite the theoretical boost of QE3. Where did the bond-buying program impact the market? How has it moved the needle? Without the benefit, you have to wonder whether the costs are worth it. A great post by Gillian Tett at FT.com points out survey findings that say in excess of 9 in 10 American CFOs think even a full 1-percentage-point drop in long-term rates wouldn’t change their behavior at all. Furthermore, 84% said a 2-percentage-point drop is no big deal. So … what’s the point?
Was the Fed Simply Delivering the Expected? There are many who think that QE3 was a foregone conclusion — that investors were already banking on the move and had baked those gains in before the official announcement. Does that mean, then, that the Fed simply had to announce QE3 or face a crash due to its decision? Did investors force the Fed to follow them into the breach by charging in too early? That’s a scary thought that undermines the authority of the central bank. Equally disturbing: The timing of QE3 has sparked criticism of some that the move was political, tied to President Barack Obama’s re-election hopes.
Kicking and Screaming: Here’s a recent Wall Street Journal report saying that Bernanke was tirelessly calling around trying to build support. Which begs the question: If so many people had to be lobbied so hard, why has the Fed been so hell-bent on this strategy? Is Ben Bernanke really smarter than everyone else? That’s quite a leap to take. It’s also worth noting that while the formal vote was a lopsided 11-1 tally, if you include non-voting members, around a third of the FOMC was wary, if not unhappy, with QE3. Oh and let’s not forget the hawk at the Fed, Charles Plosser of the Philly Fed who recently said that “monetary policy shouldn’t be a day trader.”
Doomsday Crowd Is Serious: So there are always wackos like Ron Paul tooting the Fed horn, with no real economic training or serious insights into global markets. But it’s interesting to see that lately a number of big names — with big money — coming out with harsh words for the Fed and dark outlooks. Take SocGen forecaster Albert Edwards, who just lowered his equity weighting to the minimum 30% for the French bank — the lowest since May 8, 2008 — specifically because he fears the Federal Reserve is on a “road to ruin.” Not saying the “smart money” is always right, but these kind of moves are worth noting.
Hands Tied by ZIRP: Even if cutting interest rates to zero during the downturn was the “right” way to go, anyone with a brain in their head knows interest rates have to normalize eventually. I recently read a great post on Tim Duy’s Fed Watch about the serious problems with zero-bound policy. Namely, that interest rates at zero need to be coupled with a comprehensive political effort to deal with deficits and taxes and spending — because without a stable government balance sheet or exterior efforts to stimulate the economy, you get locked into ZIRP in perpetuity. If Tim’s example of Japan isn’t enough to scare you, consider that our friends across the Pacific have a society and political system much more conducive to compromise and sacrifice. If they can’t make it work, what hope does America have? And how does the Fed ever get out of this zero-interest-rate policy mess?
Unintended Consequences: I’ll give the Federal Reserve this: On the Dallas Fed’s website, the central bank has published a paper entitled “Ultra Easy Monetary Policy and the Law of Unintended Consequences,” written by William R White of the OECD. Good for them for entertaining the possibility in theory … but whether they understand the real risk in practice is another question. I particularly think this passage on Page 11 is telling in light of QE3’s rather questionable impact on the markets thus far (emphasis mine): “A consideration that applies to both household and company spending is the message given by ultra easy monetary policy. To the extent that such measures are unprecedented, indeed smacking of desperation, they could actually depress confidence and the will to spend.” In other words, consumers and investors are seeing Ben Bernanke frantically pulling out all the stops — and rather than stick around to see if it will work, they are running screaming for the exit.
Intended Consequences, Misunderstood: And forget the unintended. Bernanke has long said inflation is not a problem right now and that the Fed will basically act to stoke inflation in the interest of supporting employment. Even if this works in theory and “saves” the labor market, it presumes the Federal Reserve can and will pivot deftly — when the time is right, and in a way to stop puffing up inflation before it becomes too hot to handle. That’s kind of akin to worrying about teaching a pilot only how to take off, then convincing yourself you’ll figure out landing when the time comes. Dangerous stuff.
All in all, pretty disturbing, no?
For the record, I think gold bugs and the bunker crowd are misguided alarmists who don’t truly understand the impacts of life without a Federal Reserve and tied to a gold standard.
But it’s a legitimate question to wonder whether the Federal Reserve is acting in the best interests of investors and consumers. Or perhaps of even greater concern is the question of whether the Fed can do anything in the current economic and political environment that would have a positive impact.
To be clear: I am no Ben Bernanke apologist and I’m not trying to let him off the hook. Frankly, I think it’s appalling many Americans fail to remember his role as an Alan Greenspan deputy, inflating the easy-money housing bubble, and I think hedgie Doug Kass was right on the money with this comment a month ago:
“’I find it hysterical and almost ludicrous that market commentators, investment strategists and investors continue to voice blind faith in the Fed chairman,’ Kass, of Seabreeze Partners, said in an email.”
All I’m trying to do here is investigate the Fed’s recent actions and see whether there’s anything to encourage me as an investor.
My verdict: Nope.
What’s your take? Share it below in the comments section.
- 5 questions for Ben Bernanke. (InvestorPlace)
- Joe Weisenthal in praise of Bernanke’s grasp of monetary policy (Business Insider)
- What do central bankers and the Fed, ECB, etc. know that we don’t? (WSJ Video)
- Bernanke gets defensive about QE3. (MarketWatch)
- Red meat alert: Gloom, Boom & Doom publisher Marc Faber live and in person, talking about how the Fed will “destroy the world.” (Zero Hedge)
- Of course, the flip side of Bernanke shrugging at inflation is Germany’s Chicken Little stance toward rising prices. (The Atlantic)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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