More on the inability of the Fed to help the economy in this environment, they can only create instability
A theme in a number of my recent posts has been how monetary policy as spectacularly ineffective in dealing with the current balance sheet recession. QE did not fix anything, it did not print money, all it did was to fuel a mini margin bubble, based on everybody misunderstading the concept of debt monetization. People were 'front running the Fed' in error.
Interest rates are *not the problem*. Even if the Fed could induce a new lending boom (which it can't) that would be precisely the wrong 'fix'. The private domestic sector needs to deleverage. That is the fundamental problem. The only way the real economy is going to be affected in this environment is through fiscal policy (and while austerity is a fiscal policy position, we have more than enough evidence that is precisely the wrong fiscal position to take).
MISUNDERSTANDING THE EFFECTS OF QE2 WAS A GRAVE MISTAKE….
22 September 2011 by Cullen Roche
No story has dominated the market news flow in the last year like QE2. From its very inception I said the program was a “monetary non-event” and not going to achieve its targets for several reasons (it’s not money printing, it doesn’t alter the amount of outstanding private sector net financial assets, it’s not debt monetization, etc). But perhaps more importantly, I’ve discussed the potential negative effects the program could have through the channels of misconception. In other words, the myths of “stimulus”, money printing and debt monetization were all likely to fuel investors with a misguided perception as to how the program would impact the real economy.
I have called this effect an embedded disequilibrium in the market caused directly by the Fed and exacerbated by market participants who quite simply don’t understand what QE is or how it actually works. From the perspective of the Fed, they thought they could “keep assets higher than they otherwise would be” (infamous last words of Brian Sack of the NY Fed). But because QE had no transmission mechanism through which it could impact the real economy it in fact only created a disequilibrium between market expectations and the real economy via psychological channels. And as the real economy has sunk we’ve seen much of this embedded “Bernanke Put” come out of the market in the last few months.
In just the last 24 hours we’ve seen the wheels come off of the “Bernanke Put” bus. The markets appear to be realizing that the Emperor truly does have no clothes, that QE isn’t all it was cracked up to be and that the Fed can’t save the economy with their magical printing press (don’t worry – the Fed doesn’t print money anyhow, but that’s for another day).