The financial markets and probably everyone else have been awaiting today’s Fed decision as horse-race bettors do Kentucky Derby day: with the excitement of blind hope mixed with the anxiety of the unknown. In other words, we’re all waiting for leadership from somewhere especially since it hasn’t been coming from either the private or public sector. And everyone is debating whether we’re in the grips of deflation or inflation, too much intervention or not enough stim, the role of the State, this or that … it makes me dizzy.
The Fed finally announced it will reinvest proceeds from maturing mortgage bonds into long-term Treasuries. So the Fed is not reducing its balance sheet and wants to put downward pressure on long-term interest rates. The rationale being, I guess, that businesses are not investing because rates are too high (but wait, they’re already at historic lows) and that consumers are not spending (think housing or big items) because mortgage rates are too high (wait again, they’re already at historic lows too). So I don’t quite get the Fed’s action… but the markets liked it… figures.
It seems to me that we are in a classic liquidity trap or about to enter into one. Lowering rates will not make already cash-rich businesses invest or hire more if their top lines are not growing. Likewise it will not make over-leveraged consumers assume more debt to spend “unproductively” – if they could get more debt at better terms, they would rather pay down current debts! And most Banks are quite happy playing the yield curve to slowly recapitalize their balance sheets… before the next wave hits…
This morning, Mohammed El-Erian, CEO of PIMCO, justly said that looking solely to the Fed for a magic bullet was unrealistic. Rather he suggested that "the country is facing structural issues” and that what needs to be done is "First, selling a vision, a long-term vision as to what the policy response is to restore growth and employment. And second, to fill it out with proper structural policies."
Well … Here are two concepts I have not heard since the late 1970s – Long Term vision and Structural policies… Hello… anyone listening?
That will be a hard sell. As I wrote this morning, our system is geared to satisfying Short Term greed … and anything with Long Term or Structural in it smacks of Socialism… which is to be feared as Hell, right?
Fed Can't Do Much More to Boost Economy: El-Erian
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