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Awareness of Fed Credibility Problems Going Mainstream

The nation’s pre-eminent central planners just held their annual gathering at an exclusive resort just outside Jackson Hole, Wyoming and discussed how to interfere even more deeply in markets. In a speech entitled “The Federal Reserve’s Monetary Policy Toolkit: Past, Present and Future,” Fed chair Janet Yellen outlined why zero interest rate policy (ZIRP), purchases of toxic mortgage securities, and monetization of Treasury debt just aren’t adequate. Officials must add negative interest rates (NIRP) and purchases of even more sketchy assets to their “toolkit.”

Yellen has spent more than a year floating the idea of negative rates, so it is no surprise she is hustling the ludicrous policy once again. In fact, very little of what she said Friday is new. It was the usual mess of contradictions.

She started with a familiar trope about the economy being close to escape velocity. The Fed chair said she expects to wind down stimulus soon. She then followed by admitting the Fed is currently in a lousy position for handling the next crisis or downturn. Given interest rates are already near zero, officials would need to push them into negative territory. And they should consider buying other types of assets.

We also know from prior statements that Yellen views “helicopter money” is a legitimate tool, an extreme measure which entails printing money and dropping it directly into the hands of consumers.

Helicopter Money

Many question whether the arrogant and “enterprising” bankers at the Fed actually recognize some limit on what they can do. Regardless, Yellen didn’t specify what she had in mind so we are left to speculate. Maybe she thinks they should buy stocks. Or perhaps she wants to throw another life preserver to Wall Street by sopping up failing subprime car loans or bad oilfield debt.

If there was anything new and interesting last week it was an article by Jon Hilsenrath, who covers the Fed for the Wall Street Journal. It is safe to say he represents the establishment view. At long last, there are signs that disdain for the Fed is moving beyond the community of precious metals investors and free marketeers and into the mainstream.

At long last, there are signs that disdain for the Fed is moving beyond the community of precious metals investors and free marketeers and into the mainstream.

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Hilsenrath suggests the “Once-revered central bank failed to foresee the crisis and has struggled in its aftermath, fostering the rise of populism and distrust of institutions.”

He runs through just how badly and how often Fed officials have missed the mark with regards to forecasts. He talks about flawed models which overlooked important variables. And he quotes Fed officials expressing self-doubt, for example wondering if today’s low interest rates may actually be encouraging people to save more instead of borrowing more as hoped.

It’s a long way from being a thorough critique of a more complete list of Fed sins listed here:

  • The cozy revolving door with Wall Street banks.
  • Paying triple-A prices to bulk buy train loads of these banks’ worst kind of garbage mortgage securities.
  • Steering trillions of dollars worth of Treasury purchases through the banks and paying them huge fees instead of buying direct from the Treasury.
  • The complete failure of the Fed, as the chief banking regulator, to hold any senior bank executive accountable for pervasive fraud and cheating their own customers.
  • Waging a war on savers with zero interest rates, which impoverish seniors, blow up pension plans and distort capital markets – all to stimulate borrowing.

But Hilsenrath’s critique is also a long way from the religious reverence the mainstream and the financial press lavished on the Fed in years past. So that’s a start!

The bottom line is Yellen is clearly ready to implement even more destructive and bizarre policy tools. Her ideas for restoring prosperity include forcing savers to pay their banks to hold their savings and printing up money to buy an even wider array of whatever junk Wall Street would like to sell.


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