Congress Concedes to Fed Chief
In the days since Federal Reserve Chairman Bernanke announced that a second round of quantitative easing may be necessary to extend the US's budding economic recovery, the market has been in turmoil. Investors' reaction was swift as commodity prices and bond yields jumped in anticipation of inflation.
The backlash from foreign nations was equally firm, with many diplomats now beginning to do what the US Congress has so-far failed to find necessary: pressuring Bernanke to check his monetary policy and uphold the dollar's value which is, after all, still the world's reserve currency... for now.
A possible wave of global inflation is not just having an impact in the US. Like US Treasury debt, Irish debt has also seen rising rates - albeit to much greater heights. There bondholders are also concerned with the country's ability to repay its debt, which has been increasingly difficult to roll over.
Though many problems remain to be sorted out both in the US and around the world, these events have illustrated a lesson which has hopefully been learned by investors the world over: Neither Bernanke, nor any other regulator or bureaucrat, can control the market.
As events have unfolded since 2008 and government officials have reacted to them (NOTE: not anticipated), the egos of many, Bernanke included, have stopped them from realizing that the "invisible hand of the market" described by economist Adam Smith is simply larger than they, and will ultimately dominate any feeble attempts made to steer a lumbering giant.
This Fed, however, has acted particularly brazen in its manipulation of monetary policy which well-regarded investor John Hussman recently argued has amounted to the exercise of fiscal policy legally reserved for Congress. To quote Hussman directly, "the central bank is not engaging in monetary policy, but fiscal policy. Creating government liabilities to acquire goods and assets, unless those assets are other government liabilities, is fiscal policy, pure and simple."
Thankfully the last several years have made it nearly impossible for the Federal Reserve to hide its true colors. By now, anyone who still thinks that the Fed exists to look out for Americans' best interests is either blind or naïve.
Beyond the obvious bank bailouts, interest payments on excess reserves, lack of transparency, and leniency with banker-crooks, consider another example - this one more economic.
Presently the Fed has pushed interest rates to lows not seen in a half-century, announcing in public the expectation that rates will likely remain low for an "extended period" in order to encourage an economic recovery. Is this policy of cheap money really an advocacy of recovery?
In order for this economic recovery to be sustainable, the US needs people and companies to borrow. Does the depression of interest rates, along with the announcement that they will stay low, actually provide a motivation for borrowers? Why would any corporation or consumer borrow today when they know that money will still be cheap tomorrow?
This is hardly the first - or the last time - that bureaucrats have demonstrated their ineptitude for real-world economics. While the Fed continues to weigh additional measures to help prop up floundering banks whose own policies put them in their predicaments, the public opinion on bailouts is by now abundantly clear.
Before bailouts will routine, General Motors accepted government assistance, while its rival Ford stayed out of Washington's pocket. Now GM continues to suffer - typical of anything run at all like a government agency - as Ford thrives, having cut costs and gained market share over its crony-counterpart.
Now, with what seems to be an irrational and unfounded surge of confidence, the government is planning a resale of GM stock to the public. Under the deal, the UAW will own a substantial piece of the company, so we'll see how well a union can run an automaker.
For our own 2 cents, we'll go on record forecasting that if, after the government's sale of GM stock, there isn't a major change in management within 18 months (away from those who were government-appointed), the auto giant will be bankrupt within 4 years.