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The Bernanke of Oz
Today in his keynote speech in beautiful Wyoming, Federal Reserve Chairman Ben Bernanke will likely discuss whether there will be another round of quantitative easing. The expectation of another round in the works is running about even. Half of the financial industry thinks QE3 is on the way, the other half think not. What’s “helicopter Ben” going to do?
I have said in the past that QE3 will happen before the election, for all the “right” reasons. The economy is still not healthy; unemployment has ticked back up, wages are low, and last but certainly not least, Bernanke would likely be out of a job if Obama loses. Another round of quantitative easing would be a shot in the arm to the economy—well, okay, to the stock market--and surely improve Obama’s re-election odds.
Or would it?
One question that must be on Bernanke’s mind is how much would QE3 really help the economy? No, really. It’s a question of diminishing returns. Another round of conjured up funny money magically appearing on banking balance sheets and then getting funneled into the stock market one way or another, may not have the desired affect.
Like any controlled substances, used often enough, immunity builds up. What used to do the trick just doesn’t have the same impact that it did before, and that would be a disaster for the Fed. Imagine if QE3 were put into play, and it had no effect? What then?
What would the impact of very obvious failure from the Fed’s actions be in the economy? What other policy tweaks could the Fed do? What kind of signal would such Federal Reserve impotence send the rest of the world?
It might just be time for Ben to click his ruby slippers together three times…
Wait—I just got a visual—Ben’s holding his lap dog, little Timmy, and is talking to himself: “There’s no place like the Fed. There’s no place like the Fed…”
On the other hand, what if QE3 was effective in stimulating the economy, but was the last straw for those who hold US dollars? What if more quantitative easing finally tips the psychological balance against the dollar?
Is that likely? Probably not at this very moment. But is it possible? It is; and fundamentally, the more dollars in existence, the less valuable each becomes. Is it probable that other nations are sick of the US exporting inflation? Most definitely.
The issue at hand is whether the economy is truly “headed in the right direction.” There are some signs of improvement. Consumer spending is at a 5 month high, and reports for the housing, retail and export sectors have certainly looked worse. But even so, no one is cheering for the “jobless” recovery that we’re in right now. Also, inflation is lower than the Fed’s 2% target, so the economy is not moving anywhere fast.
There’s also the political aspect. Given that the national election is in two months, does Bernanke—who is supposed to be politically neutral--want to look like a political hack throwing money at the markets and the banks in order to help the president?
The answer is ‘no he does not.’ Besides, there is another Fed Open Market Committee meeting--where policy is usually set--in just two weeks from now. Why have that meeting if he announces more QE today? I’m not saying the he won’t preempt the FOMC meeting, just that the timing would seem awkward.
One other point to consider is which sends a more powerful message to the economy, adding more stimulus, or announcing that the economy is recovering sufficiently and therefore more stimulus would do more harm than good? That may well be the message we hear this afternoon. Telling the country that no more stimulus is coming may well be received as a confidence boost, rather than as bad news.
Fed is still "in charge"
That said, at the end of the day, Bernanke wants the world to know—or to think—that the Federal Reserve is in charge of the situation, that, not to worry, a sure hand is on the levers of monetary policy. It’s a perception that must be maintained at all times.
And you know what? I don’t doubt it for a minute. Without question, the Fed does have its hands on the policy levers, and as we now know, it can and has sent hundreds of billions of dollars, if not trillions, into the coffers of overseas banks whenever it sees fit to do so. And telling the US Government about it is, apparently, optional.
So Bernanke and the Fed are much like the Wizard of Oz and the Emerald City. Uncle Ben pulls levers behind the curtain amid great sound and fury, hiding his deepest fears that while he indeed has his hand on those levers, he really doesn’t know if they still work.
And what of the Federal Reserve?
After having crawled through the poppy fields of QE 1 and 2, there is no more palatable way to view that warped reality other than through rose-colored glasses. At the end of the day, QE3 or no QE3, I think we’d all be much better off with flying monkeys running the show. Perhaps they already are.
And those are…The Gorrie Details.