A Word Here, A Word There (Fed's inexorable march to irrelevance)

What a ridiculous sham. Every few weeks the financial community ‘heart beat’ stops for a few seconds to find out what pronouncements will be handed down from the mount at the latest Federal Reserve meeting. Every few weeks, the parsing begins dissecting each word to see if anything has been omitted, or added, or changed from the prior meeting's text. Immediately, all kinds of wild trading ensues, in some cases, even before any sane person has had a chance to read and digest the intended meaning of the words. It is ironic that all of these fireworks occur following the pronouncement from an institution that stood back literally for years at a time and watched as an enormous credit bubble grew out of control, and then stood back again and watched as that bubble burst.

Even within this institution, many now perceive growing discord within the Fed, as the rumor all day (ahead of the meeting) had been that potentially as many as three out of six board members might be dissenting votes. As it turned out, only Dallas Fed Chair Richard Fischer was the lone dissenting vote, with other potential dissenters likely politically assuaged by means of a tougher wording on inflation in the Fed’s statement. While the Fed still decided to cling to its statement of moderate growth, that conclusion sounds errant in light of the fact that there is a strong possibility that Q2 GDP was boosted solely by ‘one off’ government refund checks.

The Fed isn't irrelevant, its performance in the present crisis has been masterful, and as a result no great hit to the real economy has followed from the epic financial crisis raging since last summer, and no depositer has lost a dime. It is just done - short rates at 2% with longer ones to mid range credits up at 5-7% will cure the banks' problems in a year or two. Narrow spreads made for dangerous banking, wide ones with make for renewed profitability at the banks without undo risk taking. The Fed's next move will be higher, but is probably a year away, maybe more.

Well, the author is talking about the coming irrelevance. Up to now, I agree that Fed averted outright disaster by their intervention.

I suppose the author believe that Fed's capacity to contain damage will be less and less effective (or costlier and costlier) and people find it less and less credible.

When the situation turns too big for Fed to do anything about it, maybe it is called 'irrelevant.' Even in such a situation, I believe Fed has some power left, but maybe not enough to turn the tide(i.e., great damage to real economy.)

One might argue that Fed can give us a choice between 'slow death' and 'quick death.' Averting 'quick death' could be yet declared as turning the tide, only to lead economy to slow but not-reversible march to the bottom we could have reached anyway with quick death. To me, such a path look increasingly likely.

In that sense, it could be still relevant.

One has to wonder if a free economy needs such overhead as the Fed (in particular) and the federal government (in general) provides. Think about the money spent vs. the value returned. Investors (and businesses) received no (or little) governance over wild lending and received a bill via increased government spending (loans -> taxes or inflation eventually).

Milton Friedman suggested that the Fed should just be a minor department sitting in the shadows of some minor federal agency making sure that our money supply just equaled the increase in economic productivity. Also, why do we need a Fannie Mae or Freddie Mac to make contributions to political causes and assume terminating amounts of financial risk (in trillions, hundreds of trillions)? No one knows the real amount.

And where were the accountants and their standards board? How did the rating agencies get away with Triple A ratings on junk? Both of these failures point back to severe structural imbalances.

If one follows the dictum that “money goes where it is treated best,” the financial interest of businesses and free citizens augur for much better treatment. I think the economy and our political culture now begs for some kind of major transformation, and I sure wished I knew how our political economy was going to play out. I think it’s clear that major changes are ahead and that all the players on the field are the wrong guys.

With Obama and McCain, no hope is in sight.

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