Controversy at the Federal Reserve Means Quantitative Easing Will Start in Earnest Only After a Deflationary Shock

From 11 Big Surprises for the Next Decade:

11. New Economic Term Developed, A Yo-Yo Depression- Throughout the first 15 years of the 21st century investors and economists were debating heavily upon the economic environment. Is it deflation, inflation, stagflation or hyperinflation? Eventually, a new term emerged- Yo-Yo depression which describes an economic environment in which the economy moves violently every year or so from inflation to deflation 

From Marching Towards a Yo-Yo Depression:

The Lesson the Markets Thought Bernanke In 2008
In the end of 2007 it was clear that United States was entering a deflationary environment as a result of the housing crash and the credit contraction that had begun. However, since every trader in world read Bernanke’s speech they knew he will act aggressively. As a result, as Bernanke started lowering interest rates in late 2007 the price of oil and agricultural commodities started to rise dramatically. His actions may have delayed the credit crunch to September 2008 but were not enough to prevent the housing collapse. The rise in oil prices only worsened the financial position of U.S households and made the credit contraction even worse. None of his actions helped the ability of debtors to repay their debt. On the other hand he did cause harm by causing consumer price inflation to rise.

Does the Fed Want Hyperinflation?
The Federal Reserve could have started Q.E in October 2007. The plan was already in place, as the helicopter speech clearly shows. But it chose to keep rates at 2%, let Lehman Brothers fail and risk the collapse of the worlds entire financial system. If could have saved Lehman Brothers, like it did A.I.G. It could have printed trillions of dollars and the government could have sent 100,000 dollar check to U.S households, but it didn’t.
There were three incidences when the Fed was confronted with a run on the Dollar. The first was in 1931, the second in 1979, and the third 2008. In all cases the Fed chose to defend the dollar at the price of health of the economy and the financial system.
The reason is simple. The Fed is a monopoly bank and it doesn’t want to self destruct. Hyperinflation will wipe out the banks since they only hold paper assets and it will eventually cause the destruction of the Federal Reserve itself. If people will not trust the dollars the Fed prints then the Fed will not have any powers at all.
So the Fed decided to print money only when oil and food prices crashed. Then it was free to print as much as it wanted since people were so terrified of deflation. When oil prices went up again, the Fed started to slow down the money printing. It is trying to keep the financial system afloat, along with containing commodity prices as much as it can.
But life isn’t that simple. The Fed can print money, but it can’t control were that money floats. Printing large amounts of money at this stage will only result in a high commodity prices but will do nothing to resume bank lending.
Once there is a big crash, and credit spreads will widen again, the money printing will have some affect since it will help tighten the spreads and prevent large “Too Big to Fail” corporations from going bankrupt. But first the dollar liquidity crunch will play out and cause havoc around the world. When the big collapse of China will come, it will bring down commodity prices to a level where the Fed will feel free to really print money.

Eventually the money printing will result in an inflationary crisis that will end with a deflationary one, creating a Yo-Yo environment.

 
 The Wall Street Journal reports:
 
The Aug. 10 meeting of top Federal Reserve officials was among the most contentious in Ben Bernanke’s four-and-a-half year tenure as central bank chairman. With the economic outlook unexpectedly darkening, the issue was a seemingly technical one: whether to alter the way the Fed manages its huge portfolio of securities.
At least seven of the 17 Fed officials gathered around the massive oval boardroom table, made of Honduran mahogany and granite, spoke against the proposal or expressed reservations. At the end of an extended debate, Mr. Bernanke settled the issue by pushing successfully to proceed with the move.
Officials were clustered in two camps. In one camp, Mr. Dudley, and the presidents of the Boston and San Francisco Fed banks, Eric Rosengren and Janet Yellen, were distressed that the Fed was far from its objectives of low unemployment and stable inflation.

Richard Fisher, president of the Dallas Fed, and others expressed a concern that Fed moves might be ineffective, arguing that businesses weren’t using already ample, cheap credit to fund investments because they were uncertain about many other problems, including government deficits and new financial regulations.

Narayana Kocherlakota, president of the Minneapolis Fed, argued that a large part of today’s unemployment problem is caused by issues the Fed can’t solve, such as the mismatch between the skills of jobless workers and the skills that employers wanted. “The Fed does not have a means to transform construction workers into manufacturing workers,” Mr. Kocherlakota said in a speech after the meeting.
The president of the Philadelphia Fed, Charles Plosser, who has had misgivings before about Mr. Bernanke’s initiatives, deemed the latest move premature because, though the Fed was lowering 2010 growth estimates, it wasn’t significantly ramping down its estimates for growth in 2011 and beyond. Two other frequent dissenters, Thomas Hoenig of Kansas City, and Jeffrey Lacker of Richmond, Va., also objected. Fed governor Betsy Duke, a former commercial banker, also expressed reservations, according to participants.

Read the original story at Israel’s Financial Expert