The Fed’s Problems Are All In Our Heads

Ben Bernanke must be feeling a lot like Peter Pan.  Apparently, his efforts to restart our moribund economy are being hampered by the investing public’s lack of faith in his ability to steer the markets.  Specifically, Bernanke and company put billions of newly created dollars to work last week and we simply didn’t care enough to buy treasuries along side the Fed; instead, we sold them, pushing yields higher and valuations lower.  This shows the irrationality of investors, at least it does in the eyes of those critiquing such things.  The WSJ ran an article today entitled “Criticism Hinders Fed’s Plan,” which attempts to lay the blame for the Fed’s ineffectiveness at the feet of anybody else. 

Their reasoning is simple – if we would just believe in the Fed, then all would work according to plan – lower yields, lower cost of borrowing, higher asset prices, etc.

But what if it works the other direction? What if the reality is that market participants are not causing the Fed to be ineffective, but are simply noting that the Fed is ineffective? To me, that is much more likely.  In fact, to me this is not just logical, but is a long time in coming.  Our view from the beginning of this debacle is that the government (both US govt and Fed Reserve) would throw everything they could at it, but in the end it wouldn’t help.  Instead, it would be like using a bucket of monetary and fiscal stimulus against a tide of deleveraging.  In this analogy, we were wrong.  They didn’t use a bucket, they used a firehose.  It was much more stimulus ($700 billion bailout, $800 billion stimulus, $1.7 trillion printing, now another $600 billion printing) than we thought would be used.  But the outcome is still what we had thought, only pushed out further. 

The emperor has no clothes.  Is that the fault of the emperor, or those who simply choose to see the truth?

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