The Federal Reserve, The Debutante Ball and The 15 Parrots

Alan Greenspan thrived through complexity. That is, he snowed his opponents.

Ben Bernanke is instead intellectually honest; he’s not trying to hide the decision making process as did his predecessor. Thus, we will have an explanation of policy intent Apr/27 following the 2-day FOMC meeting. This is a debutante ball, a coming out, something which we and two other individuals, like good parents, funded Oct/19/1993 in the halls of Congress.

So we want to prepare our clients up front for this event. Relevant background material serves as a good start.

In our Sep/5/10 sketch - Caught Flat Footed - we predicted the Fed may launch another stimulative program. That was announced Nov/3 and called QE II.

We have offered several past issues explaining the workings of the Federal Reserve for those who have a job or are otherwise occupied, but do have at least a passing interest. We have also explained the mechanics of QE II and, how it can be reversed. It’s pretty simple stuff. Want to flood the markets with money? Buy that herd of cattle at the asking price, credit the rancher’s bank’s account at the Fed. The source of the money? Thin air naturally. Want to reverse QE II? Sell a herd of cattle at the market price, debit the rancher’s bank’s account at the Fed and you’re done.

We anticipated QE II, yes, but saw it as unnecessary and still do. See our sketch of Dec/5/10- Too Big For Its Britches for the reasons why. We did not agree, understanding that QE II serves not other purpose but to 1) fuel commodity price inflation abroad and 2) bolster the equity prices of otherwise less deserving US firms. The US economy was not in need of more liquidity for goodness sake. The ground is saturated. It all runs off.

But now there is rancor in the ranks. Some policy makers are taking our side. There is always disagreement among policy makers naturally but in the old days it was hidden - all were supposed to tow the party - Greenspan’s - line. For example, Greenspan hosted a conference call before the hearing we attended, coaching all the governors and district bank presidents how to answer our inquires (as they had them in advance). They did just that, sounding like 15 parrots. (Ref., HR28, Hearing before the Committee On Banking, Finance and Urban Affairs, Serial # 103 - 78, US GPO, 1994)

No more. We have democracy at the Fed, freedom of expression.

We’ll see how Bernnake handles this bunch, Apr/27.


Robert Craven