Caught Flat Footed

In our sketch of Aug/22 we noted that the Fed has done about all it can. On reflection, that statement is perhaps not accurate; we were a tad hasty; we should have known better given our background. Let’s take a look. (No yawning now. Stick with us.)

Alan Blinder, once vice chair of the Fed and now a Princeton prof said that, “The heavy artillery has already been fired.” We have a letter from Alan dated Jan/96 thanking us for supporting his in-house battle with Greenspan. That was a pleasure. Still, dear Alan represents a certain class of economist - lefties. It so happens that the chorus that the Fed is finished is from this school, which represents perhaps 70% of major names in the trade. We joined them Aug/22. That was a mistake. (Not thinking, watching videos of our granddaughter.)

Blinder, Roubini, Krugman and others may not be completely neutral in their prediction of Fed impotence. All are supporters of Keynesian witchcraft. All now go by the prescription that the ball is in the fiscal court. Most of us know that means more debt and a crushing burden for our kids.

In fact, as a few tethered thinkers have disclosed, “The Fed has an arsenal of neutron bombs if it wants to use them...,” according to Ambrose Evans-Pritchard in today’s Telegraph. He lectures the rest of us to, “Get a grip, the lot of you. While there is no easy way out for the US after stealing so much prosperity from the future through debt, there is no excuse for this dead-end defeatism. Clearly, the ‘canonical New Keynesian' model that holds such sway on America's elites is intellectually exhausted.” Hah! Refreshing stuff from this Brit.

And of course he is right. In grad school, we all had to memorize the so-called aggregates, the expanding components of money supply. M1 is the core; M2, M3 include a broader scope. No need on this occasion to delve into particulars. In the article we hear from Tim Congdon, from International Monetary Research that, “Bernanke continues to babble on about futile credit easing: neither he nor his staff seems to appreciate the difference between purchases of assets from non-banks and from banks.” Congdon knows that nowadays banks sit on the money and that others use it, or might.
This means huge bond purchases by the Fed but outside of the banking system; it means buying from pension funds, public bodies, insurers, etc. This is the broader M3; these folks might actually spend it. (Where does the Fed get the $? Out of thin air naturally, but we won’t worry about that right now.)

So for all you readers out there who have been distraught, fretting that the Fed’s desultory firing of popguns is all that's left, take heart. We know this topic eclipses all others at dinner time. We know you ponder the aggregates endlessly. Don’t worry. There's a few "neutron bombs" left.

Robert Craven