Cowboys from...Washington Part I

“Under the lights where we stand tall”

I woke up this morning and felt like it was a Pantera kind of morning, cheerful background music to write a blog about my favorite cowboys from…what’s the euphemism? 

Last week Ben Bernanke and the Federal Reserve blew up the U.S.’s credibility with the rest of world just days before the G20 Summit, spurred the already bullish gold and silver market and sparked fears of hyperinflation. Nice. The decisive yet aggressive title track to Pantera's fifth album, just echoes the power behind the Fed’s QE2 decision so well that I couldn’t help borrowing pieces for my blog. I am torn between admiring the Fed’s decisive action, which our government generally lacks, being concerned about one government agency having so much power and wondering what the Fed was thinking.

Riding Into Town

On November 9, I was sitting in my weekly Global Economy class with Professor Michael Waugh when he began class ritual of discussing current events. He asked the class if anything important had happened since we last met. No one mentioned the midterm elections.

Why? Because the Federal Reserve stole the show with their announcement on November 3^rd it’s commitment to purchasing $600 billion dollars worth of Treasury securities in the coming months. On November 4^th, The Washington Post published an op-ed by Federal Reserve Chairman Ben Bernanke explaining the intended effect of the action. Bernanke argued this would lower interest rates and prevent deflation. Easier financial conditions, he said will support growth, ease lending and make houses more affordable. Essentially, the Fed will print $600 billion dollars to influence already historically low interest rates.  Critics argue this will lead to inflation, a weaker dollar and incite the global leaders, who have spent a great deal of time battling against currency manipulation.

On a trusty steed

Yet the Fed’s action cut right to the point. Well…to their point anyway. Cutting interest rates—the cure-all for economic woes. Interest rates are the most powerful tool the Fed has to stimulate the economy. Over the last ten years, it has shown a willingness to slash those rates regardless of the outcome—aka a substantial contribution to the housing bubble and subsequent mortgage crisis.  They slashed rates so fervently, they had to switch to a different tactic of buying up Treasury Securities.

Still, in theory, lower rates stimulate the economy by cutting the cost. I suspect at some point soon we hit the wall of diminished returns but still the price of money is a substantial business expense. That money could be better spent on economic growth.  

In 2008, we elected President Barrack Obama based on his platform of “change” and “Yes, we can.” But, despite several major pieces of legislation, including the healthcare act and our friend “Dodd-Frank,” unemployment is still high and progress is frustratingly slow.   The midterm election saw the House of Representatives change hands but not the Senate. The nation, disappointed with Democrats voted to make the switch to Republicans, yet failed to change the Senate. Would the GOP move faster with control of both the House and Senate? Probably not. But a divided government isn’t going anywhere fast. Granted it was an economy class, but I think the reaction in Professor Waugh’s class is also an indication of a disenchanted view of the political scene.

“We’re taking over this town.*”

The Fed, however recklessly, can. It is their responsibility as per the U.S. Congress to “The Federal Reserve's objectives - its dual mandate, set by Congress - are to promote a high level of employment and low, stable inflation,” according to Bernanke, in his Washington Post op-ed.  During the crisis, the Fed has taken a lead role in controlling monetary policy, taking action where Congress couldn’t. Yet in doing so, they disrupted diplomatic relations with the rest of the world in an aggressive money-printing policy. Let’s hope these cowboys from Washington know what they are doing, because they have the nation worried and the world angry.

*From Pantera