One Trillion is not enough!(Scary Fed policy)

Pretty scary stuff on how the Fed is stealing a trillion dollars from us to give to the banks in the misguided notion of subsidizing them while they continue to lose money. -------------------------------------------------------------- We noted in previous comments that the Fed's zero interest rate policy or "ZIRP," in conjunction with QE, is draining something on the order of $1 trillion annually... [more]

Pretty scary stuff on how the Fed is stealing a trillion dollars from us to give to the banks in the misguided notion of subsidizing them while they continue to lose money. -------------------------------------------------------------- We noted in previous comments that the Fed's zero interest rate policy or "ZIRP," in conjunction with QE, is draining something on the order of $1 trillion annually in income from individual and corporate savers to subsidize the banking sector. The key thing to understand about the continuing crisis in the mortgage sector is that the process of foreclosing on homes is reducing assets of commercial banks by an amount that is far larger than the $1 trillion in total tangible capital of the U.S. banking industry. Read that last sentence again. --------------------------- We need to recognize that assertions regarding the effectiveness QE are just part of a belief system unsupported by data -- the definition of most modern religions. This is troubling enough, but Dudley goes on to sketch the mechanism by which he believes that QE would support economic activity: "Even in today's challenging circumstances; lower long-term rates would support the economy through a number of channels. Lower long-term rates would support the value of assets, including houses and equities and household net worth. Lower long-term rates would make housing more affordable and support consumption by enabling households to refinance their mortgages at lower rates. This would increase the amount of income left over for other spending." ----------------------------------- And on Dudley do right ------------------------------ In short, Dudley supports QE partly because he believes that it would lead to a policy-based, higher asset-price, easier credit, consumption-driven boom much like but more widely based than either the NASDAQ technology stock or more recent real estate bubbles. This ought to be very troubling as it suggests that the Fed has not learned from past mistakes. The Fed believed that the financial markets without serious oversight were efficient and robust enough to weather a prolonged period of a near zero real and then unusually low Fed funds rates, as well as a tidal wave of financial innovation. The Fed's fundamentalist faith in efficient markets was misplaced, as shown when risks they had dismissed were realized. Currently, the markets is pricing-in the Fed ushering in QE2 with "shock and awe" after the next FOMC meeting. It appears that the Fed will expose the economy to risks it has cavalierly dismissed as "too dark" in pursuit of returns that it "believes" exist. The public deserves better. It deserves a good faith analysis and honest presentation of both the upside and downside risks attached to QE. Dudley remains mute on a number of ancillary issues. For example, he does not mention the transference of more than three-quarters of a trillion dollars annually from savers to the banks due to low rates even though this decreases the amount of income available for consumption spending. He also remains mute on the blurring of the distinction between the Fed and Treasury. From the Fed financing the public ownership of AIG to the apparent willingness to commit to monetizing (though QE) of the fiscal deficit, the Fed has moved in the direction of allowing both the Executive and Legislative branches of government to avoid their responsibilities. http://us1.institutionalriskanalytics.com/pub/iramain.asp [less]