The Fed Capitulates to Populism

Another example of macro confusion was evidenced in some of the responses to the Labor Department’s recent employment release. Apparently employment went up more than expected (200,000 jobs) and unemployment went down more than expected (to 8.5%). So what was the response? The US stock market declined and one expert said the market was not impressed by the progress. The expert went on to tell us how many jobs had been lost since 2007. Another response quoted Fed officials who said that this was evidence that the Fed ought to do more to assist housing. Apparently we need even lower mortgage rates to make sure the economy recovers.

This reveals one of two things. Either these experts live on the moon or medical marijuana is more prevalent than I thought. I hear Joe Biden is promoting legislation that would give any recipient of a new handicapped parking sticker a year’s worth of naturally grown weed. Apparently seventeen red states, including Pakistan have now indicated a willingness to commit to the Obama ticket.

As a practitioner of the arcane metaphysical enterprise called macro, I am offended by all this nonsense. Is it not possible that good news could actually be taken as good news? Of course, it was not great news but keep in mind that the employment report DID NOT say that employment tanked by 100,000 jobs and it DID NOT say that all American manufacturing jobs have moved to Haiti. It said we had a decent run of the employment numbers in December. Keep in mind that these numbers are seasonally adjusted so a decent run does not mean that Christmas came in December. It means that Christmas came as usual on December 25^th and that employment growth was higher than it usually is in December. So smile a little bit. Let’s have a little toast to jobs in December.

Okay I admit that I am always ready to toast whether the employment news is good or bad. But let’s not exaggerate. This news is sort of like me announcing to my wife that I lost 5 pounds on my latest low JD diet.  Losing 5 pounds does not mean that I can eat obscene amounts of ribeye steaks at Little Zagreb’s steak restaurant. And it does not mean that I have succeeded in restoring my body to the svelte 200 pounds I weighed when I was in Mrs. Montgomery’s fifth grade class in Coconut Grove Elementary School. But let’s face it – 5 pounds is 5 pounds and it calls for a little cheese cake and JD.

No one in their right minds expected employment to increase by 400,000 jobs and no one thinks the US economy is healed of its 40 years of economic orgies. But lighten up guys. The increase in December supports a view that the US economy is slowly mending. As such it indicates that the US is a little less vulnerable to outside shocks. Our banks are better prepared to withstand Europe’s wake and our firms are poised to expand should these new growth sprouts continue spread and continue to take hold.

The other part of this has to do with the Fed making noises about the jobs report showing that the Fed needs to do something about housing. First and foremost please make note that the Fed’s job is not to affect housing – or outdoor grills or electric cars or litter boxes. The last time I checked it was classified as a central bank whose job it is to produce a stable inflation and unemployment rate. It essentially has one tool called money growth to accomplish these macroeconomic goals. It is true that Mr. Bernanke and his buds have added some new tools lately in the crisis environment but most of those were still aimed at macro indicators and goals. If you follow the idea – not mine – that the Fed should bail out housing why be so inefficient? Why not just admit that democratic government via Congress and the Executive Branch has failed us in the US and let’s crown Bernanke macro-czar and have him direct controls that will allow him to order companies to hire workers.

You think old Lar is either trying to be funny or that he is well into the JD. But the truth is that when we ask the Fed to focus on housing it is no different from asking them to focus on manufacturing workers or refrigerators or pee pee pumps. The Fed’s charter gives the Fed no real power to focus on sectors and as such it will fail if it tries. Think of what they are suggesting the Fed do. First, some experts want the Fed to buy mortgage securities or derivatives so as to push down the interest rate on mortgages. Please – do banks not have piles of money lying around? I think so. And have you checked mortgage rates lately? Do you really think banks want to lend at even lower rates? Do you think there are families sitting around counting their money (imagine Scrooge McDuck in his cash vault) just waiting for mortgage rates to drop from 3.9% to 3.8%? No No No. Even if the Fed rams more money into mortgages and even if rates fall further they will have accomplished exactly nothing. They will have not solved the problem of the housing market that took at least a decade to create and produced a whole big enough for to drive a new Equus through.

The other thing they want the Fed to do is make it easier for people to get loans. Apparently we live in a world of only extremes. In 2006 any animal, including homosepiens, could slither into a bank and be shown the mortgage vault. Hi there, want some money? Promise to repay?  No crossing your fingers behind your back! Okay, here’s the money. Aw heck – here’s a little more money for your next cruise. Enjoy your new mansion. Then somehow after the crisis banks started asking really mean and unrealistic questions like – Do you have a job? Do you have a means to repay this loan besides prayer? So now we want the Fed (or somebody) to find a way to return to the good old days when people had the right to have loans just because they were able to spell or otherwise mouth the word “gimme”.

It is truly amazing how brazen our Fed has become. It pretends that good news is bad. And then it continues to avoid real solutions to housing problems in favor of lame and ineffective worn out inappropriate solutions. Another round of quantitative easing; another reduction in long-term interest rates; another invitation to create leverage and high risk are only going to make things worse. But the real solutions are hard and involve a little pain. It used to be that we could count on the Fed to offer sensible advice. Apparently now the Fed has become one more institution that caters to populist nonsense.