Friday, April 1, 2016

The Fed Wishes You a Happy April Fool's Day

I don’t usually write short punchy things for my blog but I just couldn’t help myself yesterday after I read the paper and noticed that Mrs Yellen was being lauded for her recent remarks in which she assured the world that the Fed would hold off on its plan to become again a responsible Central Bank. Apparently people who operate in the stock market were given an unexpected Easter egg from Mrs Yellen and they reacted by pushing the stock market a bit higher.

So what’s my beef with all that? Or more appropriately, what’s my tofu?

Let’s imagine that you were perfecting your best run on the ski slope in Maggi Valley when you heard a loud crack and the next thing you knew was that ski patrol people were buckling you into a sled bound for the nearest hospital. Both you and the doctor stared at your swollen and oddly bent leg. Aha said the doctor – you seem to have injured your knee. Clearly this North Carolina doctor had trained at Harvard.

Dr Tarheel concluded that what you needed was a large shot of pain medicine. That pain medicine worked quickly and you felt much better. In fact you felt so good that you kissed four nurses and you patted Dr Tarheel in a place that was reserved for only Mrs Tarheel. You couldn’t walk very well but who cared! Off you went assisted by metal crutches. Later when the pain returned, you gobbled a few more pills and life was good.

Back home in Atlanta, you realized that you still could not walk. So you saw Dr Charlie and he explained that there was serious damage in your knee and he would have to operate. Your rehab would be both painful and long. Nurse Peter smiled and agreed wholeheartedly. Painful and Long? Life is too short for painful and long. You are a busy man. People need you on your feet. Maybe someone will invent a new way to solve knee issues that is not painful and long. And man, that pain medicine is good stuff. You might take three pills this time instead of two.

So as time goes by you get pretty good at those crutches. Of course, your ankle starts to hurt because of the extra stress of walking with crutches and you start getting bellyaches from all those drugs. Dr Charlie calls and asks how things are going and you explain that you still don’t have time for the operation. People need you and you just can’t let those other people down. And by the way, could you give him a prescription for new pain pills that will help with the swollen ankle and the hurting stomach?

Enough? Silly? Not really. Because no one gets it. Mrs Yellen doesn’t get it and the stock market doesn’t get it. This country has real structural problems that are not going to go away. The Fed has become the drug of choice – basically healing nothing and making us feel a little better, maybe giddy at times. In the meantime the drugs are creating imbalances in markets. Savers have gone half a decade with close to zero for a return. They need to go to the racetrack to get decent returns on their money. Banks riddled with new regulations sit on reserves while firms refuse to ask for loans. These imbalances are accumulating and will leave us on a cliff waiting for a stiff wind. 

If only China were stronger. If only Europe would grow faster? If only oil prices would rise another couple of bucks. If only the sun would rise in the West. The Fed is waiting and meanwhile we are getting swollen ankles and tummies. Shame on you Mrs Yellen! Do your job and return to responsible central banking. Maybe if those people who run the rest of the government knew you had some principles, they might start doing their jobs too. Now where is that JD? 

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