The Fed is Not Incompetent. It is Corrupt.

Like a dog with a bone, I refuse to release it. The bone is monetary policy. And the more I read about Fed policy the more I want to yank that bone out of  my master’s evil hand.

Many of you know me. You know I don’t jump from the frying pan into the fire. Or vice versa. I don’t jump on conspiracy theories. I am boringly middle of the road. 

But just in the last weeks it hit me like a ton of bricks. The Fed is not incompetent. I usually refer to the Fed as a bunch of bozos. But I take that back. I cannot escape the conclusion of late that they know exactly what they are doing and what they are doing is corrupt. In the name of saving the economy and our jobs – what they are really doing is saving the asses of powerful people in the financial markets. They don’t give one hoot about all those retirees and potential future retirees who will now receive zero interest on their lifetime accumulations. 

What they care about are wealthy people and institutions who take too much risk in financial markets. These game players are being bailed out by the Fed despite the fact that the Fed knows that monetary policy actions taken today or tomorrow will have zero impact on the economy. To hell with the economy. To hell with the stock market. Too hell with retirees. Instead, save all those fools who participate in the riskiest markets for basically their own financial gain. That’s who the Fed is helping today. It is sad things have gotten that bad.

The interesting thing about monetary policy is that it is a lot like Dolly Parton’s undergarments. They are pretty much a mystery. In any econ department just about anywhere there is some guy or gal teaching monetary policy. This guy or gal is usually not very popular. Why? Because monetary policy is inscrutable. I remember Clarence Philbrook taught monetary policy at UNC when my cohort was going through there. 

Sure, econometrics was tough but Peter Schmidt was a great teacher. Dick Froyen made macroeconomics understandable. Bill Pfouts taught a non-mathematical microeconomics course that made a lot of sense. But poor Clarence. No one understood a word he said. Jesse L to this day swears he never learned one thing in that course.

Monetary economics sadly suffers from being interesting – it always brings together theory, history, and ideology. But it suffers because no one really understands what money is and why it is important in a modern economy. And then there is this thing called a central bank that somehow is given the legal and moral right to print as much money as they want. Don’t worry folks, these people at the Fed love you and they would never abuse this precious responsibility. Right? If you said said yes, then I have a bridge I’d like to sell you.

Enough background. Get to the point Larry.

Recent history. The Fed pumped enough money into the US economy in the last years to fill the grand canyon and Green Lake. That means that banks are awash with money. There is so much of it that they couldn’t possibly lend it out.*  It ended up in a category that only Clarence Philbrook understood – called excess reserves. Excess reserves make about as much sense as you and I having “too much money”. Tuna, you have too much money. I know Larry. It’s fun. I put it in a wheel barrow and move it around town so everyone will see I have money I don’t need. 

Excess Reserves is money that banks don’t lend. It just sits around doing nothing for no one. In the good old days the Fed would remove it. Made sense. Add too much. Remove it. Rocket science. But our Fed today didn’t remove it.

Point – if commercial banks need money for something today – it is there. And lots of it. But it doesn’t even matter. The Fed just dumped another giant load of money on the economy. Wasn't there already enough money? Why did they dump even more?

Answer – there is no answer. What did they say? Did they say that borrowers were being turned away from banks? No. They didn’t say that. Did they say that car-buyers could not find loans or that home buyers could not find mortgages? No. They did not say that.

They said that markets were not functioning properly and that mortgage and other bonds interest rates were rising. Aha. Now they actually said something. But you know what? Most people have no idea what that means. I am not even sure I know what that means. I have been studying money since Spanky and our Gang was the top show on TV.

Here’s my guess. A bunch of financial players had a bunch of bonds sitting there and decided that the prices on those bonds were going to fall. As you know, when it comes to recessions, lots of asset prices decline. So instead of taking care of their own stuff – they get some of their powerful buddies to call the Fed – and say something like – Hey Fed you are killing us rich folks. We have worthless bonds. Buy them from us.

Thus Jay and the boys and girls at the Fed quit sucking their thumbs over the virus and bought a bunch of worthless bonds from a bunch of influential people who thought they were going to lose some money. Instead of hedging or covering their collective asses in the usual ways of markets, they decided it was better to have the corrupt Fed take care of them. The disquiet in the bond markets subsided and the world was once again safe to watch reruns of Lassie and Howdy Doody.

Well maybe not. People wonder why the Fed can't do anything right these days. Maybe the reason is that people know the Fed is corrupt and is simply going to make one mistake after the next. Maybe that is what has changed. We all know the Emperor is wearing no clothes. 

* I checked the data. Before 2008 banks held less than $2 billion in excess reserves. Then the Fed went crazy. By 2014 banks were holding an average of $2.7 trillion in excess reserves. From $2 billion to almost $3 trillion! Wow! By March 20th of this year the average amount declined to $1.6 trillion. Yes trillion. There is still a ton of money out there. Why add more? Liquidity crisis? You gotta be kidding me.